Up nearly 20% year-to-date, Walt Disney (NYSE:DIS) has been one of the steadier names in the Dow Jones Industrial Average. However, Disney stock lost some of its luster in the third quarter. With just one trading day left in the July through September quarter, Disney stock is staring at a loss of nearly 7% for the last 3 months.
Some of that recent decline could be attributed to investors’ concerns about Disney’s long-awaited entry into streaming entertainment, a market where the company will compete with entrenched names such as Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN) as well as latecomers like Apple (NASDAQ:AAPL). But there’s also major player, Hulu, which Disney now has control of and can package with Disney+.
Streaming rivalries are real. So much so that Disney CEO Bob Iger recently left his spot on Apple’s board of directors, citing conflicts of interest. The names of the companies’ streaming offerings are even similar. Disney has Disney + and Apple has Apple +. Streaming TV is something to consider with Apple stock. The company controlled 16% of the streaming device market in the U.S. at the end of the second quarter, a percentage that could nearly double by the end of this year, assuming the company executes.
Apple +, which debuts on Nov. 1, will cost just $4.99 per month, for now undercutting essentially all its rivals on price. However, the mouse has some ways of combating the Apple effect that could propel Disney stock higher as the company rolls deeper into streaming offerings.
The Customer Is Always Right
That saying has been around in business almost as long as business itself. However, some industries have eschewed the notion, in some cases to their peril, and not delivered goods or services customers found desirable.
This is especially true in the entertainment business. It explains how we, the viewing public, wind up with poorly rated TV shows and movies that perform poorly at the box. In streaming, Netflix has experienced this phenomenon, too. Sure, plenty of Netflix subscribers enjoy “Narcos” and “Orange Is The New Black,” but many of the company’s other original content offerings have been duds.
For Disney + to positively impact Disney stock, it would be wise for the company to heed the advice of its viewers. Academic research confirms as much.
“Mina Ameri and Ying Xie of the University of Texas at Dallas and UCLA Anderson’s Elisabeth Honka make a case for streaming businesses to continue to focus on customer ratings from the broad community,” according to the UCLA Anderson School of Business. “The researchers found that, more so than the feedback from a personal network of cyber-friends, the community-wide word-of-mouth opinion was the most effective factor in increasing viewership.”
Observing the viewing habits of a popular Japanese cartoon series, the researchers found that viewers that are also on social media are more likely to watch if they see positive comments about the show in question in social media forums. Data suggest the phenomenon can boost ratings.
“A 1.0 percent increase in the average rating among the personal network of site friends produces a 0.01 percent increase in views,” notes the UCLA Anderson study. “A 1.0 percent increase in the number of ratings within a friends’ network triggers a 0.27 percent increase in views, and a 1.0 percent change in the number of views results in a 0.21 percent pickup in views.”
Bottom Line: Content Is King
A major plus, no pun intended, for Disney stock is the content library it can bring to its streaming service. Just looking at movies, the company has the Marvel and Star Wars franchises and is similarly content rich on the small screen.
“ESPN remains the crown jewel of Disney’s media networks segment, which now includes the recently acquired Fox cable entertainment channels like FX,” said Morningstar in a recent note. “ESPN dominates domestic sports television with its 24-hour programming on its growing number of networks. It profits from the highest affiliate fees per subscriber of any cable channel and generates revenue from advertisers interested in reaching adult males ages 18-49, a key demographic.”
Through various acquisitions over the years, Disney owns six studios — Marvel, Pixar, Lucasfilm, Disney Animation, Disney Live Action, and 20th Century Fox — and essentially control primetime programming on two of the four major networks — its ABC network and Fox.
Of course the market knows this and assigns a somewhat rich multiple of 21.37x forward earnings to Disney stock, but that multiple will prove warranted if the company properly executes in the streaming arena.
Todd Shriber does not own any of the aforementioned securities.
