May the Fourth be With You!

First of all, Happy Star Wars Day to everybody out there, and May the Fourth be with you.

Having said that, I’ve been wondering for a while what value has the Star Wars franchise brought to Disney (NYSE: DIS) since it was purchased in 2012.  Off the bat one would argue that the purchases of Star Wars and Marvel were brilliant moves by Disney from a business strategy perspective, although many Star Wars fans doubted the “purity” of the movies to come, and were worried that the quality would decrease, and movies would be commercialized (even more than by George Lucas, if that is even remotely possible).

After Episode VII was released last December, the stock tanked 25%.  Of course, most of that was driven by a whole market contraction during the first couple of months of 2016; however, the S&P 500 dropped 11%, and the Dow Industrials 11.5% during the same period.  So Disney under-performed the two major indices by nearly 15% on the months following the release of the seventh installment of Star Wars.  Why?

Although the Star Wars franchise has generated revenues in excess of $30 billion over the last 40 years, revenues from the box office are just above the $6 billion mark, add to this a further $5.5 billion for home video sales and rentals, and we get to slightly over one third of the total revenues.

The real money is made by merchandising, selling toys, games and licencing.  Toys alone have returned in excess of $12 billion over the life of the franchise, throw in a further $3.4 billion from video games and $1.8 for books and that makes for over half the total revenues.

Despite Star Wars Episode VII (The Force Awakens) shooting up to the third highest grossing movie of all times (behind Avatar and Titanic) and bringing home a cool $1.9 billion, it fell short on the merchandising side.

Launching a movie the week before Christmas was a very bad idea, since most of the expected sales would come from toys and games that would be bought as Christmas presents around the world.  However, they couldn’t let too much out in the shape of toys or games, since that would compromise the secrecy of the movie.  There were only a few toys that were available from September, with many new toys shipped out on the day or the day after the movie was released.  Unfortunately that left only a week for shoppers to get in their Christmas orders.  Maybe a summer release, would have pushed toy sales to top the billion dollar mark, as opposed to the $700 million they sold through out the year.

Disney’s woes are not limited to ill-timing of their releases, they have some serious dogs in their portfolio.  ESPN, for example, has lost 7 million subscribers in the past two years, putting it back to its 2006 subscriber level of 92 million.  ABC Family lost 5 million subscribers, while the Disney Channel lost 4 million and Lifetime, A&E and the History Channel have lost 6, 6, and 5 million subscribers respectively.

Disney’s parks are doing pretty well, bringing in a steady stream of income, and number of visitors growing year-on-year.

All in all, Disney continues to appear as a solid investment, but they need to get their house in order and decide what to do with some of the cable channels that are bleeding subscribers.

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