Decoded’s Take
- Disney may be known for its blockbuster billion-dollar box office hits, but the real profit centers are its TV channels, parks and resorts, and retail merchandise.
- While the TV business generates the most profits for Disney, it’s stagnant and at risk of obsolescence as cable continues its decline. Streaming is a valiant effort to replace this revenue but success has proven elusive.
- The Parks, Experiences, and Products segment has demonstrated consistent historical growth and has the most potential for long-term success as long as Disney continues creating and maintaining IP franchises that consumers love.
The Business
Disney is an entertainment behemoth.
In order to make sense of its vast empire, let’s break it up into business segments:
- TV Channels: Disney Channel, ABC, ESPN, FX, National Geographic, and affiliated local broadcast networks
- Parks, Experiences, Products: Disney Theme Parks, Disney Cruise Line, Disney Vacation Club, Disney IP branded merchandise and games
- Content Licensing: Theatrical distribution of Disney’s films, licensing media to other TV/subscription services, stage plays, music distribution, and more
- DTC Streaming: Disney+, ESPN+, Hulu, and their international equivalents
Now, I always thought that Disney’s real estate holdings and travel products revolve around its parks, and for the most part, they do. But when I started doing research, I realized that their footprint extends far beyond 🤯
- Disney is developing a residential community in Rancho Mirage, CA
- Disney Vacation Club has independent properties in Florida and South Carolina unrelated to Disney Parks
- Disney owns a resort on the Hawaiian island of Oahu that promises “Activities and Entertainment Showcasing Disney Storytelling,” ” Encounters with Disney Characters,” and “Luxe Accommodations with Magical Disney Touches.”
- Disney Cruise Line is a 5 ship (soon to be 7 ship) line that — again — has nothing to do with its parks
- Disney owns a tropical island in the Caribbean that is exclusive to guests on its cruise line
The Numbers
| Segment Operating Income | 2022 | 2021 | 2020 | 2019 | 2018 | 2012 |
| TV Channels | $8.5B | $8.4B | $9.0B | $7.5B | $7.3B | $6.6B |
| Parks, Experiences, Products | $7.9B | $0.5B | $0 | $6.8B | $6B | $2.8B |
| Content Licensing | -$0.3B | $0.6B | $2.5B | $2.7B | $3.0B | $0.7B |
| DTC Streaming | -$4.0B | -$1.7B | -$2.8B | -$1.8B | -$0.7B | — |
Disney is such a complex business that we’ll analyze each of its segments separately.
The TV business continues to be its most profitable, having generated $8.5B in operating profit in 2022 and a total of $40.7B over the last 5 years. Its revenues primarily stem from affiliate fees and advertising revenues, and its costs from content production and licensing. While profits are consistent, growth is weak. Its 2022 profits represents only a 29% increase over its 2012 profits of $6.6B (2.6% CAGR).
Parks, Experiences, and Products is a close second, having generated $7.9B in profits in 2022. Its revenues come from park tickets, hotels and resorts, cruise tickets, food & beverage, product sales, video games, and more. Its costs are the operating costs of its parks, hotels, cruises, and manufacturing costs. Even in 2020, when parks and resorts were closed due to the pandemic, this segment barely lost money. Further, it demonstrates consistent strong growth. Its 2022 profits represents a 182% increase over its 2012 profits of $2.8B (11% CAGR).
Next, let’s take look at its Content Licensing segment. Its revenues primarily come from theatrical releases (think: box office) and licensing content to other distributors, and its costs primarily stem from content production and advertising. Making good content is hard, even for Disney, so this segment is its most volatile. In 2022, it even made a net loss of $0.3B. In 2018 — its best year ever — this segment made $3B in profits thanks to hits like Black Panther ($700M), Avengers Infinity War ($679M), Incredibles 2 ($609M), and Deadpool 2 ($318M). However, even in its best year, this segment’s operating profit is dwarfed by Live TV ($7.3B in 2018) and Parks, Experiences, and Products ($6B in 2018).
Finally, streaming. This one’s never made a profit, and it’s unclear when that might change. Production, marketing, and technology costs have outstripped consumer subscription revenues since the beginning of this segment’s existence.
The Analysis
Here’s another way to think about Disney’s business: IP Creation and IP Exploitation. Disney’s studios (Walt Disney Animation, Twentieth Century, Marvel, Lucasfilm, Pixar, and others) crank out content that Disney distributes to audiences that make those consumers fall in love with its characters and stories. Disney’s parks, hotels, cruises, and partners use that IP to create different products and experiences that consumers then pay a premium for. Disney’s streaming services create spin-offs of popular franchises that then attract consumers to subscribe and watch.
There’s one notable exception to this mental model, which also happens to be Disney’s most profitable business: traditional TV. ESPN, ABC, FX, National Geographic, and other unrelated channels don’t have any relation with core studio IP. These business were acquired or started opportunistically over the years and are destined for long-term obsolescence as traditional TV continues its decline. While they may continue to generate good profits for the company in the years to come, it’s likely to be overtaken by Disney’s other businesses as this segment continues to stagnate.
Next, let’s look at streaming. The motivation for investing in Disney+, ESPN+, and Hulu no doubt stems from the pressure to replace TV profits with streaming profits to get ahead of its inevitable decline. Especially for Disney+, the company has leaned heavily on studio IP, making its core films available on the service and creating Star Wars, Marvel, and Disney spin-off content to attract subscribers. If one or more of these efforts pan out, it would be a nice way to reduce reliance on TV profits, but at $11B in losses and counting, it’s an expensive bet.
Core content production and licensing is Disney’s oldest and most important business. It is the engine that powers the rest of Disney. Its primary objective is to make audiences fall in love with its characters and stories, not necessarily to generate the most amount of profit. Once consumers are hooked, there are infinite ways to monetize through its Parks, Experiences, and Products segment, which is likely to keep up its ferocious growth and be Disney’s revenue and profit driver for years to come.
Disney operates in a competitive environment too. Its films competes with those from other major studios like Warner Brothers, Universal, Paramount, HBO, and others; its streaming services with Netflix, Max, Apple TV+, and more; its theme parks with Universal Studios; its resorts and cruise line with Hilton and Royal Caribbean. But besides tactical execution, its business success ultimately depends on customers loving its characters and stories. As long as they manage to capture audiences’ hearts, they’ll capture audiences’ wallets too. And, at least for now, The Mouse reigns supreme.
Until next time!
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