Much of Disney's better-than-expected financials were rooted in one-time circumstances: ESPN's higher affiliate revenue deferral, a real-estate sale at its theme parks and an ad rebound from big media's double-digit dive in 2009. Disney also continues to benefit from tight cost controls.
The latest national economic indicators suggest a continuing weak economy next year spurred by high unemployment, debt, housing inventories and defaults, and consumer skepticism. Many of Disney's core film studio, theme park and consumer products businesses are tied to those grim economics - making its recent Disney World ticket price hikes all the more curious. The best Disney and its rivals can hope for beginning 2011 is moderating single-digit increases in its cable and broadcast advertising.
The good news is that unlike Rupert Murdoch's News Corp., Disney does not own newspapers, and it can continue to benefit from Netflix's pioneering streaming revenues efforts. The bad news is the areas where it is making digital inroads, such as video games and mobile entertainment, isn't gaining traction fast enough.
Because of its clearly defined appeal to children, young teens and families, Disney can position itself for what Veronis, Suhler Stevenson says will be the media and communications industry edging out overall U.S. economic growth through 2014, growing an average 6% annually to $1.42 trillion. A key driver will be making the most of "advances in digital technology" to deliver and capitalize on content and services that are relevant to individual consumers.
Internet and mobile services will grow at more than double that rate, increasing an average annual 14.6% to $87.79 billion in 2014. If you factor in spending on traditional media's digital platforms, that amount increases 14.5% annually to $164.83 billion, according to the new VSS forecast. That combination is the only way media companies can hope to control and stimulate product and service growth, despite stagnating and counterproductive macro economics. So what should Disney do?
Like other companies with cash on their balance sheets, Disney is tempted to continue buying back more of its stock. Disney's free cash flow has increased 25% year to date. The better course is to keep reinvesting in its businesses for long-term growth. It recently acquired the social game company Playdom for $763 million. VSS forecasts that, despite its present slump, the video game market will match the size of the declining newspaper industry during the forecast period.
Selectively acquiring startups to enhance and extend its social media reach - a critical area in which all Big Media is deficient - is a smart use of funds as Disney acquires expert talent as well as digital functionality. These targeted investments could yield broader and bigger returns down the road than brick-and-mortar expenditures like building the Art of Animation Resort in Orlando. Will Disney do something bold like acquire a thriving social media or e-commerce giant that can catapult its core businesses into a new level of revenue generation?
Clearly, Disney CEO Bob Iger has been contemplating ways to exit businesses whose models are hopelessly broken. Broadcast networks, such as ABC, will continue to be marginalized by the Internet bypass and consumers' ability to cherry-pick content on connected mobile devices. Trying to unload the ABC TV Network and the ABC owned-and-operated TV stations as a package could be tricky but wise, given the lingering legacy costs
A major broadcast owner with ABC affiliates, with the help of private equity, could be a buyer provided they agree to a long-term distribution agreement with Disney, which will continue to generate program-related revenues from the Internet and mobile devices. VSS predicts that spending on online and mobile platforms will grow 25% annually through 2014, or three times the average annual 6% growth spending rate on broadcast TV.
Advertising is back now from last year's double-digital collapse (ABC-owned TV stations and network ad revenues increased more than 30% last quarter), but forecast future low single-digit growth is nothing to cheer about. Disney has the vision, resources and sound foundation to take advertising and marketing to a new level working with Google. It could boldly leverage interactivity to create a more effective cross-platform business model that transforms its loyal consumers into resources for creating, recommending and buying products. Failing to understand the potential power and productivity of social media will likely prove to be Big Media's Achilles heel. Disney could be the glowing exception. VSS sees traditional consumer advertising revenues stagnating through 2014.
Disney's Imagineering operations have been the source of creating new films, theme parks and consumer products for decades. It should put the same wizardry to work creating new digital interactive platforms for information, entertainment and communications. VSS forecasts that overall entertainment and leisure media should grow an average 6.3% annually to $354 billion by 2014. Disney could grow at a much faster rate if it were more enterprising about integrating digital interactivity and social media to all aspects of its business - especially the cable networks that generate more than 60% of its annual earnings (EBITA). Disney's build out of ESPN, its most valuable asset, is an example of what is possible.