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Disney: Matryoshka Franchise Model that Gives Birth To New Franchises
Disney’s future is more closely tied to its content lineup, than how Netflix subscriber base is doing
Yes, Disney+ added another 7.9mn subscribers in the Jan-March 2022 quarter. Investors were relieved, especially after Netflix lost 200,000 net subscribers over the same period.
Other bits from Q2 FY 2022 are found at the end of this article, but the real highlight for investors should be Disney’s franchise flywheel, as emphasized on the call by Chapek and illustrated by the enduring value of Toy Story:
“And nearly 30 years after the film debuted, Toy Story is still a key consumer products franchise, generating over $1 billion in annual retail sales. And in just a few weeks, Pixar's Lightyear will tell the origin story of everyone's favorite space ranger when it hits theaters on June 17”
Developing a single franchise is hard enough. Just look at Warner Brothers – for years, it tried to build a standalone Catwoman franchise, but after Halle Berry killed it in 2004, it looks unlikely. Disney, on the other hand, seems to be churning franchises out like a machine. Who knew there was a demand for a Buzz Lightyear origin story? I did not, but I want to watch it.
Extracting franchise value via traditional means of toys, live shows, and theme park rides, has always been part of Disney’s DNA. In recent years, however, a new direction is taking hold – franchises giving birth to new franchises. Secondary characters from major films like Frozen, Star Wars and Avengers are spinning off standalone shows and movies like Olaf Presents, Black Widow, WandaVision, Loki, Rogue One, and The Mandaolorian. And The Book of Boba Fett, the most recent Star Wars show on Disney+, was spun off from The Mandaolorian. It is the Matryoshka model of franchises: a franchise within a franchise within a franchise.
Out of all the streamers and studios, Disney is furthest along in the art of remakes, reboots, sequels, prequels, and spin-offs. It is especially potent coupled with Disney’s vertical integration across almost all possible distribution points, including DTC, theme parks, linear, merchandising, music, films, and cable.
With top-grade content harvested from a string of acquisitions (most notably, ABC, 21st Century Fox, Pixar, Marvel, and Lucasfilm), get ready for franchises you never thought you wanted, as Disney continues to extract value from old and new intellectual properties. Upcoming releases in 2022 include Marvel series Ms. Marvel, more Star Wars series (Andor and Obi-Wan Kenobi), a live-action Pinocchio with Tom Hanks, and Hocus Pocus 2. I am looking forward to Melissa McCarthy’s version of Ursula for the live-action Little Mermaid (likely 2023). These shows and films (post theatrical windows) will be exclusive to Disney streaming channels (Disney+ or Hulu).
Exclusive content that people want is what matters to Disney growing its subscriber and fan base. Investors should look at the expanding franchise universe as a proxy for Disney’s future, rather than how Netflix is doing one quarter or another.
Highlights from Q2 2022:
Disney+ added 7.9mn more subscribers, and management reiterated that it is on track for 203-260 million (AND profitability) by FY 2024
Note that Disney+ still expanding worldwide: see below quote from Q4 2021 earnings call on its FY 2022 plan that will double the number of markets to 160+ by FY 2023, from 80+ currently:
“(for) FY 2022, we plan to bring Disney+ to consumers in 50+ additional countries, including in Central, Eastern Europe, The Middle East, and South Africa to ~110 countries, mostly in Q3 FY 2022. Our goal is to more than double the number of countries we are currently in to over 160 by FY 2023”
Reiterated the unique (and elusive) four-quadrant appeal of Disney+
Internationally, more local content is being developed – there are 500 productions currently under development, with 180 slated to premiere this fiscal year
Disney+ is on track to launch an ad-supported tier, and advertisers attending the May 17 Upfronts are in “excitement” for its ad inventory
Parks in Hong Kong and Shanghai remain closed – financial impact is not immaterial, and it is estimated to be $350 million in Q3 2022 alone
US parks continue to do well, and it even outperformed the seasonally high Oct-Dec 2021 quarter in terms of revenue. While management had previously reiterated how Parks division could become even more profitable in the post-Covid era – due to all the efficiency changes and smarter choices of entertainment options – inflation could alter that trajectory
(Author is a shareholder of Disney)
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