Disney Should Study Slumdog

There was a little less sparkle in the Magic Kingdom this quarter with the announcement of Disney’s Q2 results. Revenues fell 7% to $8.09 billion, which was slightly lower than the Street’s expectations of $8.15 billion. EPS of $0.43 was marginally higher than the market’s expected $0.40.

Disney can attribute its performance to the studio segment, where revenues fell 21% to $1.44 billion and margins fell a whopping 97% despite significant cost control measures announced last quarter. It seems that the releases this quarter were no match with those announced the previous year. Also, Disney faces the same problem as Warner: the economy is making consumers think twice about adding to their home video collections, making sales slower.

Disney’s theme parks were also impacted, and even though discount schemes continued to attract similar attendance in the US with only a 1% fall in Orlando (Walt Disney World) and 2% growth in other parks, overall spending per visitor fell 6% over the year. Overall parks’ revenues fell 12% to $2.41 billion. Disney is continuing to expand globally and is awaiting approval from the Chinese authorities to build a theme park in Shanghai.

In other segments, Consumer Products revenues grew 9% to $0.50 billion while Interactive Media revenues fell 17% to $0.13 billion.

Surprisingly, while the rest of the market was troubled with weakening media revenues, sports network ESPN managed to grow its affiliate revenue, which more than offset ad sales that continued to be down by a high single-digit percentage. Disney can credit that to ESPN’s content.

Disney continued to invest in content and recently announced the purchase of a 30% equity stake in Hulu, the third-largest online video destination. Like ABC.com, Hulu will help Disney expand its online media segment. The company expects Hulu to help it expand the relevance and popularity of its brands and content while combating piracy by offering a better alternative to consumers. 

Disney sees its strategy as one of “a blend of new and traditional media and business models utilizing both established and new distribution and marketing platforms. The movie theater isn’t going away, neither is broadcast television, but the same can also be said of new media. It isn’t going away and we expect it to grow in size and significance to people’s lives.”

Through its ABC.com experience, Disney has seen incremental growth in online media consumption, primarily because of the difference in target demographics. Viewers of ABC.com are younger than those of ABC’s television network.

The stock rose 1% to $23.15 with a market capitalization of nearly $43 billion, recovering nicely from the recent 52-week low of $15.14.

Disney should look carefully at the business model of Slumdog Millionaire, the recent Danny Boyle film that was made at a production cost of $15 million and raked in over $325 million at the box office. The potential of low budget movies set in the Indian context, but made with the best practices of editing and screenwriting that Hollywood excels in have immense economic potential. [Related reading: Framed Ivory]