What a meaner (and leaner) Mickey Mouse could do for the stock

Leonard Kinsey wrote a book about the dark side of Disney way back in 2011. In fact, that was the title. I haven’t read it, but the vibe I got from skimming through a handful of reviews on Amazon is it spends a lot of time focusing on tips and tricks to get into closed, off-limits or widely unexplored parts of the parks — kind of like a guidebook — from a guy who’d been there hundreds of times. Cool … but not quite the portrait of a less-than-pretty Walt Disney World, more specifically behind-the-scenes stuff the self-proclaimed “Happiest Place on Earth” doesn’t want you to know about, I was expecting. You know, the R-rated stuff.

That’s a book I’d read. Why? Because I’m not a kid anymore. I loved Disney movies as a kid, and the new stuff is excellent. I’m man enough to admit, when Bing Bong met his eventual fate in Disney Pixar’s “Inside Out”, I shed a tear or two. Disney brings it each and every time it makes a movie and, more often than not, it delivers. “Coco” is another of my personal favs, but, honestly, most of the content Disney creates, whether we’re talking about Pixar, an original like “The Lion King” or something in the Star Wars or Marvel cinematic universes, offer something of value. They look good … and usually have a feel-good element to them, too.

But what about those who aren’t looking for a feel-good story? What about those looking for something that doesn’t end happily ever after? Something with a little more mystery and intrigue than “Ratatouille” and more real-world implications than “Frozen”? Those people exist and, I’d bet, could be a growth driver for the stock.

R-rated movies open up a totally new audience

Forget the fact we’re slowly shaking off a global pandemic and Disney’s theme parks are largely up and running on all cylinders, all market participants want to talk about is Dinsey+, the company’s flagship streaming offering.

I get it … it’s fun to count the platform’s subscribers, which are growing, and think of the recurring revenue they create for Disney. I was billed $8.59 just the other day, in fact — a price I’ve been told is going up soon.

As of the company’s November earnings report (Q4 FY2022), the platform has 164.2 million global subscribers. That’s an increase of 12 million subs from the previous quarter, and it easily beat analysts’ estimates (9.35 million). Disney has other streamers as well, including Hulu and ESPN+. Combined, the three have some 235 million people signed up.

“2022 was a strong year for Disney, with some of our best storytelling yet… and outstanding subscriber growth at our direct-to-consumer services, which added nearly 57 million subscriptions this year for a total of more than 235 million,” said Bob Chapek, chief executive officer, The Walt Disney Company, in a letter to shareholders.

I say all that to say this: Despite all the growth, it will inevitably slow at some point. No matter what Disney does with its current content or promotions, there are only so many people on the planet with a phone or television and internet connection willing to pay $10.99 for the entertainment Disney has to offer.

The growth runway is getting shorter and shorter every time someone signs up. Unlike Walmart, which is greeting wealthier shoppers these days because prices have gone up so much, people don’t have to trip over themselves to sign up for Disney+ if they haven’t already. There are plenty of competitors with a wider range of content offerings. That said, wouldn’t it make sense for Disney to do all it can to beef up its slate? I mean, there’s an obvious way to do just that, and I hinted at it earlier: start making more R-rated movies.

A perfect example is the recently-released “Prey” (see below).

Without ruining the story for the second time in this post (sorry if you haven’t seen “Inside Out” yet), I thought the newest installment in the Predator franchise was a solid film. Seriously, it was better than decent and served its purpose, distracting me from the ups and downs of real life for a night.

Disney+, with a few more titles like “Prey” spread across its family of streamers, could, in my view, offer a much more resilient product for content-hungry consumers. It’s kind of like the pivot Wingstop had to do to grow its customer base when times got tough … only with IP instead of chicken wings. Intellectual property is as valuable as it’s ever been, and I’m sure you don’t need me to tell you Disney has some great IP. The problem is most of the best IP engages a specific type of consumer: Kids (and, to a lesser extent, their parents). It doesn’t have enough IP to engage a variety of different consumers. In other words, some consumers (not all) essentially outgrow the content. If Disney could manage to trade in some of its family-friendly reputation for a little street cred with horror fans, for example, it would only make its suite of offerings that much sweeter.

Sports gambling can be ESPN’s life preserver … if Disney lets it

Then there’s ESPN, a business that essentially has no IP to speak of. ESPN is dependent on the sporting events it airs and, well, that’s pretty much it. Honestly … when was the last time you watched something on ESPN that wasn’t a football, baseball, basketball or hockey game? Disney pays a ton of money for rights to Monday Night Football and the College Football Playoff, and tons of people watch, which brings in tons of advertising revenue. It’s a capital-intensive business, though, and it pits a bunch of companies against each other, with exclusive rights going to the highest bidder. That means operating costs are high and revenue streams like the one from CFP exclusivity could be here today and gone tomorrow.

It also has a streaming service — the aforementioned ESPN+ — that not many people use, at least not when compared to the other two cogs in Disney’s streaming machine.

One way to change that, in my opinion, would be to integrate ESPN+ with a sports betting/daily fantasy offering similar to what Draftkings delivers. The infrastructure is already kind of there. ESPN is a great resource for looking up stats and finding commentary about specific players, teams and leagues. It also has some of the best analysts and insiders in the industry, which means ESPN+ could create a one-stop shop for sports and gambling junkies alike. First, though, it would have to fully embrace the idea, which it hasn’t seemed willing to do just yet.

Like making R-rated movies, adding a sportsbook to ESPN’s offerings would open the door to more customers without chasing away any of the existing ones.

Disclaimer: I’m a market participant, not a financial advisor. This is not financial advice.