Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is Disney (DIS) a Monopoly?

Disney (DIS) will face accusations of being a monopoly because of its business model. In particular, monopoly charges against corporations with similar strategies are already flying.

To explain, antitrust activists like Sarah Miller charge that big companies mask their monopolies by owning dozens of brands. For example, Anheuser Busch InBev (NYSE: BUD) owns dozens of brands of beer.

In fact, AB InBev is one of three brewers that control 75% of America’s beer market, the Open Markets Institute claims. The Verge identifies Miller as the deputy director of the Open Markets Institute.

Disney (DIS) could be a Monopoly

The Walt Disney Company (NYSE: DIS) meets Miller’s criteria because it owns dozens of entertainment brands.

For instance, Disney owns Marvel, Lucasfilm, ABC, 80% of ESPN, Touchstone Pictures, 50% of A&E, 50% of the History Chanel, 50% of Lifetime, Pixar, Hollywood Records, 10% of Vice Media, and Core Publishing.

Moreover Disney is buying 21st Century Fox and the 20th Century Fox movie studio. In detail, the Disney/Fox deal could close on January 1, 2019, the Associated Press reports.

Disney’s (DIS) Character Monopoly

The monopoly charges will fly against Disney (DIS) because of all the popular characters it will soon own.

For instance, Disney owns all the comic book and animation rights to all the Marvel superheroes. That includes Spider-Man, Captain America, Iron Man, The Wolverine, The X-Men, The Defenders, Luke Cage, Venom, The Avengers, Nick Fury, Ghost Rider, The Hulk, Thor, The Fantastic Four, The Submariner, and Deadpool to name a few.

Additionally, Disney will get the movie rights the X-Men, Wolverine, and Deadpool when it acquires 21st Fox. Hence Disney owns the Marvel and Star Wars universe.

However that is just the tip of the iceberg. For example, Disney will acquire Buffy the Vampire Slayer; and all the Buffyverse characters such as Angel, by purchasing 21st Century Fox. In addition, to Buffy, Disney will also own The Simpsons, Archer, The Aliens, The Planet of the Apes, and Predator through Fox.

This character monopoly gives Disney vast power. For example, Disney forced Sony to add Spider-Man into the Marvel Cinematic Universe.

Will Hulu Make Disney (DIS) a Monopoly?

If that was not enough, Disney (DIS) will get a 60% stake in Hulu when it gets control of Fox. Thus, Disney will control a majority interest in one of the largest video streaming services when it takes over Fox.

To explain, Hulu is a joint venture of Disney, Fox, Comcast (CMNSA) and AT&T (NYSE: T) through Time Warner. The privately held Hulu is losing $1.7 billion a year, but it has 47.5 million subscribers in the USA and 130 million subscribers nationwide, Investor’s Business Daily estimates.

However, Disney has the resources to expand Hulu into a major streaming-video platform. For instance, Disney recorded $4.15 billion in cash and equivalents on 29 September 2018.

Notably, Disney can add all the sports from ESPN as exclusive content to Hulu. Additionally, Disney can offer all the movies and TV shows in its libraries as exclusive Hulu content.

Will Disney (DIS ) Own Television?

Uniquely, Disney will have an incredible amount of content it can load into Hulu. That content includes the Disney and 20th Century Fox film libraries, and all the TV programs from the Fox Network, ABC, FX, the Disney Channel, History, A&E, etc. Not to mention all the Marvel shows Disney produced for Netflix.

Beyond that, Disney could own two of the four major US broadcast TV networks ABC and Fox. Hence, Disney will promote its characters and productions through Fox. For example, the Simpsons visit Disneyland or meet Captain America.

Why Disney (DIS) Should Scrap Network TV

On the other hand, network TV is a dying medium. In fact, Fox’s viewership in 2017 (4.733 million) is a 10th of Hulu’s US subscriber base (47.5 million).

Notably, ABC had 5.592 million viewers in 2017; less than HBO Premium which had 7.26 million viewers, Statista estimates. Thus, Disney will have 10.325 million broadcast-TV viewers if it gains Fox.

Under these circumstances, I think Disney CEO Bob Iger should divert resources from Fox and ABC to Hulu. Hulu is will Disney will get the most “bang for its buck” because its US viewership is nearly five times that of ABC and Fox.

A smart move will be to create Fox, Simpsons, Buffy, Star Wars, Marvel, and Disney exclusive content channels on Hulu. For example, one place where you can see the Simpsons or Marvel TV shows.

Will Disney (DIS) Face Anti-Trust Action?

I predict Disney (DIS) will face anti-trust action because of Hulu and its character monopoly.

Broadcast networks like CBS (NYSE: CBS) and Netflix (NASDAQ: NFLX) are likely to push such action out of fear of Disney’s production capability. To clarify, competitors will fear that Disney can quickly build a digital video platform with a nearly unlimited amount of content.

Such a platform will be a sort of Amazon (NASDAQ: AMZN) for digital video with almost every kind of digital entertainment available at the touch of an app. Notably, viewers could choose from everything from classic 20th Century Fox movies; like Butch Cassidy and the Sundance Kid, to Spider-man cartoons, to last week’s Simpsons episode.

Obviously, smaller companies like Netflix and CBS will have a tough time competing with such a Disney platform. Therefore, anti-trust lawsuits and regulatory actions filed by friendly politicians will be inevitable.

Does Disney (DIS)  have an Economic Moat in Entertainment?

Value investors will like the sound of this because Disney could build a money machine rivaling Amazon.

For instance, Disney could generate vast amounts of float from Hulu subscriptions. In detail, float is the term Warren Buffett uses for continuing subscription payments. Such payments provide a stream of continuous cash a company can tap for expansion or dividends.

In addition to float, Disney could have an effective economic moat in entertainment. An economic moat is a market barrier that competitors cannot pierce. For example, a streaming service that wants to show The Simpsons or Captain America movies will have to pay Disney.

Obviously, the ditches or barriers built around fortifications inspire the term moat. They design a moat to deter an attack by making it difficult. Thus, an economic moat should make competition hard by making entrance to a market difficult.

Is Disney (DIS) a Superb Value Investment?

Ironically, Uncle Warren supposedly came up with the term moat while discussing Disney. Hence, Disney (DIS) is a value investment of long-standing that could get better.

In particular Disney’s revenues grew at a rate of 11.96% during 3rd Quarter 2018. Notably, Stockrow records 3rd Quarter revenues of $14.307 billion and a gross profit of $6.199 billion at the Walt Disney Company.

Hence, Disney is already making the most of its resources and those resources are growing. For example, Disney reported an operating income of $3.078 billion and a net income of $2.322 billion for 3rd Quarter 2018.

Not surprisingly, Disney is generating a lot of cash. Specifically Disney recorded an operating cash flow of $3.853 billion and a free cash flow of $2.652 billion for 3rd Quarter 2018.

Is Disney (DIS) a Good Alternative to Amazon (AMZN)?

I think the cash, the character monopoly, and Hulu make Disney (DIS) a good alternative to Amazon (NASDAQ: AMZN) for value investors.

Importantly, Disney stock is a lot cheaper than Amazon – DIS was trading at $113.06 a share on 4 December 2018. Comparatively, Amazon was trading at $1,686.42 a share on the same day.

To add icing to the cake, Disney (NYSE: DIS) pays a dividend while Amazon does not. In fact, they schedule Disney shareholders to receive a cash dividend of 88¢ on 10 January 2019. Moreover, that dividend will be a 4¢ increase on the 84¢ paid on 9 July 2018.

Currently Disney shareholders are receiving a dividend yield of 1.52%, an annualized payout of $1.76, and a payout ratio of 25.4%, reports. However, only records one year of dividend growth for Disney (DIS).

If you are seeking a potential monopoly that could rival Amazon investigate the Walt Disney Company (NYSE: DIS). Additionally, the Magic Kingdom offers a growing dividend for investors with no moral objections to monopolies.