The Business Of
Movies | Disney | How Do They Make Money?
Morning All!
Now, fair warning - this is one of the longer newsletters we’ve done (but also maybe one that you learn the most from). And the reason is because Disney has a complicated revenue structure. It’s not like Netflix’s streaming revenues where we could just multiply number of subscribers with average revenue/subscriber! Disney makes money in several different ways.
But don’t worry - we’ll go through each revenue stream nice and simply! The chart below shows that Disney makes 10% of their revenue from content licensing. That’s the money they get from cinemas for their movie ticket sales (what we saw when we looked at Cineworld). And Disney makes 23% of their revenue from streaming. And that’s the money they get from subscription fees for Disney+.
So we already know how Disney makes 33% of their revenue! It makes sense to focus more today on the other 67%. And so today we’ll touch on the Content Licensing and Streaming fairly briefly, before digging deeper into the main 67%!
But to ease us in, let’s start with streaming. So, without further ado…!
Disney+… + A Few Others! (23% of revenues)
Okay, so we saw last week that for Netflix, the equation for calculating Streaming revenues is pretty straightforward. It’s…
The chart below shows us how Disney’s streaming platforms compare vs Netflix when it comes to subscribers. What’s quite remarkable is that whilst Netflix began streaming in 2007, Disney+ only started in late-2019! And in Disney’s first year the company managed to attract 74m subscribers. It took Netflix 9 years to get to that figure! Which shows how mainstream streaming has become.
The other thing to note in Disney’s streaming segment, is that Disney+ isn’t their only streaming platform! Disney also owns Hulu and ESPN+. And across all three of these platforms, the company has a total of 235m subscribers - higher than Netflix’s 231m!
Disney’s growth in streaming has been fuelled by their incredible franchises. And the decision in 2017 to end their distribution deal with Netflix meant that the only place to stream Marvel. Star Wars. Lion King. Aladdin, etc. was Disney+. But instead of just relying on their back catalogue, Disney have also been investing in their original content. In a few weeks, we’ll see the release of Ed Sheeran’s documentary: The Sum Of It All. Which I am very much looking forward to!
The next question to ask is about pricing. Are Disney+, Hulu, ESPN+ subscribers charged a similar amount to Netflix subscribers? Well, the chart below shows us that of the 3 platforms, Disney+ is by far the cheapest. With the average subscriber only paying $4.24/month.
Why is this? Well, as we saw last week with Netflix, subscription prices vary by location (wealthier vs less wealthy countries). For Disney+, the reason their average monthly subscription is so low is because nearly 40% of their subscribers are in India. In the US, the average revenue per paid subscriber is $6.34/month. Whereas in India, this figure is only $0.88!
But hold on, what about Hulu - is the subscription super expensive or something? Well, Hulu is an interesting case. Because while Hulu has its own streaming platform which is priced similar to Disney+. It also has a ‘streaming + Live TV’ bundle which is priced at $69.99/month. We’ll talk more about TV further down today’s newsletter. But basically, Disney are telling people that instead of having your Sky or Virgin subscription with loads of live channels. And also having a streaming platform like Disney+. You can combine the two with Hulu’s live bundle!
When we take an average of all these subscriptions, Disney’s revenue/subscriber comes to $7.39 in 2022 vs Netflix’s $11.76. So a 37% discount. But, hold on - they have about the same number of subscribers. And those subscribers are paying 37% less. Does that mean Disney makes about 37% less than Netflix in streaming revenues… ?
Well, yes! Disney made $19.6bn in streaming revenues in 2022. 38% less than the $31.6bn Netflix made in 2022 revenues.
Okay, so that’s Disney’s streaming revenues. And what a few years of growth they’ve seen. However, this growth has come at a cost… and we’ll see tomorrow how painful it’s been for Disney!
Content Licensing (10% of revenues)
The next revenue stream we’ll look at involves Disney’s film production. As we said yesterday, Disney owns Walt Disney Studios, Marvel Studios and 20th Century Studios. And these studios now have 3 channels to distribute their films: (i) Disney+. (ii) Other streaming platforms like Amazon Prime. (iii) Cinemas.
The OG distribution channel as we saw in Part 1 of The Business Of Movies was via cinemas. And the graphic below (which we saw in the Cineworld newsletters) reminds us how the relationship with cinemas works.
Now, in the cinema channel, whilst film studios take a solid cut of the ticket sales (around 53%). Movie ticket sales as a whole are in decline. As we saw in the Cineworld study, cinema admissions were stagnant for the decade pre-pandemic. And then the pandemic saw admissions absolutely crater. Even now, the number of people visiting cinemas is down ~30% vs pre-pandemic levels.
But all of this poses a tricky dilemma for Disney. If cinema admissions are declining but streaming subscribers are rising. Why not distribute more films via Disney+ and/or Amazon Prime and charge your subscribers a fee to rent the film? Well this is exactly what’s happening.
In 2021, we saw Disney announce that Black Widow will be released on Disney+ at the same time as it is released in cinemas! And Disney+ subscribers who wanted to watch the film at home had to pay $30 to rent the film. Disney also license most of their content to Amazon Prime. And in the screenshot below you can see that I could buy Avengers: Endgame on Prime for £13.99. And Disney would take a cut from that purchase.
So, how much money does Disney actually make from selling their content via cinemas vs selling their content via 3rd party streaming operators? Well, the 2022 annual report shows us that the company made ~$1.9bn from taking their cut from cinema ticket sales. And nearly double, ~$3.4bn from licensing their content to streaming operators like Amazon Prime.
However, despite these numbers, the cinema channel remains an incredibly important part of Disney’s business model. In 2021, Disney actually signed an agreement with Cineworld to ensure their films will only hit streaming platforms 45 days after cinema release. To protect cinemas! But why would they do this? Cinema is clearly the least important channel right?! Well, as we’ll see at the end of this newsletter, the value of a cinema release isn’t really in cinema ticket sales...
Linear Networks (33% of revenues)
Okay, now let’s get into the new stuff. Because whilst Disney has streaming. And cinema. The company also dabbles in TV! As we mentioned yesterday, Disney owns networks such as ESPN. The Disney channel. The National Geographic channel. And The ABC network - which gives viewers cracking shows like Modern Family and Grey’s Anatomy.
But how does Disney make money from owning these networks? Well, the graphic below gives us an idea.
People like me and you want to watch TV and so we go to Pay-TV providers like Sky/Virgin Media/BT in the UK.
These Pay-TV providers need content to provide their customers. And so they go to networks like ESPN, Disney, ABC and ask to distribute their content.
These networks allow the Pay-TV providers to distribute their content. But charge them a fee for the privilege. These fees are called affiliate fees.
But wait, what are affiliate fees? I thought those are the links that influencers share so they make money when we click on them?!
Well, affiliate fees are very similar to what we’ve seen earlier. And they’re one of the major ways networks make money. In fact, affiliate fees are the highest revenue generating stream for Disney as a whole business! Bet that’s surprised some of you! It definitely surprised me… and Phil!
Okay, so how do they work? Well, as we said Pay-TV providers in the US (Comcast, AT&T are the main ones) - want content to keep their viewers entertained. And Disney has content. Content for sports lovers (ESPN), for kids (Disney), and for comedy fans (ABC Network). And these networks give Pay-TV providers the right to distribute their content at a fee for every viewer of their channel.
The chart below shows us the affiliate fees that the top 12 networks in the US charge the Pay-TV providers. And the first thing to note is that Disney own 7 of the top 12 networks (highlighted in yellow)! And ESPN is by far the most expensive channel for companies like Comcast to have in their offerings!
So Disney distributes ESPN for $7.64/month per subscriber. How many subscribers are there for ESPN? Well, in 2022 this figure was 74m. Just to be clear, this 74m is the number of people who have pay-TV packages with Comcast, or AT&T. And ESPN is a part of their TV bundle. So for Disney, the annual affiliate fees they would receive from pay-TV providers for ESPN would be $7.64 x 12 x 74m. $6.8bn! Just from ESPN! Add in affiliate fees from their other channels like Fox News, ABC, etc, and total affiliate fees in 2022 came to $17.5bn!
Whilst this is a monster number, the worry for Disney is that growth is stuttering. The chart below shows that affiliate fees have declined by 1% in both 2021 and 2022. And the reason is because of the cord-cutting that’s gripped households in the US and worldwide. It’s a trend that started 10 years ago and has accelerated recently. But more households are opting to ditch their TV providers and just watch shows on streaming platforms. And I’m one of them! Why do I need 900 channels through a Sky or BT subscription and pay £40/month for it. When everything I watch is on Netflix, Disney+ and Amazon Prime!
How has this impacted Disney? Well, for one, their prized asset ESPN had 100m subscribers in 2011. So the 74m it has now is quite the drop. And the fall in subscribers looks set to continue. With the company losing nearly 1m more subscribers in just Q1 of 2023. Disney have looked to soften the blows by investing in their streaming services, including ESPN+.
Because whilst the ESPN cable business lost ~900k subscribers in Q1, ESPN+ gained ~600k subscribers. Remember though, that Disney makes $7.64/month from every ESPN cable subscriber. But only $5.53 from every ESPN+ subscriber. So even if the gains in the ESPN+ subscribers equalled the gains in the ESPN subscribers, Disney would still be seeing a loss in revenues…
Now, of course, there’s a reason why pay-TV providers are paying ESPN/Disney so much per subscriber. And that’s because of their content. It’s always about the content isn’t it! And ESPN have acquired the rights to several major sports in the US. Tomorrow, we’ll look at the hefty bills that Disney have to pay for these media rights!
But the final point when it comes to TV - is that affiliate fees aren’t the only way Disney makes money here. The second way is through Advertising! I won’t spend too long on this. But let’s think about all those ads we see on TV. They’re there for a reason - companies want to advertise to viewers. And the more eyeballs on a screen, the more valuable these ad slots are. The chart below shows us the most expensive 30-second ad slots on American TV in 2020/21.
Yes, that’s a whopping $784k to advertise for 30 seconds during NBC’s Sunday Night Football! Disney’s FOX and ABC networks feature strongly in the top 10. But I’m surprised why ESPN isn’t there - this data is from Statista. I’m assuming ESPN doesn’t reveal their ad slot prices. But I’d be surprised if ESPN wasn’t actually on this list!
Either way, the chart shows you how lucrative ad slots are for networks. And hence for Disney. In 2022, the company made a very healthy $13 billion from advertising. $9bn from their TV segment. And $4bn from their streaming segment.
Parks and Experiences (34% of revenues)
Okay, nearly there! And this last section - Disney’s Parks and Experiences - is where the previous 3 segments really come to life. There’s quite a few ways Disney makes money from this segment. So let’s touch on the main 4 revenue streams below and how revenues would be calculated…
Theme park admissions - tickets sold x average price per ticket.
Merchandise, food and beverage - tickets sold x average spend per guest.
Resorts and vacations - rooms occupied x average spend per room.
Merchandise licensing and retail - ~10% of merchandise sales.
Now, we’re going to focus more on the third and fourth streams of revenue. Because the first two should be more straightforward to understand. It’s like how Cineworld makes money! Theme park admissions are like cinema admissions. And merchandise, food and beverage is the amount spent on food and drinks! Maybe less popcorn and more candy floss at Disney though!
So, resorts and vacations. As we mentioned yesterday, Disney’s resorts are some of the most popular vacation destinations in the world. And in fact, the Florida resort is the most visited vacation resort in the world! But how does it make money? Well, it’s simply…
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And the chart below shows how these two drivers have trended for Disney over the last decade.
The number of rooms occupied at Disney’s resorts was consistently high every year pre-pandemic. With the peak of 11.6m nights booked in 2019. Obviously, we saw a substantial fall during 2020-21. But families returned in numbers in 2022 (10m nights booked).
But the other interesting thing to note here is the average spend per night. And as we’ve seen previously, with great businesses like LVMH (and to a certain extent Netflix). The ability to raise prices without losing customers is an incredible asset. Disney’s average guest spend per night has increased 5% per year over the last decade. And this has been the main driver of the ‘resorts and vacations’ revenues reaching $6.4 billion in 2022.
Okay, so if you’ve made it this far, firstly - well done! And secondly, you’re in for a treat! Because the final revenue stream in Disney’s Parks and Experiences segment is merchandise licensing and retail. Now, why is this a treat? Because it helps us understand so much of Disney’s business model.
Disney is the biggest licensor in the world. What does this mean? Well, in 2021, there was $261 billion worth of merchandised retail sold globally. And Disney accounted for $56 billion of this! All the Marvel clothes, Star Wars masks, Frozen bags, Avatar whatevers! Whenever people buy these products from a store, Disney takes a ~10% cut from all these sales!
In 2022, Disney made $5.2 billion in revenue from ‘merchandise licensing and retail’. And let’s put this in context. Remember, how much did Disney make from licensing their movies to cinemas in 2022? $1.9bn. How much did they make from licensing all their content to third party streaming operators? $3.4bn.
So, for Disney, the value in releasing blockbusters like Avengers and Star Wars isn’t just about cinema ticket sales. In fact, that’s only a small part of it! The main way Disney makes money from producing their hit movies is through selling merchandise! In addition, what’s the reason so many families are visiting Disney’s resorts for vacation? So their kids can see Elsa, Tony Stark and the gang! I’m saying all of this to make you aware that whilst Disney’s movies make the company some money. The majority of Disney’s revenues come from building on the movie experience. Which probably wouldn’t be the same if those films were just watched by families in their living rooms on Disney+! So, cinema operators - we think you’ll be fine!
Putting It All Together!
The table below sums up what we’ve looked at above. And breaks Disney’s $82bn revenues down, not by segment, but by revenue stream. Despite the pandemic, Parks and Experiences (theme park admissions, food and drinks, resort nights booked) still make up the largest chunk of Disney’s revenues. Affiliate fees have shrunk slightly in 2022 but are still second.
Subscription fees have seen the biggest growth growth over the last 5 years - going from 0% of revenues to 18%! And Theatrical licensing (revenues from cinema ticket sales) has fallen the greatest from 7% to 2% of revenues. However, as we just mentioned, it’s important to remember that these theatrical experiences are a big driver to Disney’s Parks and Experiences revenue. And their merchandise licensing revenues!
18th Apr 2023
That’s a wrap for today! Phew - we told you it was going to be a long one! But that is how Disney makes money. Tomorrow, we’ll be looking at just how profitable these revenue streams are. And don’t worry… it’ll be shorter than today!
Have a fantastic day!
The Business Of Team