As content owners increasingly become power brokers, few companies have the strength of The Walt Disney Company (NYSE:DIS). However, the benefits go well beyond selling valuable content to companies like Netflix, Inc. (NASDAQ:NFLX).
Content Power!
The Internet has changed entire industries in a very short period of time. For example, the music industry was nearly destroyed. Now, however, it appears to be getting back on its feet, the most notable recent event being Apple Inc. (NASDAQ:AAPL) signing a lucrative deal with Sony Corporation (ADR) (NYSE:SNE) for access to the media giant’s music library.
Sony was rumored to be the last major hold out to Apple Inc. (NASDAQ:AAPL)’s iTunes Radio service. Holding out, however, allowed Sony to demand, and get, more than twice the normal royalty rate for ads surrounding its content. This shows why hedge fund manager Daniel Loeb wants to see the company split in two to unlock the value of the content business.
Although Sony Corporation (ADR) (NYSE:SNE) shares have jumped lately, the laggard consumer products division is still an issue holding back the shares. With a new version of the PlayStation game console coming out, however, the company could be on the cusp of at least stemming the decline. More aggressive investors interested in content should take a close look at the turnaround potential of Sony shares.
Video
Video, however, is really where the content wars are heating up. Sony has plenty of video and will soon be renegotiating contracts for its content. That adds additional upside potential. However, one of the biggest players in content is Disney.
The Walt Disney Company (NYSE:DIS) not only owns its famous mouse and pals, but it has been bulking up by acquiring key brands like Marvel and Lucasfilm, which owns the Star Wars franchise. Add in ABC, ESPN, and Pixar and Disney looks like the juggernaut of media. Its content is so vital, that Netflix recently inked an exclusive deal with The Walt Disney Company (NYSE:DIS).
That is a huge statement, because Netflix, Inc. (NASDAQ:NFLX) is looking to transition its business model. It wants to become something of an online television station, offering exclusive and desirable content. The Disney deal speaks volumes about both the resolve at Netflix and the value of what The Walt Disney Company (NYSE:DIS) has to offer. In fact, Netflix let a deal with Nickelodeon parent Viacom lapse because it is getting more selective in what it buys.
Expensive
Content, however, is expensive. While the cost of entering new markets was one of the reasons for a nearly $4 drop in earnings between 2011 and 2012, increasing content costs were also in the mix. With a sky-high price, Netflix is priced for perfection. Investors should be wary of the changing content dynamics, particularly as Netflix looks to create more of its own shows. Conservative types should probably avoid the stock.
Doing More
The Walt Disney Company (NYSE:DIS) has also been paying up for content. Marvel and Lucasfilm cost $4 billion each, for example. For Disney, however, that content can be spread out over a large base. Clearly, it will make more movies and television shows based on the two purchases and, thus, have more to sell to others. But any company could do that.
What other companies don’t have is Disney’s amusement assets. Disney already has a section of its Florida Disney World parks dedicated to Star Wars. Now there are rumors that a big Star Wars themed park expansion is in the cards. And the brand is perfect for the recent trend toward amusement parks creating different “worlds” within a park.
The best example is the Harry Potter themed section of Universal Orlando. The section recreates scenes from the popular book and movie series. That section helped the amusement park set an attendance record in the first year after it opened. While Harry Potter is big, Star Wars is one of the few concepts that is bigger. Done well, Disney could find this a huge customer draw. And it still hasn’t done anything to integrate Marvel’s collection of comic book characters into the parks.
Never Cheap
The Walt Disney Company (NYSE:DIS) shares are never cheap, with good reason. For example, the top line grew every year over the last decade except in 2009. Earnings have traversed a similarly strong upward path. The dividend has been increased annually for years, as well. And, of course, it owns all of that great content.
An around 1.2% dividend yield and a price near all time highs makes this stock most appropriate for growth and momentum investors. However, it should be on everyone’s watch list, just in case a broader market sell-off creates a buying opportunity.
The article This Media Giant Can Do More Than its Peers originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Netflix and The Walt Disney Company (NYSE:DIS). The Motley Fool owns shares of Netflix and Walt Disney. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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