Disney

Disney's model is a loop, and the clearest statement of it is a drawing Walt made in 1957: the studio in the centre, arrows running out to television, music, merchandise, publishing, comics and Disneyland, and arrows running back. A film creates characters; the characters sell toys and fill a park; the park and the television show make people want the next film. Nothing on that page has changed in seventy years except the size of the arrows and the names of the boxes.

What has changed is where the profit sits. In the year to 28 September 2024 Disney earned revenue of ≈ $91.4 billion across three segments. Experiences — the parks, cruise ships, resorts and consumer products — made ≈ $34 billion of revenue and ≈ $9.3 billion of operating income, roughly 60% of the group's total. Entertainment — the studios, the streaming services and the linear television networks — made ≈ $41 billion of revenue and only ≈ $3.9 billion of operating income, and inside that the streaming business turned its first annual profit, of ≈ $143 million, while the traditional television networks shrank. Sports, which is ESPN, made ≈ $17.6 billion and ≈ $2.4 billion.

So the honest description of Disney in 2024 is a theme-park company that owns a film studio and a declining television business, with a streaming service that has only just stopped losing money. The stories are the input; the admission ticket is where the return is collected. That is not a criticism. It is what Walt drew.

Disney's moat is a library of characters that people feel they own, and a set of physical places where they can go and stand next to them. The first half is real but contested — every studio has characters. What no competitor has is the second half: twelve theme parks on three continents, a cruise line, and seventy years of families who went as children and now take their own. A rival can make a better film; it cannot build Disneyland, because Disneyland is not a park, it is the place where the film is true. That is the third-place logic Schultz sold at Starbucks, at a scale and a price point no coffee shop can reach.

The second layer is the loop itself. Pixar, Marvel and Lucasfilm were bought not for their films but for what their characters do on the rest of the drawing — the merchandise, the park lands, the cruise itineraries, the television. Disney can pay more for a story than any other buyer because it has more places to put it. That is scale economics of an unusual kind: the return on a character compounds across divisions, and only Disney has all the divisions.

Where it is weaker: the television networks are melting, and ESPN's cable income is going with them, and no amount of park pricing hides that on the income statement. Streaming has reached profitability but at a margin that makes the whole exercise look like the price of admission to the future rather than a business. And the studio has had a difficult few years, with Marvel and Star Wars showing what over-production does to a franchise — a lesson Nike learnt with the Dunk in the same period. The characters are the moat. Making too many films about them is how you spend it.

Disney's allocation record over twenty years is really the record of one strategy: buy characters, then put them on the drawing. Pixar for $7.4 billion in 2006, Marvel for $4 billion in 2009, Lucasfilm for $4 billion in 2012 — three deals that between them bought the most valuable story library in the world for less than one year of today's park revenue. Each looked expensive at the time. Each was paid back many times over, not from the films alone but from what the characters did in the parks and the toy aisles. This is the best sustained acquisition record in consumer business, and it is Iger's.

Then there is Fox. The $71 billion purchase of most of 21st Century Fox in 2019 was made on the same logic — more characters, more library, more content for a streaming service about to launch — and it has not worked the same way. Much of what was bought was linear television in decline, and the debt is still there. Disney overpaid for the past in order to fund the future, and the honest scorecard has to hold both the Pixar deal and the Fox deal on the same page.

The present allocation is a correction. The dividend is back but small, the buyback is modest, content spending has been cut from its 2022 peak, and the large capital commitment is $60 billion into the parks and ships over ten years. That is management saying, in cash, that the part of the drawing that earns is the part that gets the money. It is also a bet that the pricing power of the parks has room left, which is the question the thesis turns on.