Disney’s Competitive Advantage Is Its Intellectual Property

Disney’s Competitive Advantage Is Its Intellectual Property
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During his recent interview with Tobias, Alex @TSOH_Investing discussed Disney’s Competitive Advantage Is Its IP. Here’s an excerpt from the interview:

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Disney's Competitive Advantage Is Its IP

Tobias: Let’s talk about some of the other names you’ve got in there. Disney, you said you got that in the Fox spinoff?

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Alex: Yeah, I got it. When doing Disney bought the majority of Fox’s assets, you had the option to to take stock, cash or some combo. I took shares as part of that deal. I think part of the thinking now in my mind is, obviously, they’ve released Disney+ and a couple of their other D2C assets they’ve had significant growth. It’s super early, but they’ve had significant growth so far in terms of signups.

For me, I keep coming back to the idea that having really great IP and a really great monetization engine is– I’d rather approach the direct to consumer video problem or figuring out the business there, I’d rather approach it from that angle than having really great technology, like Netflix unquestionably has. And granted, they have a huge user base and that will lend itself to stuff like Cobra Kai and You that they license or buy from others, and then they increase the audience 5X or 10X or 20X. So, those are certainly very real advantages. But as I keep coming back to it personally, I like the idea of owning the parks business, of owning just really great IP.

Now, with that said, Disney didn’t own Pixar 20 years ago, they didn’t own Marvel 20 years ago, they didn’t own Lucasfilm 20 years ago, so– and Berkshire did own in the late 90s and they sold, I think part of the reason is recognizing that reality that this business is, in my mind, definitely not foolproof, it requires continued nurturing of those key brands, that key IP, and potentially adding stuff over time. I think that people they have in charge of Marvel right now, my friend, Francisco Olivera, can talk about this a lot more than I can, but the people that haven in charge are the right people, and they’re nurturing those franchises and I think it continues showing the results.

Tobias: It was sort of a meme in the late 90s that a lot of the value migrates from the owners of the distribution to the content producers, because content tends to be unique, whereas distribution tends to be– there is a little bit more distribution, and I think that I couldn’t agree more. It’s a content game and they have been very good at producing it, but there was that notable period before they bought Pixar where they just hadn’t had a Disney Princess worthwhile for a little while. No criticism of the Disney Princesses they had, but that’s sort of the business where that they get a young– my daughter, she falls in love with the Princess of the day and that’s what gets her into that ecosystem. And if they miss, then she’s not part of that ecosystem. It’s hard to get them back in as they get older. But their purchases have been quite good, though, Star Wars, and, Pixar, Marvel, all great acquisitions.

Alex: Yeah. Former CEO, Bob Iger, said in his book, he went before the board– And this is very early after he became CEO, and he essentially told them, “If we don’t do this Pixar deal, this could be the end of this company.” Might not have been that drastic, but he said, “This a very important deal. We have to do this because we’ve lost that animation. We’ve lost that IP engine that we have to have for this company to work.” And him doing that deal and then subsequently, Lucasfilm and Marvel are obviously masterstrokes that– we’ll see how Fox turns out, but he certainly bought himself a bit of cover by doing those three deals at what turned out to be incredibly good prices.

Tobias: They looked expensive. I think they looked optically expensive at the time. Pixar looked expensive, I think.

Alex: Right. Yeah.

Tobias: But ultimately, worthwhile.

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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