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The Walt Disney Company (DIS): An Unsettling Trend in the House of Mouse

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The Walt Disney Company (NYSE:DIS) has made headlines this year with the strong openings of films such as Iron Man 3 and Monsters University. Both films reported impressive earnings, with Iron Man 3 enjoying the second-largest opening weekend of all time and Monsters University reporting the second-largest opening among Pixar films. Clearly, Disney’s studios are working hard on churning out blockbuster hits.

The Walt Disney Company (NYSE:DIS)

Unfortunately, not all is well in the House of Mouse. While its animated features continue to do well and films by some of its studios are breaking records, other films leave a lot to be desired. Last year’s John Carter underwhelmed, causing the studio to take a loss on the $250 million film after marketing and other expenses were factored in. The company’s recent reboot of The Lone Ranger seems destined for a similar fate, failing to strike box office gold over the long 4th of July weekend while being bombarded with negative reviews.

Investors don’t care… yet

Fortunately for The Walt Disney Company (NYSE:DIS), the threat of a major summer tentpole release being branded a flop hasn’t shaken its investors. The company has had solid growth as a whole, and any hit the film might cause to the studio entertainment segment is reduced by other well-performing films. In the company’s most recent quarterly report, studio entertainment revenues increased by 13% to $1.3 billion while operating income increased by $202 million to $181 million. This revenue growth will increase further in the next quarter’s report to account for this summer’s blockbusters.

It’s worth noting, however, that one part of the reason for the company’s strong performance was the write-down of John Carter in the same quarter of the previous year. The segment reported a loss of $84 million in the second quarter of 2012, and if not for the amazing performance of Iron Man 3 might have suffered similarly as a result of The Lone Ranger. Occasional flops won’t break the company, but if The Walt Disney Company (NYSE:DIS) continues to fumble with blockbuster releases that cost over $200 million to produce then investors might worry that the company’s film income is inconsistent.

Interactive losses

Significant flops at the box office aren’t the only things that The Walt Disney Company (NYSE:DIS) has to worry about when it comes to investor confidence. The company’s interactive segment has been struggling for a while now, reporting an operating loss of $54 million in the recent second quarter. This is an improvement from the $70 million loss reported in the second quarter of 2012, but with the segment reporting only an 8% growth rate it may take several more quarters for it to become profitable.

The Walt Disney Company (NYSE:DIS) isn’t ready to give up on its interactive segment without a fight, of course. Growth drivers for the segment include the expansion of the company’s mobile business in Japan and further expansion into social gaming. While the investment into the Japanese mobile business increased the segment’s operating expenses, this investment will likely pay off in the long run with increased mobile revenues. Likewise, an expanded social gaming presence brings an opportunity for more revenue through microtransactions and similar monetization opportunities.

Disney is also shielding itself from some losses in the interactive segment. In May, the company signed a multi-year contract with Electronic Arts Inc. (NASDAQ:EA) to make the company the exclusive developer of new games based on the lucrative “Star Wars” franchise. EA and its studios already have multiple games in the pipeline based on the property, all but ensuring profits not only for itself but also for Disney. While Disney retains the rights to develop “Star Wars” games on certain platforms, Electronic Arts Inc. (NASDAQ:EA) will do the bulk of the development and likewise will bear the bulk of the expenses associated with game development.

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