Fortnite is the harbinger of more pain for the already struggling toy industry

While it is rather clear to us why Toys R Us is filing bankruptcy and even Star Wars themed toy sales weren’t enough to help Mattel (MAT) this past holiday season, in-app purchases for the new iOS version of Fortnite are rather revealing. The recently launched gaming app, which sits at the center of our Connected Society and Content is King investing themes, typifies the shift toward gaming, and mobile gaming, in particular, that has changed the kinds of toys that children of all ages play with.

At Tematica we like to say confirming data points for our investment themes are all around us in everyday life. In this case, all one has to do is look at the kinds of “toys” being used by children, tweens and teens as well as some adult – smartphones and in some cases tablets to play games, read or even stream movies and TVs. With a nearly endless choice of games, books and video content, one has to wonder how long traditional toys, such as action figures and dolls, can survive? Perhaps they will in a limited form that powers licensable content to gaming and content producers much the way the struggling comic industry is being utilized at the movie box office.

That would mean companies like Mattel and Hasbro (HAS) understand what it takes to pivot and capture the benefits of our Asset-lite Business Model investing theme.

 

Though it launched on iOS as a limited “early release” last Thursday, Epic Games’ Fortnite is already sitting atop the App Store’s free app download charts and, according to fresh estimates from Sensor Tower, has grossed more than $1.5 million in worldwide in-app purchases.

Players spend real money to buy V-Bucks, which can be redeemed for skins, accessory modifications, character animations and more. Currently, V-Buck packs range from $9.99 for 1,000 currency units to $99.99 for 10,000 units. Larger purchases net additional in-game currency, for example the $99.99 tier comes with an extra 3,500 V-Bucks on top of the standard 10,000 units.

According to the report, $1 million of Epic’s total estimated earnings came in the first three days after in-app purchases were activated. The performance puts Fortnite well ahead of similar battle royale style games Knives Out and Rules of Survival, which earned approximately $57,000 and $39,000, respectively, when they debuted.

A separate report from Apptopia adds color to Epic’s release, noting the game now sits in the No. 1 overall App Store spot in 89 markets. Currently the second-highest grossing game in the U.S. behind App Store stalwart Candy Crush Saga, Fortnite appears in the top-ten highest grossing charts in 15 markets, the analytics firm says.

 

Source: Fortnite estimated to have grossed $1.5M in in-app purchases after 4 days on iOS App Store

Disney’s buying Fox has a Connected Society appeal

With consumers increasing shifting their content consumption to streaming services, be it online or via mobile, we are seeing a number of moves by companies to position themselves accordingly. AT&T (T) is looking to buy Time Warner (TWX), Alphabet (GOOGL) is expanding the reach of YouTubeTV and Apple (AAPL) is hiring programming talent. Amid all of this, Disney scooped up key content assets of Twenty-first Century Fox (FOXA) this week, a long-time strategy of the House of Mouse, but it also acquired the controlling interest in stream service Hulu.

That extra nugget could radically change and potentially accelerate Disney’s already announced plan to launch its own set of streaming services, one for Disney content and the other for ESPN. We see this as a potential gamechanger that also adds our Connected Society tailwind to the Content is King company that is Disney.

 

The deal puts Fox’s movie studio, 20th Century Fox, under the Disney umbrella, bringing with it the studio’s intellectual property. Having 20th Century Fox’s “X-Men” and “Avatar” under the same roof as Disney’s “The Avengers” and “Star Wars” could have huge ramifications in both the streaming world and the film industry.

Disney announced in August that it will pull its content from Netflix, effectively ending its relationship with the streaming service to start its own in 2019. This means Netflix users will no longer be able to watch content from Lucasfilm, Marvel, Pixar and Disney Animation.The deal between the two media giants means that Disney’s streaming service will include its own deep vault of intellectual property, as well as Fox’s decades of popular franchises, which would most likely get pulled from streaming competitors.

As much as this deal is about the content that Disney would be getting from Fox, it’s also about content competitors like Netflix would not.The deal also means Fox’s stakes in Hulu now belong to Disney, which already has an equal stake along with Comcast. With a majority stake in Hulu, Disney could change the award-winning streaming service’s offerings.

Source: What the Disney-Fox deal means for Marvel, ‘Avatar,’ and streaming – Dec. 14, 2017

The acquisition of Fox brings content, streaming and another thematic tailwind to Disney

The acquisition of Fox brings content, streaming and another thematic tailwind to Disney

After days of speculation, Content is King champ Walt Disney (DIS) formally announced it was acquiring the film, television and international businesses of Twenty-First Century Fox Inc (FOXA) for $52.4 billion in stock. Viewed through our thematic lens, Disney is once again expanding its content library, which means that finally the X-Men and other characters will be reunited with their Marvel brethren under one roof. As the inner comic book geek in me sees it, perhaps we will know get the X-Men movie we deserve.

While I only half kid about the comic book potential of the deal, the reality is the transaction expands Disney’s reach to include movies, TV production house, a 39% stake in Sky Plc, Star India, and a lineup of pay-TV channels that include FX, National Geographic and regional sports networks. Via a spinoff, Rupert Murdoch will continue to run Fox News Channel, the FS1 sports network and the Fox broadcast network in the U.S.

Viewing the combination through our Connected Society thematic lens, we see the move by Disney as solidifying not only its streaming content business but its streaming platform potential as well. Recently Disney shared that over the next few years it would launch its own streaming services, one for Disney content and one for ESPN, in order to better compete with frenemy Netflix (NFLX), Amazon (AMZN) and other streaming initiatives at Alphabet (GOOGL), Facebook (FB) and the burgeoning one at Apple (AAPL). Let’s remember these streaming services are all embracing our Content is King investing theme as they bring their own proprietary content to market to lure new subscribers and keep existing ones. We have previously shared our view that we are in a content arms race, and acquiring these Fox assets certainly adds much to the Disney war chest once the deal is completed in the next 12-18 months.

The added Connected Society benefit to be had in acquiring Fox is it ups Disney to a controlling interest in streaming service Hulu, which has roughly 12 million streaming subscribers and 250,000 subscribers for its new live TV streaming offering — the online TV package that replicates a small cable bundle. Hulu used to have three different bosses — Disney, Fox, and Comcast (CMCSA) — each owning an equal stake. Following the Disney-Fox deal, odds are Comcast’s role in Hulu will diminish and over time I would not be surprised to see Disney acquire that ownership piece as well. What this does is quickly lay a solid foundation for Disney’s streaming service plans, and I would not be shocked to see Disney convert Hulu into its own branded streaming service once the Fox acquisition closes.

From a thematic investing perspective, the Disney-Fox combination is a win-win on several levels, even though Disney is spending quite a bit of capital to get it done. The reality is there is no better company at monetizing its content and squeezing dollars from consumer wallets and in the coming quarters, Disney will have two very strong thematic tailwinds behind it — a more solidified Content is King tailwind and a burgeoning Connected Society tailwind keeping its sails full.

Near-term, this weekend is the domestic opening of the next Star Wars movie – initial reviews are very positive and advance ticket sales indicate a $200 million opening weekend or better.

  • We continue to rate Disney (DIS) shares a Buy, and our long-term price target remains $125

 

Remaining patient in the face of more near-term pain for Disney shares

Remaining patient in the face of more near-term pain for Disney shares

In recent weeks, shares of Content is King company Walt Disney (DIS) have drifted lower as the company shared it is pulling its content from Netflix (NFLX) and embarking on its own streaming services for Disney, Marvel and Star Wars content as well as ESPN. This move brings more than a few questions at a time when candidly there is no clear cut catalyst for the shares. Investors don’t like uncertainty and hence the slow drift lower in the shares to the recent $101-$102 level, that is in line with our entry points in the shares, from $110-$111 just over a month ago.

Given new developments that include CEO Bob Iger sharing that Disney’s 2017 EPS would be flat year over year, vs. consensus expectations that were looking for year on year growth near 2.5%, and the impact of Hurricane Irma on its Florida operations, we expect DIS shares could come under additional pressure in the near-term. One strategy would be to exit the shares, another is to recognize that in the next few months Disney will once again be back at the box office as well as opening new attractions at is very profitable parks business. As a reminder, the company recently opened Frozen land and is slated to open Toy Story land in 2018 followed by Star Wars Land in 2019. These new and branded attractions are likely to entice former park visitors as well as attract new ones.

As the water and impact of Irma subside, we will look to use any incremental near-term pain in DIS shares to improve our cost basis, remembering the company had a whopper of a share buyback program in place exiting the June quarter. On that corresponding earnings conference call, Disney signaled it would repurchase between $2.2-$3.2 billion of stock in the current quarter. Odds are that effort will help backstop the shares in the coming days. Our bias is to use any pullback that brings the shares closer to the $90 level to improve the positions cost basis. Recognizing the potential impact of Irma, and remaining questions on its proprietary streaming business, however, we are reducing our price target to $120 from $125.

  • While we expect further near-term disruptions at Disney (DIS) owing to Hurricane Irma, we will remain patient with the shares.
  • We are trimming our price target to $120 from $125.
PwC Data Confirms Our Content is King Investing Theme

PwC Data Confirms Our Content is King Investing Theme

We’ve touched on this aspect of our Content is King investing theme before, but nothing like data from PricewaterhouseCoopers to confirm it and the theme itself!

Box-office markets over the next few years are expected to grow more quickly abroad than in North America, where receipts have been relatively flat and are forecast to expand only modestly. That dynamic already is changing the way movies get made in Hollywood, as studios focus on big-tent productions like superhero epics that play across borders, or find story lines they know will fly in censorious countries.The Wall Street Journal used analysis by PricewaterhouseCoopers to give a fuller picture of the five fastest-growing box-office markets around the world.

Source: A Look at the Five Fastest-Growing Markets for Movies – WSJ

China will be bigger for the movie box office in 2017 than the US 

China will be bigger for the movie box office in 2017 than the US 

Whether its characters from Disney’s Marvel, Star Wars or Pixar stable, or even DC’s own Batman and Superman, people will flock to the movies to quench their content thirst. Increasingly the international box office is becoming a bigger and bigger factor in movie decisions. Some film, like Expendables 3, are being made solely because of foreign demand, and the same goes for streaming content from Netflix and Amazon. What this tell us is content is truly king, but it also means content companies are likely to pivot to satiate local preferences. 

China — not the U.S. — is projected to be the leader in box office revenue in 2017, according to PricewaterhouseCoopers.If true, it will mark the first time that the U.S. has not been the top revenue driver in an entertainment and media segment. The Chinese box office is expected to generate $10.3 billion next year, while the U.S. will be at $10.1 billion. By 2020, the Chinese box office will reach $15.1 billion versus just $11 billion in the U.S.

Source: China will be bigger for the box office than the US next year: PwC