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Neverland

Summary:
“Pan, who and what art thou?” he cried huskily.“I’m youth, I’m joy,” Peter answered at a venture, “I’m a little bird that has broken out of the egg.”This, of course, was nonsense; but it was proof to the unhappy Hook that Peter did not know in the least who or what he was, which is the very pinnacle of good form.Peter Pan; or, the Boy Who Wouldn’t Grow Up, by J.M. Barrie (1911) I have good stories from work. My wife’s stories are better. The asset allocator’s seat gives you access to brilliant, interesting and occasionally unseemly characters. Being a cast member at Disney World, on the other hand, gives you access to creepy Disney Dads. In case you have ever wondered, no, you would not be the first dad to ask Alice that while taking a picture with your 8-year old

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Neverland

“Pan, who and what art thou?” he cried huskily.

“I’m youth, I’m joy,” Peter answered at a venture, “I’m a little bird that has broken out of the egg.”

This, of course, was nonsense; but it was proof to the unhappy Hook that Peter did not know in the least who or what he was, which is the very pinnacle of good form.

Peter Pan; or, the Boy Who Wouldn’t Grow Up, by J.M. Barrie (1911)

I have good stories from work. My wife’s stories are better.

The asset allocator’s seat gives you access to brilliant, interesting and occasionally unseemly characters. Being a cast member at Disney World, on the other hand, gives you access to creepy Disney Dads. In case you have ever wondered, no, you would not be the first dad to ask Alice that while taking a picture with your 8-year old daughter. Yes, that polite giggle is her way of telling you you’re a moron and that you should rethink your life choices.

The best stories, however, are less scandalous. They are also usually stories about what it is like to be – as they say there – a friend of Wendy, the precocious young woman at the center of the Peter Pan stories. Why? Because most cast member roles at Disney World are exactly what you would expect. Scheduled meal appearances. Character meetings and photo ops. Peter and Wendy do all that, too, sure. But most of what they do at Disney is whatever the hell they want. Try to catch their shadows in the brutally long lines for Peter Pan’s Flight. Jump the line for the Mad Tea Party, hop in a teacup with strangers and spin it until they turn green. Play pranks on other cast members.

Peter Pan and Wendy run free at Disney because no one would believe in them if they did anything else.

Disney has been doing some running free of its own – the stock had a big week last week when the company announced the launch details of Disney+, its dedicated streaming service. It popped by a little over 10% after the announcement – more than $20 billion in equity value – and hasn’t looked back since.

Why?

It certainly wasn’t because people didn’t know about Disney’s streaming plans. Disney has been extremely transparent about almost all the details throughout its development. We have known the service was in planning for years. We knew its name in November.  We knew about the massive investment in proprietary platform content, the new VP heading up the group, and the details of some of the individual programming planned in January. In LexisNexis Newsdesk’s database, between March 31, 2018 and March 31, 2019, there were more than 48,400 news articles, major blogs, press releases mentioning Disney and streaming.

Below is the full network of that last year of articles, dominated by comparisons of the services, speculation about the impact of Disney’s streaming service on other vendors and discussions of content.

Neverland
Source: Quid, Epsilon Theory

What are the most interconnected articles, which share the most language across topics about Disney and streaming?

Big tech stocks were crushed in December. Now they’re back [CNN, March 2019]

How Disney’s Investment in Streaming Will Affect Its Bottom Line [Motley Fool, Sep 2018]

Disney is set to dominate Netflix in the battle to be ‘the world’s leading content company’ [Business Insider, March 2018]

Audience demand for Netflix originals will soon pass demand for licensed TV shows and movies, and that’s great news for the streaming giant as competition heats up [Business Insider, December 2018]

Disney to Forgo $150 Million in Fiscal 2019 as it Prepares to Launch Disney Plus [Variety, February 2019]

In short, investors have been talking about Disney and streaming for a long time. They have been evaluating, comparing and thinking about the impact. They’ve been modeling the relative loss of high-margin licensing revenue against incremental costs of running a dedicated service. They’ve been speculating about all sorts of things, because there was a lot of detail out there to permit that speculation.

Except for one detail: the price. The only bombshell in the April announcement from Disney was that the service will launch at $6.99, right in the face of price hikes from its biggest competitor.

Now, I don’t think I (or anyone else) have a perfect sense of the price elasticity of demand on a Disney streaming service. But I will tell you what I think. I don’t think $6.99 is an earnings-maximizing price. I don’t think Disney thinks $6.99 is an earnings-maximizing price. I don’t even think $6.99 is an NPV-maximizing price, not even if we use the Amazing Amazon Algorithm to daydream about price hikes someday that will make it all worth it.

And I don’t think anyone else does, either. You don’t buy Disney on the announcement of a bargain basement streaming price because you plugged the number into your model and came out with a gorgeous new price target. If you did, you probably need to check your math. No, you do it because Disney is creating a powerful narrative that it will take market share. Because Disney is creating Common Knowledge that it will dominate streaming. Because Disney wants you to know that everyone else knows that it is now a Growth Stock – not in the constituent-of-the-Russell-1000-Growth-Index sense, but in the put-us-in-your-basket-with Netflix, Nvidia and Amazon sense. In the sense of the growth! meme.

And the growth! meme is Neverland, where all you need is a little faith, trust and pixie dust.

It is the land of Uber and the other unicorns, where the act of actually making money means that you have lost sight of the real goal: to utterly dominate an emerging market. I use the term emerging market intentionally, because that is exactly what ridesharing, streaming services, brute force protein folding and coin mining hardware, and buying-literally-everything-online-with-one-day-shipping are. Mature as some of them now are, they ARE still the new emerging markets, not only literally, but in the same way that we once allocated to “Emerging Markets”, not as a value or mean-reversion play, but as our speculative instrument. As our way to bet on the explosive potential of ideas and innovation and capital finding both, rather than tweaking some variable in a financial model. And with any such speculative instrument, they only work when we do not know in the least who or what they are (which is the very pinnacle of good form).

In other words, by saying ‘we don’t care about how much money we make on this right now’, Disney is reframing the discussion about the potential of this business to be limitless. To be whatever we can possibly imagine, because it could end up being anything, really. This is obviously just a variant of the don’t-change-the-growth-narrative-and-monetize-too-early game, of course, which obviously isn’t new. Companies have been at this for a long time.

Neverland

What IS new and interesting to me is that a grown up, blue chip brand company with investors who care about about return on capital looks like they’re trying to find their way back to Neverland. I’m no prophet. I don’t know a damn thing about the streaming or media businesses that you don’t. I don’t have an edge here. But IF they manage it, I DO know this: Disney will be far from the last company looking to pull out a bit of pixie dust, to journey from the boring land of economic fundamentals to the land of growth! memes.

Rusty Guinn
Executive Vice President of Asset Management, Salient. Rusty Guinn is the executive vice president of asset management at Salient. He oversees Salient’s retail and institutional asset management business, including investment teams, products, and strategy. Rusty shares his perspective and experience as an investor on the Epsilon Theory website.

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