Walt Disney Co. said Tuesday it will launch a pair of video-streaming services in the next two years, ending a distribution deal with Netflix as it responds to the cord-cutting trend pressuring the cable industry.
The company plans to an ESPN video-streaming service early next year and a Disney-brand streaming service in 2019.
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In making these moves, Disney said it would pay $1.58 billion for an additional 42% stake in BAMtech LLC, a direct-to-consumer streaming technology and marketing-services company. It already had a 33% stake in BAMtech.
Disney made the announcement amid its latest quarterly report Tuesday that showed troubled sports network ESPN continued to pressure results with revenue for its fiscal third quarter coming in below analysts's expectations.
Operating income in its cable networks segment, which houses ESPN, retreated 23%, weaker than the 21% decline predicted by analysts cited by FactSet. Operating income within the segment contracted for the fourth time in the last five quarters.
Shares in the media and entertainment giant fell 3.1% in after-hours trading to $103.07.
ESPN, one of Disney's cable properties, has been an example of the challenges facing the cable industry amid declining viewership and the overall cord-cutting trend. Earlier this year the network shed some of its most recognizable on-air talent in a round of layoffs.
The sports-network's presence in U.S. pay-TV households has fallen by around 6 percentage points, to 89%, since fiscal 2013, according to MoffettNathanson. The research firm estimates ESPN has lost more than 5 million subscribers from people downgrading to less expensive "skinny" bundles.
The media-network segment, which includes cable and broadcast, posted a 0.7% decline in revenue to $5.87 billion. The segment is responsible for roughly half of the company's operating income and is bigger than its studio and theme-park units.
However, the company's theme-parks unit saw the biggest revenue increase, up 12% to $5.87 billion. The studio entertainment segment saw revenue slide 16%, pressured from the performance of releases that included "Guardians of the Galaxy Vol. 2," "Pirates of the Caribbean: Dead Men Tell No Tales" and "Cars 3" compared with prior-year films like "Captain America: Civil War," "The Jungle Book," and "Finding Dory."
Overall, Walt Disney reported a third-quarter profit of $2.37 billion, or $1.51 a share, down from $2.60 billion, or $1.59 a share, a year earlier. Excluding certain items, adjusted earnings were $1.58, down from $1.62 a year ago.
Revenue sagged 0.3% to $14.24 billion.
Analysts surveyed by Thomson Reuters had expected adjusted earnings of $1.55 a share on revenue of $14.42 billion.
Traditional pay-TV distributors lost an estimated 941,000 subscribers in the period between April and June, the worst quarterly loss ever, according to MoffettNathanson. The period is always rough for the cable industry as college campus shut down for the summer, among other seasonal factors.
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Walt Disney Co. just became the biggest cord-cutter Hollywood has ever seen.
The world's largest entertainment company said Tuesday it is starting two online streaming services to offer its sports, movies and television programming directly to consumers, a broadside at distributors old and new, including cable providers and Netflix Inc.
As part of the strategy, Disney said it would pull future movies from Netflix, an announcement that sent shares for the streaming service down 7% in after-hours trading.
Disney will start one streaming service for its ESPN sports unit early next year, and another in 2019 that is to carry other Disney entertainment, including original material available only on the new service.
The moves represent a gamble that in the long run it will be more lucrative for Disney to sell its entertainment -- which includes some of Hollywood's most valuable stories and characters -- directly to consumers, rather than through services that offer large, upfront payments but also serve as gatekeepers to audiences.
Disney has dominated the film industry in recent years, thanks to acquisitions that have placed the "Star Wars" franchise, Pixar Animation and Marvel Studios under one roof.
The shift also signals rising confidence at media companies that they can take control of distributing their content online, without relying on Netflix or others as much as they now do. CBS Corp.'s earnings this week included a strong report on the early performance of its direct-to-consumer offering CBS All Access, one of the drivers of its subscription revenue.
Disney and other media companies have come to rely on the licensing revenue from Netflix deals, but they have been looking for ways to wrest back control, as it has become apparent that such arrangements mean decreased visibility and ratings for them and their subbrands.
The new Disney-branded service is to carry movies Disney releases starting in 2019, including "Toy Story 4" and "Frozen 2," the company said Tuesday. Disney chairman and chief executive Robert Iger said on an earnings call with analysts Tuesday the company would offer the service first in the U.S. before expanding internationally.
Eventually, he indicated, older Disney titles are likely to be added to the service. Pricing hasn't been determined, he said, and he left open the possibility of separate services for Star Wars and Marvel content.
Disney's decision to go its own way is a damning evaluation of the traditional cable system, where cord-cutting has already weakened providers and caused revenue declines in Disney's own cable networks division, which includes ESPN.
Operating income in its cable networks segment, which houses ESPN, retreated 23% in the third quarter, weaker than the 21% decline predicted by analysts cited by FactSet. Operating income within the segment contracted for the fourth time in the last five quarters.
Tuesday's news came about two years after Mr. Iger told investors the company was seeing "some subscriber losses" at ESPN, an acknowledgment that would come to define earnings announcements.
Since then, in Wall Street's eyes, the long-term issues at ESPN have overshadowed the successful return of the "Star Wars" franchise, the hit performance of movies such as "Beauty and the Beast" and the opening of the Shanghai Disney Resort.
The new ESPN streaming service will include Major League Baseball and National Hockey League games. However, it will not be a streaming version of the regular ESPN cable-network channel. Flagship programs such as "Monday Night Football" and NBA basketball won't be on the ESPN streaming platform. ESPN President John Skipper will manage the network's streaming service, which will be accessed through an updated version of ESPN's current app.
Disney has become a bellwether for the entertainment industry at large, and its move into streaming services could encourage other conglomerates to consider direct-to-consumer models, further weakening a cable industry already hit by cord-cutting.
In the past couple of years at Disney, adapting the company to a consumer landscape dominated by new players like Netflix has become a top concern.
Disney said Tuesday it would pay $1.58 billion for an additional 42% stake in BAMTech LLC, a direct-to-consumer streaming technology and marketing-services company. It already had a 33% stake in BAMTech.
Netflix and Amazon.com Inc. have spent aggressively on original content, as studios and networks rethink the strategy of selling their programming to relative newcomers that have emerged as their biggest competitor for viewers. The tech companies' expansion into producing original content has widened the rift with traditional Hollywood studios.
In a statement, Netflix said: "U.S. Netflix members will have access to Disney films on the service through the end of 2019, including all new films that are shown theatrically through the end of 2018."
"We continue to do business with the Walt Disney Company on many fronts, including our ongoing relationship with Marvel TV," the company added.
The move Tuesday represented the strongest break yet from a Hollywood studio with Netflix, a 20-year-old company that began as a DVD distributor.
Disney was one of the first Hollywood players to cozy up to Netflix. In 2012, it struck a deal giving Netflix the first subscription video window for its movies after their theatrical run. Disney's Marvel unit also struck a deal to make original shows for Netflix including "Jessica Jones" and "Luke Cage." Those pacts helped establish Netflix as a legitimate contender to services such as HBO and CBS Corp.'s Showtime.
While Mr. Iger didn't rule out Marvel continuing to create content for Netflix, on Monday the streaming service acquired Millarworld, a comic book publisher with its own collection of superheroes to build franchises around that now seems like a possible hedge against Tuesday's news.
Mr. Iger's plans come as the he faces the end of his tenure. He has said he would leave the company in 2019. Important to his legacy will be how well he prepares Disney for a media ecosystem in which technology has upended traditional distribution models.
Disney shares fell 3.1% in after-hours trading Tuesday to $103.07.
ESPN has been an example of the challenges facing the cable industry amid declining viewership and the overall cord-cutting trend. Earlier this year the network shed some of its most recognizable on-air talent in a round of layoffs.
The sports network's presence in U.S. pay-TV households has fallen by around 6 percentage points, to 89%, since fiscal 2013, according to MoffettNathanson. The research firm estimates ESPN has lost more than 5 million subscribers from people downgrading to less expensive cable bundles.
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(END) Dow Jones Newswires
August 08, 2017 21:02 ET (01:02 GMT)