By Joe Flint and Ben Fritz
Walt Disney Co.'s biggest business, cable TV, is stalling. And
the problems go well beyond ESPN.
The sports network's struggle to adapt to a rapidly changing
media landscape has garnered much of the attention from investors
and analysts.
But ratings have fallen significantly at Disney's biggest brands
reaching children, teens and young adults, led by Disney Channel
and Freeform. Those two channels each has lost about four million
subscribers over the past three years, bringing them to around 90
million apiece.
The troubles are twofold: a lack of hits and the broader move by
audiences away from traditional television to digital alternatives.
The shift to streaming services such Netflix Inc. and web-based
platforms like Google's YouTube is particularly pronounced among
younger viewers targeted by these Disney networks.
Channel executives say they are trying to improve programming
and determine how aggressively to make the leap to mobile and
online formats.
"We see the migration," said Disney Channel President Gary
Marsh. "One of the challenges is trying to serve the viewership
where they're going as opposed to trying to drive them where we
want them to go."
Disney Channel programming is focused on children, while
Freeform, which changed its name from ABC Family in January of
2016, is aimed at teenagers and young adults.
Cable TV has long been Disney's biggest business, accounting for
30% of its revenue and 43% of profits last fiscal year. About 26%
of cable revenue and profits come from entertainment networks like
Disney Channel and Freeform, Morgan Stanley estimates, while the
rest is generated by ESPN. (Disney doesn't disclose the
breakdown).
Even though Disney Channel is considered a relatively costly
channel for cable companies, it doesn't command the large
subscription fees that ESPN does.
Also at stake for Disney is the exposure its TV channels offer
for toys, clothes and other products that the company relies on for
hundreds of millions of dollars annually in revenue.
As consumers "cut the cord," Disney's once fast-growing cable
business has slowed down. Cable revenue is flat and operating
income down 6% in the first half of the current fiscal year, which
has alarmed Wall Street.
Disney Chief Executive Robert Iger has said that strengthening
online accessibility for television programs is a priority and that
the company is preparing to offer its channels, in part or whole,
directly to consumers online rather than just through costly cable
packages.
Profits for Disney Channel and Freeform are driven in part by
long-term contracts with cable companies, but the erosion in
ratings is likely to ultimately hit the bottom line unless the
networks can generate substantial new digital revenue.
Both channels are considering when, not whether, to launch
direct-to-consumer apps, similar to Time Warner Inc.'s HBO Now.
"There's no doubt in my mind that the company will pursue that,"
Mr. Marsh said, adding that such an option could be unveiled in the
near future.
For the first six months of this year, the commercial-free
Disney Channel's ratings among in its core 2-11 and 6-14
demographics fell 23% in prime time and 13% and 18%, respectively,
during the full day, compared with the same period a year ago.
Ratings are also down at the smaller Disney Jr. and Disney XD
networks, which fall under Mr. Marsh's Disney Channel umbrella.
Making the transition to online and mobile platforms is a
delicate dance. Distributors like Comcast Corp. and AT&T Inc.'s
DirecTV pay high subscription fees that currently account for a
large chunk of the Disney networks' profits. They are wary of too
much content being available outside of the pay-TV ecosystem.
Online video currently carries fewer ads and generates
significantly less revenue than network programming, particularly
if it is available to people who don't subscribe to cable.
Still, Freeform President Tom Ascheim said digital viewing for
the channel has doubled in the past two years as his network has
put its shows online, including full seasons of popular programs
like "Famous in Love."
Such a strategy could mean a short-term hit to ratings and
revenue but Mr. Ascheim said, "When we look out a bunch of years
from now, digital gets bigger than linear. That feels real
clear."
On the Disney Channel, some new shows, such as "I Didn't Do It"
and "Best Friends Whenever" didn't click with kids, which
contributed to the ratings decline.
"We haven't had the breakout hits in the last year or so," Mr.
Marsh said.
Disney Channel is betting on "Raven's Home," a spinoff of its
hit "That's So Raven." It also has a sequel to its smash original
movie "Descendants."
Canceled shows on Freeform include the dramas "Guilt" and "Dead
of Summer," which both were darker than the network's "Pretty
Little Liars" and "Famous in Love."
Freeform's prime-time viewership among people aged 12-17 was
down 25% from January through June. For the 18-34 demographic, the
drop was 20% over the same period.
Both Freeform and Disney Channel are confident that their new
slate of shows will lift ratings. Freeform is now targeting young
men along with women. Next season, it plans to debut "Cloak and
Dagger," its first show from sister unit Marvel. The deal took some
persuading, given Marvel's concerns that Freeform wasn't accustomed
to the high budgets Marvel's shows require.
The first couple phone calls were, `Hello...click,' said Karey
Burke, Freeform's executive vice president of programming and
development, who convinced Marvel that her network would spend the
big bucks necessary.
Write to Joe Flint at joe.flint@wsj.com and Ben Fritz at
ben.fritz@wsj.com
(END) Dow Jones Newswires
July 04, 2017 07:14 ET (11:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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