By Ben Fritz
Walt Disney Co's market capitalization is almost twice as big as
Netflix Inc.'s. It operates the most successful movie studio in
Hollywood, one of the most profitable channels on cable television
and the biggest theme-park business in the world.
Yet its pursuit of 21st Century Fox Inc.'s entertainment assets
indicates that repositioning its television business to compete in
the streaming, a-la-carte world Netflix dominates has become
Disney's top priority.
Disney's TV operation alone is substantially larger than
Netflix, but its growth has stalled while its digital competitor is
booming. Netflix's revenue increased 32% in the first nine months
of its current fiscal year to $8.4 billion and its operating income
grew 163% to $593.4 million. In the first nine months of its fiscal
year, Disney's TV revenue was flat at $18 billion and operating
income fell 11% to $6 billion.
Recent talks for Disney to acquire Fox's entertainment cable
networks and film and television studio, and stakes in European
satellite broadcaster Sky and streaming television company Hulu,
have stalled, and it is unclear whether they will restart, let
alone result in a deal, according to people close to the
discussions. Fox and Wall Street Journal parent News Corp. share
common ownership.
In an interview before the Fox talks were reported this week,
Disney Chief Strategy Officer Kevin Mayer said Disney has in the
past decade spent $15 billion buying up "really high quality"
intellectual property from Pixar Animation Studios, Marvel
Entertainment and "Star Wars" producer Lucasfilm.
"Now we've turned our attention to the one platform seeing
growth challenges," he said. "That's the television platform."
That same logic applies to its pursuit of Fox's assets, analysts
and people close to Disney said.
The company is already in the midst of a multibillion-dollar
effort to launch direct-to-consumer online video offerings, an
effort that could be the final legacy of Chief Executive Robert
Iger, who is scheduled to retire in 2019.
That same year, Disney has said, it plans to launch a
family-entertainment service featuring television shows and movies,
including recent theatrical releases that currently stream on
Netflix under a deal that ends next year and Mr. Iger intends to
not renew.
Next year, Disney aims to debut an ESPN streaming service
featuring sports not currently available on television.
Both will use technology from the streaming company BamTech, on
which Disney this year spent $1.58 billion for majority
control.
Mr. Mayer described the streaming services as "not an
anti-Netflix move, but a pro-Disney move."
He said he believes Disney's video offerings can stand alongside
Netflix's, as well as Amazon.com Inc.'s streaming service, in a
future where families subscribe to multiple digital-entertainment
services.
But if Disney isn't looking to take down Netflix, it is
reckoning with the company's success. In addition, Disney and other
Hollywood studios now view Netflix less as a cash-rich buyer for
its content than as a competitor, particularly as the digital
company has moved aggressively into original production with hits
like "Stranger Things" and even big-budget movies like the upcoming
"Bright," starring Will Smith.
In pulling its movies from Netflix in 2019, Disney gave up an
estimated $300 million-plus a year, people with knowledge of the
arrangement said. And while it currently produces Marvel superhero
series like "Daredevil" for Netflix, new Marvel shows in the future
are expected to live on the company's own streaming service.
"Netflix is eating the world," said one veteran Hollywood
executive. "The biggest challenge for Disney, and for all of us, is
to compete with them."
Buying Fox's 30% stake in Hulu would give Disney majority
control of that streaming service, which the company could position
as an adult-targeted entertainment service that stands alongside
its family and sports ones, said people close to the company. It
could feature content produced by 20th Century Fox's television
studio, as well as those that air on the FX cable network, both of
which Disney would buy under the stalled talks, said people close
to Disney.
With Sky, Disney would get the dominant European pay-television
distributor. Fox currently owns 39% of Sky and has bid $15.5
billion to buy the rest -- an offer currently held up by U.K.
regulatory review.
Owning even part of a traditional TV distributor would be a big
shift for Disney. But it would bring the company more in line with
two of its biggest competitors: Cable giant Comcast Corp., owner of
NBCUniversal, and AT&T Inc., which owns DirecTV and has agreed
to acquire Time Warner Inc.
Buying Fox would bring Disney one other significant asset that
would make it a more formidable competitor in TV and film. Under a
deal that dates back to the 1990s, Fox controls big- and
small-screen rights to Marvel's X-Men and other characters who have
appeared in their comic books, as well as the Fantastic Four.
Fox has produced 15 movies with its Marvel rights, including the
hits "X-Men: Days of Future Past," "Deadpool" and this year's
"Logan." It has recently moved into television, with "Legion" on FX
and "The Gifted" on the Fox network.
Following an acquisition, Disney would consolidate its control
of all its Marvel characters save for Spider-Man, still at Sony
Pictures Entertainment, and could have them appear together in
films and TV series.
Write to Ben Fritz at ben.fritz@wsj.com
(END) Dow Jones Newswires
November 08, 2017 05:44 ET (10:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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