DIS Walt Disney Co

21st Century Fox deal, other steps are aimed at positioning the firm in streaming market

By Erich Schwartzel 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 8, 2018).

Walt Disney Co. Chief Executive Robert Iger gave investors a preview of what he wants his company's next chapter to be.

After several years of assuaging investors nervous about cord-cutting and competition from streaming giants such as Netflix Inc., Mr. Iger, on a conference call with Wall Street analysts Tuesday, focused on Disney's high-stakes plan to fight back: the company's own direct-to-consumer offerings and a pending $71.3 billion acquisition of 21st Century Fox Inc.'s entertainment assets.

"Consumers are picking and choosing from all of the options in the market," said Mr. Iger, in remarks after Disney's release of quarterly financial results. "We continue to move full steam ahead on our direct-to-consumer strategy."

Mr. Iger has reorganized his company and is spending heavily to implement that strategy. In the three months since his previous earnings call, Mr. Iger won a bidding war with Comcast Corp. for the Fox assets, which include the company's film and television studios, as well as media company Star India and the Sky PLC pay-television operator. The deal has already been approved by U.S. authorities at the Justice Department but still needs clearance from several foreign jurisdictions.

If the deal closes, as Disney says it expects it to next year, it will put the company responsible for "Avatar" and "The Simpsons" under the same roof as Mickey Mouse, Luke Skywalker and "The Avengers." Those brands will then be used to sell consumers on a Disney-branded streaming service set to launch in late 2019.

Mr. Iger's hope is that the strength of Disney's brand and characters will allow it to compete in a crowded streaming market and "thrive alongside Netflix, Amazon and anyone else," he said.

The focus on direct-to-consumer offerings will suddenly put Disney, a company best known for traditional film and television entertainment, in charge of three separate digital services. The company's ESPN Plus sports-programming streaming service was launched earlier this year, and Disney will become a majority owner of Hulu if the Fox deal closes. Hulu is a joint venture among Disney, Fox and Comcast's NBCUniversal.

"They will basically be designed to attract different tastes or different audience demographics," said Mr. Iger, referring to the three different services. The company might bundle the subscriptions for customers who want all three, he added.

Disney's streaming service, featuring programming that includes "Star Wars" and "High School Musical," will have fewer titles than an "aggregation" service like Netflix, he said, and will instead rely on consumers' perceived demand for the company's franchises.

The Disney service "does not to have to have close to the volume of what Netflix has because of the value of the brands," Mr. Iger said.

It remains unclear how exactly Fox's film and television assets will fit under the Disney roof, but Mr. Iger nodded to some plans on the call Tuesday. The company's Fox Searchlight label, responsible for recent best-picture winners such as "12 Years a Slave" and "The Shape of Water, " will likely produce for streaming services with original film and television projects, he said.

Fox's film studio will continue work on existing series, he said, including planned sequels to "Avatar," "The Fantastic Four" and "X-Men." Mr. Iger indicated that such films will remain traditional theatrical releases, rather than be produced for streaming-service distribution.

The company said certain expenses for its third fiscal quarter almost doubled from the same period a year earlier to $196 million. That increase stemmed partly from its agreements to buy the 21st Century Fox assets, as well as higher compensation costs, Disney said.

21st Century Fox and News Corp, parent company of The Wall Street Journal, share common ownership.

Control of Sky remains an open question for Disney. Comcast is still angling for control of the European pay-TV operator, and currently has the lead with a bid that values Sky at $34 billion, or about 5% higher than Fox's most recent offer.

Another round of offers would come from Fox, but Disney has the right to veto any deal and effectively end the standoff because it would acquire the Sky stake when its deal closes. On Tuesday, Fox posted its Sky offer document, satisfying a requirement under U.K. takeover rules and giving it more time to respond to Comcast's higher offer.

Mr. Iger indicated Tuesday that he wanted to win Sky, citing it as one of the Fox international assets that fit into Disney's "global growth strategy."

In the third quarter, Disney posted year-over-year increases in net income and revenue, if not to the extent that most Wall Street analysts expected. Revenue climbed 7% to $15.2 billion and net income rose 23% to $2.9 billion.

Revenue was driven by a 20% increase in the company's studio-entertainment division. Disney's "The Incredibles 2" set a box-office record during the quarter, becoming the top-grossing animated film to date with nearly $600 million in the U.S. and Canada. Another major release for the quarter, "Avengers: Infinity War," has collected more than $2 billion world-wide.

Disney's film arm had a rare misstep during the quarter, too, with "Solo, " now the lowest-grossing "Star Wars" title in history at $213 million.

--Micah Maidenberg contributed to this article.

Write to Erich Schwartzel at erich.schwartzel@wsj.com

(END) Dow Jones Newswires

August 08, 2018 02:47 ET (06:47 GMT)

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