By Erich Schwartzel and Joe Flint
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.
Write to Erich Schwartzel at erich.schwartzel@wsj.com and Joe
Flint at joe.flint@wsj.com
(END) Dow Jones Newswires
August 08, 2017 21:02 ET (01:02 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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