Disney is tired of suffering from cord-cutting, which has been pulling subscribers away from ESPN. The company announced plans to launch its own direct-to-consumer entertainment streaming service — and removing its films from would-be rival Netflix — in its third quarter earnings release.
After markets closed Tuesday, Disney reported revenue of $14.24 billion and earnings of $1.58 a share for the three months ended July 1, which the company defines as its fiscal third quarter. That compares with the $14.28 billion in revenue and earnings of $1.62 the Mouse House hauled in during the corresponding period last year. Analysts had estimated Disney would report revenue of $14.42 billion and earnings of $1.55 a share, on average.
“Today we announced a strategic shift in the way we distribute our content,” Disney Chairman and CEO Bob Iger said in a statement announcing the earnings. “The media landscape is increasingly defined by direct relationships between content creators and consumers, and our control of BAMTech’s full array of innovative technology will give us the power to forge those connections, along with the flexibility to quickly adapt to shifts in the market. This acquisition and the launch of our direct-to-consumer services mark an entirely new growth strategy for the company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands.”
Disney will pay $1.52 billion to acquire an additional 42 percent of BAMTech, the streaming video technology business the company acquired a 33 percent stake in last year for $1 billion — and which will provide the technological underpinnings for its upcoming streaming services. The company will launch its previously announced ESPN-branded sports streaming service in early 2018 and a Disney-branded direct-to-consumer product in 2019. The Disney streaming service will be the exclusive home for subscription video-on-demand viewing of the company’s recent hits, including its live-action remakes and Pixar animated features — meaning they will be removed from Netflix when it launches. However, existing Disney movies released before then will remain on Netflix.
Those services won’t entirely replace the lost subscribers that have bailed on the pay-TV subscriber ecosystem (and ESPN execs have said it won’t duplicate what it puts on traditional TV), but it could turn into a growing source of revenue, and position Disney’s entertainment and ESPN’s sports empire for the likely future of television. Competitors are entering the space too, with CBS Chairman and CEO Les Moonves announcing a forthcoming CBS sports streaming service on the company’s earnings call Monday, as well as expanding its flagship CBS All Access service internationally.
After becoming the first-ever studio to gross more than $7 billion worldwide in a calendar year in 2016, Disney has continued its momentum into this year, topping all other studios through August 6 with 19.9 percent market share. But with an absolutely massive 2016 spring quarter at the box office, led by “Captain America: Civil War,” “The Jungle Book” and “Finding Dory,” which each grossed more than $330 million domestically during the three month period. “Guardians of the Galaxy Vol. 2” was the only Disney movie to clear the $300 million mark during the spring quarter, which explains some of the theatrical drop-off.
Disney has nothing on the slate in the third quarter (which has contributed to a weak forecast for the overall box office), but its winter is set to include surefire hits like the Marvel movie “Thor: Ragnarok,” animated “Coco” and “Star Wars: The Last Jedi,” which should help the studio finish on a strong note.
The theatrical business looks solid, but Disney’s cable networks still generate the biggest piece of the company’s profit — and continued subscriber losses at ESPN are taking a toll. The company’s cable networks reported a 3 percent drop in revenue and a 23 percent dip in profit compared with the same time the previous year.
Disney’s theme parks business have been a notable bright spot and continued that during the past quarter. Shanghai Disneyland Park, which celebrated its one-year anniversary on June 16 after welcoming 11 million guests during the year. And rival Wanda Group, whose outspoken chairman once called out Disney for building an amusement park in China, was forced to sell its theme park business to a fellow Chinese company.