“If you look at Disney’s businesses, except for the theme parks, virtually all of the businesses touch consumers through third parties, everything from big box retailers to the owners of motion-picture theatres," Disney’s chief executive officer said in an interview on Bloomberg TV. “This is an opportunity to reach the consumer directly."
The need for Disney to act was underscored by the company’s fiscal third-quarter financial results, which were also announced on Tuesday. Sales and profit fell because of weakness in the company’s big cable TV division, especially ESPN, where subscribers and ad sales shrank.
Still, Iger’s decision shocked the investors, sending shares of both Disney and Netflix lower in late trading.
Disney’s plans include a new online ESPN service next year that would broadcast more than 10,000 live sporting events, including major league baseball, hockey, soccer and tennis for what Iger called a “reasonable" monthly fee.
In 2019, the company will launch a Disney video service, featuring live-action films, Disney Channel TV shows and Pixar movies.,
In the process, the Burbank, California-based company said it’s ending a deal to offer its newest films online through Netflix, the video-streaming pioneer. That will stop in 2019. Consumers, Iger said, are moving rapidly online and Disney needs to move with them.
Shares of Disney fell 3.8% to $102.92 in extended trading. Netflix, which is losing a key supplier, was down 4.6% to $172.95.
Iger, 66, has shown a willingness to make big bets in the past. To revive the company’s flagging film business, he spent $15.2 billion over almost a decade buying a trove of movie ideas: Pixar Animation, Marvel Entertainment’s cast of comic superheroes and Lucas film’s Star Wars franchise.
Now, he’s focusing on Disney’s biggest business- television, where cord cutters and cord shavers threaten two crucial sources of revenue - advertising and subscriber fees.
In the third quarter, which ended in 1July, Disney reported a rare drop in sales and profit. Earnings at the company’s TV networks slumped 22% amid higher-costs for sports programming, as well as, a drop in subscribers and weak ad sales at its flagship ESPN channel. While profit of $1.58 a share beat analysts’ estimates, revenue declined slightly and missed projections.
“We looked at the sub losses of 3% as the high end," Edward Jones analyst Robin Diedrich said in an interview. “We’re not seeing the tailing off that we expected. This is continuing to happen."
The immediate fallout for Netflix looks minimal, though investors may fear other Hollywood studios will move against the company and further restrict what they sell to the online service. Netflix will spend more than $6 billion on programming in 2017, much of it from other media outlets, and has a long term budget of $15.7 billion, with a significant portion dedicated to the company’s own original productions.
Netflix has lost content before, including pictures from Sony, Paramount, MGM and Lions Gate. Yet its subscribers have continued to grow and the company has successfully expanded its streaming service worldwide.
“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," Los Gatos, California-based Netflix said in a statement.
“We continue to do business with the Walt Disney Co. on many fronts, including our ongoing relationship with Marvel TV."
Disney already has its toes in direct-to-consumer businesses. For two years, the company has offered Disney Life, an online video service in the U.K. featuring classic films and TV. As part of Tuesday’s announcement, Iger said Disney would pay $1.58 billion to buy an additional 42% of BamTech, an arm of Major League Baseball that provides streaming services for everything from ball games to World Wrestling Entertainment Inc.
Disney will let viewers watch what Iger called a “Netflix of sports" via a single ESPN app. Some will be cable customers who watch ESPN and ESPN2 over the web. Others will be monthly subscribers for just the new online sports programming. Some day, Disney could seamlessly offer all of its traditional TV channels online for a monthly fee, he said.
To some degree, Disney’s CEO is taking a page from other entertainment executives, such as CBS Corp.’s Les Moonves and Time Warner Inc.’s Jeff Bewkes, who have launched direct-to-consumer subscription services such as CBS All Access and HBO Now. But few have the characters and sports licenses that Disney has accumulated and the potential to sell those to customers around the world.
“Disney has great content that crosses generations," said Trip Miller, a shareholder at Gullane Capital Partners in Memphis. “There is no doubt my grandchildren will consume Disney content that we consumed as children. They are just going to be consuming it in a different way."
Iger knows his plans and remarks will likely anger big distributors such as Comcast Corp.’s Brian Roberts and Randall Stephenson of AT&T Inc., which owns DirecTV. He acknowledged that on BloombergTV on Tuesday.
“My guess is distributors will look at this probably more as a threat than anything else," Iger said. “It’s not intended to be that. We are reacting to the marketplace." Bloomberg