The new Disney will be a thrill ride

WATCH OUT, NETFLIX

In order for Disney to get to “Disney-plus,” it’s going to have to be Disney-minus for a while.

On Wednesday, Walt Disney Co. will officially complete its acquisition of 21st Century Fox Inc.’s film and TV assets for about US$85 billion, including debt. The deal expands Disney’s library of content as it looks to become a competitor to Netflix. Next comes the April 11 big reveal of Disney-plus, stylized as Disney+, the name of its new subscription streaming app that will be available at the end of the year.

While both these moves may be advantageous to Disney in the long run, earnings during the next few years will likely reflect significant disruptions to a company that shareholders appreciate for its stable nature and predictability. There may be meaningful losses in the new direct-to-consumer streaming business, reduced licensing revenue for Disney’s other divisions and disturbances to its unique corporate culture. Disney is also issuing some stock to Fox investors, which will reduce earnings per share. So, for the first time in a long time, Disney’s quarterly results could be a bit tumultuous.

Developing a streaming product is extremely costly. The company is forecasting that losses for the direct-to-consumer streaming unit worsen by US$200 million in the current quarter versus a year earlier. As it builds and then launches Disney+, the unit may lose US$1.4 billion in total this year and more than US$2 billion in each of the next two years, according to Michael Nathanson, an analyst for MoffettNathanson.

Alan Gould of Loop Capital Markets pegs the loss at more than US$3 billion by 2022. Buying Fox also increases Disney’s stake in Hulu to 60 per cent. Hulu is growing, but loses money as well.

The cultures of Fox and Disney don’t exactly mesh well, which is already creating headaches for Disney CEO Robert Iger. Just last month, Fox was ordered to pay US$179 million to actors and producers from its hit show Bones after they “claimed they were cheated out of their share of profits,” Bloomberg News reported. The judge blasted Fox executives, who will now work for Disney, forcing Iger to put out a statement defending their “character and integrity.” (Fox is challenging the ruling.)

This merger and streaming gambit pose significant challenges, but Disney is shrewd. I’ll explain why after you read these remarks Iger made in 2014 gushing about Netflix:“We’re growing our business with Netflix because we believe in their platform and its future. … We also believe that our brands can be well-monetized on their platform, which is evidenced by what they’re paying for our brands and our content. As long as that continues, which I think it will, not just domestically but internationally, our business is expected to be robust with them or even grow.”

Not long after, Disney introduced a little-noticed streaming product in the U.K. called DisneyLife that served as the testing ground for what would later become a full-fledged streaming strategy. Publicly, Disney was happily working with Netflix, while quietly planning its attack. Its experience with DisneyLife and the technological hiccups that came with it led to the important acquisition of BAMTech, which would later power ESPN+ and Disney+.

Fox will test Iger’s patience, and Disney+ will test investors’ patience. But as I wrote recently, Iger is more than getting compensated for the trouble. He also hasn’t given shareholders a reason to doubt him yet.