Dis­ney takes on Net­flix with new stream­ing op­tions

Los Angeles Times - - FRONT PAGE - By Daniel Miller and Meg James

Walt Dis­ney Co. will launch two Net­flix-like stream­ing ser­vices — one for sports and an­other for films and tele­vi­sion shows — in one of the bold­est moves by an en­ter­tain­ment com­pany to ad­dress the chang­ing me­dia land­scape.

The stand-alone sub­scrip­tion ser­vices would ap­peal to younger au­di­ences who are turn­ing away from tra­di­tional me­dia and flock­ing to Net­flix and other dig­i­tal plat­forms. The ESPN ser­vice, which would be avail­able next year, is ex­pected to fea­ture 10,000 sport­ing events an­nu­ally, among them Ma­jor League Base­ball games.

The Dis­ney-branded film and TV of­fer­ing, set to de­but in 2019, would in­clude orig­i­nal con­tent de­vel­oped by Walt Dis­ney Stu­dios.

The move comes at a time of grow­ing un­ease in Hol­ly­wood about the ris­ing clout of Net­flix, which has si­phoned view­ers from lin­ear tele­vi­sion and changed con­sumer habits — threat­en­ing con­ven­tional busi­ness mod­els. Un­til re­cently, stu­dios have been happy to li­cense their tele­vi­sion shows and movies to Net­flix, reap­ing big checks. A few have taken rel­a­tively mod­est steps to chal­lenge Net­flix by with­hold­ing cer­tain films and shows.

Some es­tab­lished me­dia com­pa­nies have taken a more ag­gres­sive ap­proach, launch­ing their own stream­ing ser­vices. HBO, CBS, Show­time, Starz — even the Ten­nis Chan­nel — each have their own dig­i­tal chan­nels of­fered di­rectly to con­sumers. At the same time, stream­ers such as Ama­zon.com are look­ing to get deeper into the live tele­vi­sion busi­ness and have been on the hunt for sports rights.

But Dis­ney’s ac­tions, an­nounced on the same day it de­liv­ered weak fis­cal thirdquar­ter earn­ings, go much fur­ther, and rep­re­sent a ma­jor shift in strat­egy. The

com­pany said Tues­day that it would end its dis­tri­bu­tion agree­ment with Net­flix for new films, be­gin­ning with the 2019 cal­en­dar year the­atri­cal slate. In­stead, view­ers would have to go to the Dis­ney ser­vice to stream those movies. Shows cur­rently pro­duced by Dis­ney’s Marvel Stu­dios such as “Jes­sica Jones” would still be avail­able on Net­flix.

“This is a dec­la­ra­tion of in­de­pen­dence by Dis­ney, and now you have a di­rect com­pe­ti­tion be­tween these two be­he­moth play­ers,” said Peter Csathy, founder of the ad­vi­sory firm Creatv Me­dia. “Net­flix has a huge head start, but Dis­ney thinks it can win. And Dis­ney can fea­ture the most valu­able con­tent li­brary in the world.”

As part of its ef­fort to cre­ate the new ser­vices, Dis­ney is pay­ing $1.58 bil­lion for a greater stake in Bamtech, a stream­ing video com­pany that is de­vel­op­ing both prod­ucts. Dis­ney pre­vi­ously dis­closed it was work­ing on the ESPN ser­vice when it ac­quired a 33% in­ter­est in the com­pany, which was cre­ated by Ma­jor League Base­ball, in Au­gust 2016. Dis­ney will now own 75% of Bamtech.

“No one is bet­ter po­si­tioned to lead the in­dus­try into this dy­namic new era, and we’re ac­cel­er­at­ing our strat­egy to be at the fore­front of this trans­for­ma­tion,” Dis­ney Chief Ex­ec­u­tive Robert Iger said dur­ing a con­fer­ence call with an­a­lysts.

Dis­ney’s third-quar­ter earn­ings re­port un­der­scored the rea­son­ing for the tac­ti­cal realign­ment. For the quar­ter that ended July 1, Dis­ney re­ported a profit of $2.37 bil­lion, down 9% from a year ear­lier. It de­liv­ered ad­justed earn­ings per share of $1.58 and rev­enue of $14.2 bil­lion, which was es­sen­tially flat com­pared with a year ear­lier. An­a­lysts had pre­dicted earn­ings per share of $1.55 on rev­enue of $14.5 bil­lion, ac­cord­ing to Fac­tset.

Dis­ney’s me­dia net­works unit, which houses ESPN and ABC, had a tough quar­ter, re­port­ing seg­ment op­er­at­ing in­come of $1.84 bil­lion, which was down 22% from a year ear­lier. The unit’s op­er­at­ing in­come de­clined on a year-over-year ba­sis for the fifth quar­ter in a row. Within the ca­ble net­works group, which in­cludes ESPN, seg­ment op­er­at­ing in­come was down 23% to $1.46 bil­lion. Dis­ney at­trib­uted the drop-off, in part, to higher pro­gram­ming costs be­cause of a new NBA TV con­tract, and lower ad­ver­tis­ing rev­enue at ESPN.

ESPN has long been the profit en­gine for Dis­ney. But ESPN has been squeezed by ris­ing sports rights costs at a time when pay-TV rev­enue has been un­der threat be­cause of cord-cut­ting. ESPN has lost more than 10 mil­lion sub­scribers since 2010, ac­cord­ing to Nielsen data.

Robin Diedrich, an an­a­lyst with Ed­ward Jones Re­search, said that the sub­scriber losses prob­a­bly drove Dis­ney’s de­ci­sion to launch the new plat­forms.

“We con­tinue to see more ero­sion of gen­eral sub­scribers in the tra­di­tional busi­ness,” she said. “That is the con­cern and prob­a­bly what was push­ing them to do this sooner rather than later.”

Iger said that “mon­e­ti­za­tion pos­si­bil­i­ties are ex­tra­or­di­nary” for Dis­ney once it launches the new stream­ing ser­vices, whose prices have not been dis­closed.

He said the Dis­ney-branded prod­uct would in­clude ex­clu­sive films and TV shows — a prospect that could make it a must-have for some con­sumers be­cause of the many pop­u­lar brands in Dis­ney’s sta­ble. Over the last decade or so, Dis­ney’s multi­bil­lion-dol­lar ac­qui­si­tions of Pixar An­i­ma­tion Stu­dios, Marvel En­ter­tain­ment and Lu­cas­film have given it a trove of valu­able in­tel­lec­tual prop­erty. Dis­ney’s lu­cra­tive fran­chises in­clude “Star Wars,” “The Avengers” and “Toy Story.”

“It’s been clear to us for a while [that] the fu­ture of this in­dus­try will be forged by di­rect re­la­tion­ships be­tween con­tent cre­ators and con­sumers,” Iger said.

Dis­ney has worked with Net­flix for years to dis­trib­ute its con­tent — in­clud­ing hit films and orig­i­nal TV shows. In a state­ment, the Los Gatos, Calif., com­pany af­firmed its busi­ness re­la­tion­ship with Dis­ney, not­ing the two com­pa­nies con­tinue to work to­gether on Marvel TV projects. Both Dis­ney’s and Net­flix’s stock lost more than 3% at one point in af­ter­hours trad­ing Tues­day. Shares of Dis­ney had closed up about half a per­cent to $106.98 in reg­u­lar trad­ing.

Net­flix has been rid­ing a wave of en­thu­si­as­tic in­vestor sen­ti­ment af­ter it posted strong growth for the sec­ond quar­ter that ended in June, sur­pass­ing 100 mil­lion sub­scribers world­wide dur­ing the re­cent three­month pe­riod. The com­pany has at­trib­uted the growth to its strong con­tent slate, which in­cludes new sea­sons of pop­u­lar se­ries in­clud­ing “House of Cards,” “Or­ange Is the New Black” and “Master of None.” This week, it ac­quired comic book pub­lisher Mil­lar­world and signed a deal to do a six-episode talk show with David Let­ter­man.

De­spite Net­flix’s in­creased em­pha­sis on orig­i­nal shows such as “Stranger Things,” most of the con­tent viewed by its sub­scribers re­mains pro­gram­ming that Net­flix li­censes from other stu­dios, in­clud­ing Dis­ney. Net­flix is ex­pected to spend at least $6 bil­lion this year on con­tent, up from $5 bil­lion last year.

Some an­a­lysts have spec­u­lated that it would make sense for Dis­ney to pur­chase Net­flix to in­oc­u­late it­self from au­di­ences’ shift to stream­ing video. Now Net­flix finds it­self more di­rectly com­pet­ing with the $167-bil­lion ti­tan.

“Dis­ney chose to fight,” Csathy said. “The hit on Net­flix is real.”

Dis­ney’s de­ci­sion is sure to rip­ple across the me­dia and en­ter­tain­ment busi­ness. Pay-TV op­er­a­tors, for ex­am­ple, have dreaded the prospect of a stand-alone ESPN ser­vice be­cause it would give some con­sumers more rea­son to ditch their TV sub­scrip­tions.

How­ever, many of these ca­ble com­pa­nies pro­vide high-speed In­ter­net ser­vice, which has be­come the most prof­itable part of their busi­ness. Con­sumers use more data as they stream hun­dreds of hours of tele­vi­sion shows and movies.

Charley Gal­lay Getty Im­ages for LACMA

DIS­NEY’S new stream­ing ser­vices would ap­peal to younger au­di­ences who are f lock­ing to Netf lix and other dig­i­tal plat­forms. Above, Net­flix con­tent chief Ted Saran­dos, left, and Dis­ney CEO Robert Iger at a 2015 event.

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