Deep pockets a must to fight Netflix, its competitors find

Costs adding up for Disney, WarnerMedia and Discovery Inc.

Media giants are realizing what Netflix Inc. already knows: Streaming is expensive.

The costs are adding up as Walt Disney Co., WarnerMedia and Discovery Inc. build their own online video services to make up for shrinking cable and DVD businesses. Those investments, coupled with efforts to pull back content from Netflix and other online services, mean revenue and profit will be under pressure for years.

“Starting a direct-to-consumer service takes an incredibly strong stomach for losses,” said BTIG analyst Rich Greenfield. “If you want to win, it’s very expensive.”

Deep-pocketed buyers like Netflix and Amazon initially helped media companies survive the decline in DVD sales and rentals by providing a new outlet for movies and TV shows. But now they’ve become a threat — luring customers away from lucrative cable subscriptions — and have forced major media companies to develop their own online services.

Disney lost just under $100 million on streaming in the first quarter and expects to lose an additional $200 million on its online video efforts in the second quarter, mostly to develop ESPN+, its subscription sports channel. The company will also surrender about $150 million in operating income after cutting off licensing to competing services, executives said on a February call. “Captain Marvel,” a superhero blockbuster that opened Friday, is the first Disney movie in years that won’t eventually show on Netflix.

Michael Nathanson, a media analyst with MoffettNathanson, expects the Burbank, California-based entertainment giant to lose more than $1 billion this year and another $1 billion next year by forgoing licensing deals and investing in its online video business, including Disney+, which will be the TV home for the company’s movies when it debuts later this year.

AT&T Inc., which bought Time Warner Inc. for $85 billion last year, is looking at a minimum of $1 billion in new annual costs for added programming it wants from HBO, the premium cable network.

DREAMSTIME Netflix initially helped media companies survive the decline in DVD sales and rentals by providing a new outlet for movies and TV shows. But now it has become a threat.