Disney sees a future sans Netflix, Comcast, DirecTV

Bloomberg

Walt Disney Co.’s Bob Iger is ready to embrace the cord cutter.
Disney, the world’s largest entertainment company, outlined plans on Tuesday to sell some of its premiere content directly to consumers online starting next year. It will offer live sports and animated films including “Toy Story 4,” sidestepping partners from Netflix Inc. to pay-TV providers like Comcast Corp. and DirecTV.
“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 theaters,” Disney’s CEO said. “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 and helped send shares tumbling as much as 6.1 percent on Wednesday, the most since February 2016. 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 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 5.5 percent to $101.07 as of 9:31 am in New York. Netflix, which is losing a key supplier, was down 4.5 percent
to $170.40.
Barton Crocket, an analyst at FBR Capital Markets & Co., said Disney’s new digital strategy could weigh on both Disney and Netflix.
At Disney, “we see a measure of EPS pressure as the investments ramp up,” he wrote in a note on Wednesday. “We see this as negative for Netflix: More options for the consumer have to limit Netflix’s pricing leverage and constrain its market opportunity as some consumers might be happy with Disney for online entertainment, instead of Netflix.”
Iger, 66, has shown a willingness 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 Lucasfilm’s “Star Wars” franchise.

Biggest Business
Now, he’s focusing on Disney’s biggest business, TV, where cord cutters and cord shavers threaten two crucial sources of revenue— advertising and subscriber fees.
In the third quarter that ended July 1, Disney reported a rare drop in sales and profit. Earnings at the company’s TV networks slumped 22 percent 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.
“We looked at the sub losses of 3 percent 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.