By Erich Schwartzel
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 8, 2019).
Walt Disney Co.'s hit movies, led by "The Lion King" and "Toy
Story 4," once again helped drive strong quarterly results. But the
company is largely looking beyond the theater for its future,
focusing instead on reasons for folks to stay home.
Disney Chief Executive Robert Iger has spent billions of dollars
buying franchises, from the Avengers to Star Wars -- brands that
will soon be put to the test when Disney launches Disney+, its
putative streaming rival to Netflix Inc.
"We're making a huge statement about the future of media and
entertainment," Mr. Iger said on a conference call with Wall Street
analysts Thursday.
Highlighting the company's dueling priorities, Disney's
theatrical-movie division posted a 52% rise in revenue and 79% jump
in operating income in the three months ended Sept. 28.
Overall, Disney's profit slumped by more than half to $1.05
billion, hurt by a sharp rise in costs stemming in part from the
Disney+ production costs. But its shares rose in after-hours
trading as earnings beat analysts' expectations.
Despite the company's box-office riches, a streaming-first
mentality now pervades the company, if Mr. Iger's remarks were any
indication. Disney's film and television divisions are producing
hundreds of hours of programming not only for Disney+ but also a
19-month-old ESPN streaming service and Hulu, a third service that
Disney now controls after its $71.3 billion acquisition of the 21st
Century Fox entertainment assets.
A team of newly hired engineers has built out an interface and
technical underpinning to withstand millions of subscribers. Former
partners like Amazon.com Inc. are now streaming rivals, forcing
Disney to negotiate deals that get its service onto as many
platforms as possible.
In trying to turn every home into a Mouse House, Disney's
streaming launch is a long-game attempt to allay concerns Wall
Street began expressing in 2015 when Mr. Iger acknowledged
subscriber losses at ESPN, the company's most profitable division.
The prospect of long-term decline at the cable sports network
delivered a shock to Disney's share price, since investors focused
on the company's vulnerability to Netflix despite record-setting
performances at the box office and in theme parks.
Disney is preparing a trio of streaming services to appeal to
more than its core family demographic; and no deal was more
instrumental to the strategy than its absorption of Fox. The
integration of those assets continued on Thursday when Mr. Iger
announced that Fox's FX network will begin producing programming
for Hulu.
Hulu will become the service where Disney sends its more mature
shows and movies. Episodes from original FX shows will be available
on Hulu one day after they premiere, including new shows from "Ex
Machina" director Alex Garland and another starring Cate Blanchett.
Other Fox brands like Fox Searchlight, the studio label behind
Oscar winners like "The Shape of Water," will also develop shows
and movies for the service.
The ESPN streaming service and Hulu will be sold as a bundled
collection for $12.99 a month.
Disney seems to be borrowing elements of Netflix's playbook for
Disney+. The service will allow users to download shows and movies
for later viewing, and multiple user accounts are to be permitted
on each household subscription.
But Disney is also diverging in significant ways. All Disney+
programming will be family-friendly, and episodes will premiere one
at a time, more akin to traditional broadcast or cable television
than to Netflix's binge-it-all approach. Mr. Iger has also said he
wants Disney+ to have a user interface that feels more personally
tailored than Netflix's algorithm-driven model.
Industry insiders expect Disney+, which will cost $6.99 a month,
to siphon some users from Netflix, whose most popular offering goes
for $12.99. Netflix in October missed its subscriber-growth target
in the U.S. and overseas for a second consecutive quarter.
Netflix lost domestic subscribers for the first time in nearly a
decade two quarters ago, and in its latest quarter added 517,000
stateside users -- short of its expectation of 800,000.
By getting into streaming, Disney has gone from a company that
provided other platforms -- including Netflix -- with marquee
entertainment, and into a rival competing for subscribers.
The awkwardness was highlighted last month in a recent dispute
with Amazon over terms to carry Disney apps on Fire TV devices. Mr.
Iger said Thursday that the two companies had reached a deal to
carry Disney+ on the Amazon devices when it launches next week.
That is a significant gain for Disney+, since Amazon had 29% of
the U.S. market for streaming-media boxes in the second quarter,
according to Strategy Analytics, behind only rival Roku Inc.
Subscribers on Tuesday will see a combination of classic Disney
programming coming out of "the vault," including older movies like
"Swiss Family Robinson" or "The Little Mermaid." That fare will be
combined with newer releases from Marvel Studios and original
programming based on some of Disney's most popular franchises, like
the Star Wars spinoff "The Mandalorian" and a new series based on
the 2006 made-for-television movie "High School Musical."
Star Wars is yet another example of a franchise divided by
Disney's streaming strategy. While "The Mandalorian" is the most
notable original offering on Disney+, the theatrical releases of
the franchise will go on "a bit of a hiatus" following the December
release of "Star Wars: The Rise of Skywalker," Mr. Iger said,
acknowledging the struggle some of the Star Wars titles have had at
the theatrical box office.
Disney's total revenue increased to $19.1 billion, slightly
missing analysts' consensus estimate. Revenue jumped 22% to $6.5
billion at the company's media networks, which include ESPN, and
52% to $3.3 billion at its studio entertainment division.
Excluding certain items, earnings were $1.07 a share, higher
than the 94 cents a share expected by analysts polled by
FactSet.
Shares of Disney rose 4.5% to $139 in after-hours trading.
Depressed tourism in Hong Kong, driven by the anti-China
protests that have filled the city's streets in recent months, led
to a significant decline in attendance at Hong Kong Disneyland. If
current trends hold, the location could post a revenue decline of
$275 million in the current fiscal year, compared to just-ended
fiscal 2019, said Disney finance chief Christine McCarthy.
--Allison Prang and Dana Mattioli contributed to this
article.
Write to Erich Schwartzel at erich.schwartzel@wsj.com
(END) Dow Jones Newswires
November 08, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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