Disney takes a billion-dollar bet on streaming

AT DISNEY, CONTENT is king.

The media conglomerate’s studio entertainment, including popular films such as the animated Finding Dory, The Jungle Book and the Marvel saga Captain America: Civil War helped boost the company’s third-quarter profit above expectations.

But The Walt Disney Company’s cable and broadcast channel revenue growth was weaker.

Disney said it will also spend $1 billion for a 33% stake in the Major League Baseball video streaming service BAMTech.

Media companies like Disney are trying to adapt to the increasing popularity of on-demand streaming video and “skinny bundles” — that is, cheaper, slimmed-down channel packages, some of which omit expensive channels like ESPN.

In a call with analysts, CEO Bob Iger said that traditional cable packages known as “multichannel bundles” are most profitable for Disney. But he acknowledged that new digital-video options offer consumers choice and variety.

“We must create or take advantage of new opportunities in ways that are complementary to our multichannel offerings,” he said.

That includes an ESPN-branded streaming service Disney plans to launch sometime before the end of the year. Pricing hasn’t been determined. The new service will offer different programming that’s “complementary” to ESPN, Iger said.

Disney CEO Bob Iger

Films up, TV down

It’s been a year since Iger warned that subscriptions at Disney’s key sports network ESPN might fall slightly as cable “cord-cutting” gathered steam, an announcement that tanked Disney shares.

Subscribers were down about 4% year over year, according to Nielsen statistics cited by BMO Capital Markets. ESPN’s impact at Disney is huge because it leads the cable-network division that accounted for nearly half of Disney’s operating income last year.

Cable network revenue, including ESPN, edged up 1% to $4.2 billion. An ESPN rate increases offset a decline in subscribers. Broadcast revenue rose 5% to $1.71 billion.

Film, by contrast, has been a standout for Disney. Revenue in that segment rose 40% to $2.85 billion.

“The pattern over the last few quarters has been that the company has outperformed for studio entertainment results, and underperformed media networks,” said Nomura analyst Anthony DiClemente. “That trend is likely to continue.”

BMO Capital Markets analyst Daniel Salmon also said that he expects the company’s film slate to be strong this year and next. For instance, the Star Wars offshoot Rogue One is due out in December.

Successful movies could help offset the “secular challenges” at Disney’s cable and network channels, he said.

Disneyland

Meanwhile, Disney’s theme parks had their splashiest introduction to date when Shanghai Disney opened its gates in June after a decade of negotiations, five years of construction and weeks of testing. The company hopes the Chinese attraction will help revive its struggling international theme-park business.

The new park should generate $1.5 billion to $4.5 billion a year in revenue, according to Drexel Hamilton analyst Tony Wible. Disney’s state-owned Chinese partner, Shanghai Shendi, which owns 57% of the 7.5 sq km park, will get the lion’s share.

Another possible bright spot could be an upcoming Hulu television service. Hulu, part owned by Disney, said it will stop offering free TV episodes as it readies a live-streaming service. Time Warner recently took a 10% stake in Hulu, joining Disney, 21st Century Fox and Comcast’s NBCUniversal as co-owner.

Time Warner plans to contribute some of its channels, including TNT and TBS, to the new Hulu service. It will show broadcast and cable channels in real time, without making viewers wait until the next day for episodes.

“We see skinny bundles as a potentially valuable new source of distribution for ESPN and the upcoming Hulu skinny bundle (and reportedly YouTube now) can help support that,” said BMO’s Salmon. “However, skinny bundle distribution is very nascent and the contribution to overall subscriber revenue is still tiny.”

Overall , Disney’s net income rose 5% to $2.6 billion. Revenue rose 9% to $14.28 billion, also beating expectations.