Disney Reshapes TV With $1 Billion Streaming Deal, Web ESPN

Thursday, Aug 11, 2016

Walt Disney Co. reported third-quarter results that reflected tough times for its TV business and said it’s taking big steps in online video to adapt to changing consumer viewing habits.

The world’s largest entertainment company said Tuesday it will pay $1 billion for a one-third stake in BAMTech, a technology and streaming business formed by Major League Baseball, and launch a new web-based ESPN service this year. The company also said networks including ESPN and the Disney Channel will be part of a new online video service planned by AT&T Inc.’s DirecTV division.

“This is a whole new world where distributors are going into the content space and content owners are going into the distribution space,” Disney Chief Executive Officer Bob Iger said in an interview Tuesday on Bloomberg TV. “We are looking at a marketplace that is so dynamic.”

The changing market for pay television, marked by a drop in subscribers for conventional cable and satellite services, is forcing companies like Burbank, California-based Disney to rethink how they offer programming. TV channels including ESPN, the Disney Channel and the ABC network are the biggest contributors to Disney’s sales and profit. The company said ESPN continued to lose subscribers in the quarter that ended July 2.

Just how concerned investors are about those businesses was apparent after Disney reported fiscal third-quarter results. Even though it beat analysts’ estimates on higher profit from motion-picture hits and theme parks, Disney fell as much as 1.9 percent in late trading Tuesday. Yet the shares rebounded 2.7 percent to $99.27 Wednesday, the biggest intraday gain in almost four months, after Macquarie Capital analyst Tim Nollen upgraded the stock, citing Disney’s BAMTech investment.

‘Ideal Mechanism’

“Disney owning this technology gives it the ideal mechanism to offset cord-cutting at ESPN, and across its networks,” said Nollen, who raised his rating on the shares to the equivalent of buy from hold.

The cable TV unit’s results help explain why. The division registered a narrow 1 percent increase in third-quarter earnings and sales. Higher TV programming costs and subscriber losses countered rising advertising and affiliate fees in the cable division, the company said.

For a Gadfly piece on Disney’s BAMTech acquisition, click here.

Third-quarter profit excluding some items rose to $1.62 a share, Disney said in a statement. That topped the $1.61 a share average of analysts’ estimates compiled by Bloomberg. Sales at the world’s largest entertainment company increased 9 percent to $14.3 billion in the quarter, compared with estimates of $14.2 billion.

BAMTech gives Disney a proprietary streaming platform already used by other entertainment companies, including HBO Now and the National Hockey League. As part of the deal, Disney has an option to acquire a majority stake in the business in coming years. It will pay $1 billion in two installments, now and in January.

The money will be used to accelerate BAMTech’s video service platform, which already serves 7.5 million paying subscribers at various clients. BAMTech will also become a partner for Disney in the delivery of future digital products, including the new ESPN service. Current programming on ESPN’s linear networks won’t appear on that service, which will feature some baseball, hockey and college sports. Future online products could include content from Marvel and “Star Wars,” Iger said on Bloomberg TV.

“This provides us opportunity to jumpstart other branded business in the direct-to-consumer space,” Iger said.

Third Quarter

The quarter also marked a tumultuous one for the company’s theme parks. In June, Disney opened its $5.5 billion Shanghai Disney Resort, the company’s largest foreign investment. The same month a child died in an alligator attack at Disney’s Orlando, Florida, resort and a mass shooter killed 49 people at a nightclub in the city.
SeaWorld Entertainment Inc. last week reported a 7.6 percent drop in attendance last quarter, in part due to weakness in Orlando, and Disney said Tuesday its domestic attendance also declined because of the earlier Easter break this year.

Earlier Tuesday, Euro Disney SCA, the company’s resort in France, reported a 9.2 percent drop in quarterly revenue, citing security concerns in Brussels and Paris, strikes and poor weather.

Disney’s new Shanghai park has welcomed more than 1 million guests since its June 16 opening and customer spending, particularly on food and beverages, is strong, Iger said.

Disney has four of the top five films this year, including three that came out last quarter. The May 6 release “Captain America: Civil War” is No. 1, with worldwide sales of $1.15 billion, according to researcher Box Office Mojo. The live-action remake “The Jungle Book” has generated $941.2 million its since April debut and “Finding Dory,” the sequel to the 2003 hit “Finding Nemo,” has taken in $871.3 million since its mid June release.


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