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Disney's Direct-to-Consumer Effort Isn't Coming Cheap

Jeff Baumgartner
2/5/2019

Disney's direct-to-consumer initiatives are the company's top priority, but it's going to cost some serious dough to make its vision go.

The Walt Disney Co. (NYSE: DIS), which recently reorganized its corporate structure to provide more transparency into its OTT and DTC business, said losses for its direct-to-consumer and international business segment for fiscal Q1 totaled $136 million, widened from a year-ago loss there of $42 million.

"DTC remains our number one priority," Bob Iger, Disney's CEO, said on Tuesday's earnings call.

Though Disney's OTT efforts aren't close to profitable as it moves ahead on plans to launch Disney+ later this year, some of its early efforts are growing.

ESPN+, the DTC OTT sports service launched in April 2018, has about 2 million paid subs, double the number from just five months ago.

Iger didn't go into much more additional detail about the plans for Disney+ Tuesday, but reiterated that the company will demo the service and showcase some of the programming it will offer at Disney's investor day on April 11. Disney is expected to spend $500 million on original programming for Disney+ in 2019, Variety reported, citing estimates from RBC Capital Markets. (See Disney Dispenses Details About Its New Streaming Service.)

CEO Bob Iger believes that Disney+, equipped with solid brands and content, will be able to stand tall in a crowded field of streaming rivals.
CEO Bob Iger believes that Disney+, equipped with solid brands and content, will be able to stand tall in a crowded field of streaming rivals.

Disney will be using the same streaming technology platform (largely from what it got from its deal for BAMTech) to power its OTT services, but Iger believes that the brands and content tied to those services such as Marvel, Pixar and Lucasfilm (and what it will get from the still pending deal for Fox) will help Disney break through from the "competitive clutter."

BAMTech "is an extremely robust platform" that can bring scale to live streaming as well as customer transactions, Iger said, noting that the system was able to handle just under 15,000 transactions a minute for ESPN+ for a recent UFC fight. "The stability of the platform is critical for times like that."

Disney expects the ongoing ramp up of ESPN+ and Disney+ to have a $200 million adverse impact on operating income in Q2, with two thirds of that attributable to ESPN+, Disney CFO Christine McCarthy said.

Iger believes that the costs associated with Disney's DTC efforts will pay off, and that Disney will come out of it stronger than it would have without those investments.

"This is a bet on the future of our business," he said. "What we're trying to do here is invest in our future."

Iger also shed some light on Hulu, which is still operating at a loss, though those losses are being largely been offset by the service's revenue streams (subscriptions, program sales, affiliate and ad revenues). Disney owns 30% of Hulu now, and will own 60% of it when its proposed acquisition of 21st Century Fox closes.

"The goal, obviously, is to operate Hulu profitably," Iger said, but wouldn't say how long that might take as the timing could shift as Disney looks at possibly introducing Hulu into global markets.

For fiscal Q2, Disney posted total revenues of $15.30 billion, flat year-on-year, and net income of $2.78 billion, down 37%. Direct-to-consumer and international revenues were $918 million, down from $931 million in the year-ago period.

— Jeff Baumgartner, Senior Editor, Light Reading

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Jeff Baumgartner
Jeff Baumgartner
2/6/2019 | 10:13:59 AM
Analyst: Disney 'doing the right thing'
Though not everyone is bullish about Disney's expensive and risky move into the world of global DTC, Michael Nathanson at MoffettNathanson agrees with Iger that this is about positioning the company for the future.

"[W]e truly believe that Disney CEO Bob Iger is doing the right thing for all Disney stakeholders in the long run," Nathanson wrote in a research note, adding that we're still in the "earliest days" of the global OTT rollout.

He was also surprised that the hit to operating income from Disney's decision to forego some licensing revenues in fiscal year 2019 in support of its DTC initiative isn't going to be as severe as feared.

On the call, Disney estimated that OI impact for FY 2019 to be -$150 million, due in part to Disney clawing back a new title, Captain Marvel, which won't be licensed to Netflix under the "Pay 1" deal.

That -$150M is "materially lower than the -$500 million hit we expected for FY 2019," he wrote.

But the losses tied to Disney's DTC activity will mount. Nathanson estimates that the foregone revenue (mentioned above) and the DTC losses will lead to incremental losses of more -$1 billion in FY 2019, and another $1B in FY 2020. JB
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