How Disney aims to overcome losses as it prepares marketing plan to launch streaming platform

Disney earnings miss forecasts as costs rise for its streaming future.

Share prices in Disney dropped after the company posted a steeper earnings decline than analysts expected, due in part to its foray into streaming media and assets purchased from its acquisition of 20th Century Fox.

Disney’s direct-to-consumer and international unit reported an operating loss of US$553m from April to June 2019, wider than the US$441m loss analysts were expecting, and an increase from US$168m loss from a year earlier.

These stemmed from its consolidation of Hulu, spending on the new Disney+ streaming platform and the ESPN+ streaming service.

It said future digital investments will lead to a roughly US$900m operating loss in the direct-to-consumer (DTC) unit in the quarter that ends in September, the company said, compared with expectations of a US$593 million loss.

For the just-ended quarter, executives said Fox's film studio performed worse than expected and costs to broadcast the Cricket World Cup through Fox's Star India exceeded its budget.

20th Century Fox acquisition

The acquisition of 20th Century Fox has brought Disney talented and experienced senior leaders, said Robert Iger, the chairman and chief executive officer of Disney in the earnings call.

These leaders, he added, are now in place to produce the content that Disney will rely on to implement its strategy.

He said Fox's studio capabilities, production expertise and valuable relationships with the creative community will be vital to Disney's DTC plans while also overseeing ABC, ABC News, Disney's own television stations, FX, Freeform, the Disney Channel and Nat Geo.

He noted National Geographic will bring a strong global brand to its portfolio, along with world-class content for its television and DTC businesses.

"Disney+ will offer more than 600 hours of premium content from National Geographic at launch, along with almost 300 hours of family entertainment from the Fox Studios library," he said.

"Disney+ will ultimately become the exclusive streaming service for our vast library of movies and series, National Geographic content, all upcoming Disney, Pixar, Marvel and Star Wars movies and a robust slate of high-quality original programming from the creative engines that drive our entire company."

Ad revenue

Christine McCarthy, the chief financial officer at Disney, said looking ahead to the fourth quarter of 2019, the company expects lower programming expenses for its broadcasting division.

She added that higher affiliate revenue was more than offset by the impact of lower program sales and a decline in advertising revenue.

“Ad revenue was lower in the quarter as higher network rates were more than offset by lower viewership. Quarter-to-date, prime time scatter pricing at the ABC Network is running 35% above upfront levels,” she explained.

She noted that ABC Studios faced a difficult year-over-year program sales comparison since results in the third quarter of 2018 reflected the sale of shows like Luke Cage. This quarter, Disney also had lower sales of shows like How to Get Away with Murder and Designated Survivor compared to last year.

Domestic cable results were up in the quarter due to the consolidation of the 21st Century Fox cable businesses and higher operating income at ESPN, partially offset by a decline at Freeform.

Over at ESPN, McCarthy said growth in operating income during the third quarter was due to higher advertising and affiliate revenue, partially offset by an increase in programming and production costs driven by contractual freight increases for MLB and NBA programming and new rights.

ESPN's domestic linear advertising revenue was up 13% in the third quarter.

“ESPN benefited from two extra NBA Finals games compared to last year. When you adjust for the mix and the total number of playoff games this year compared to last year, we estimate there was about an 8-point benefit to the year-over-year growth in advertising revenue. So far this quarter, ESPN's domestic cash ad sales are pacing down compared to last year,” she said.

Explaining why Fox's Star India costs for the Cricket World Cup exceeded, McCarthy pointed out that there were a couple of significant games that were rained out.

She said while there is insurance coverage for those games, any proceeds would be in future periods. She also noted there was also some weakness in ad revenue that was related to the Indian advertising market.

Marketing the launch of Disney+

Iger said the company will ramp up its marketing of Disney+ later in August. He also announced that in the US consumers will be able to subscribe to a bundle of Disney+, ESPN+ and ad-supported Hulu for $12.99 a month.

The bundle will cost the same amount as Netflix’s standard plan in the US.

Iger also said the company was going to allow members of D23, its official fan club, to be the first to subscribe and that he will be going through a “comprehensive” marketing plan with his team next week.

“Disney+ is going to be treated as the most important product that the company has launched in, I don't know, certainly during my tenure in the job, which is quite a long time,” said Iger.

“You will see marketing both in traditional and non-traditional directions basically digital and analog also significant amount of support within the company on basically company platforms.”

He added: “And then, of course, all of the touchpoints that the company has, whether it's people staying in our hotels, people that have our co-branded credit card, people who are members of D23, annual passholders, I could go on and on. But the opportunities are tremendous to market this. And I feel good about some of the creative that I've already seen.”

Globally, Iger said Disney will launch Disney+ in two international markets for a start, before rolling it out to other international markets in the next two to three years.

He explained this is because a number of those markets are different than the US, but share the same an interest in Marvel, Pixar, Disney, National Geographic and Star Wars.

“The product that's being made for the platforms travels globally, and that's a big deal. We will have to augment it in certain markets with local programming to meet quotas that are now being applied to OTT services. And we're also going to enter into discussions on an international basis market-by-market with local distributors as well. We're already in those discussions actually,” he explained.

This will also allow Disney to focus more on quality than on quantity, he said, emphasizing that the company needs enough quantity under each brand umbrella to drive subscribers who are primarily interested in brands like Marvel and Pixar.

“Obviously if you compare us to Netflix, we're going to have far fewer products than they do, but we're lying on the strength of our brands and the fervor that fans of those brands have for the product that we make under those brand umbrellas,” he added.

More strength in Asia Pacific and Hong Kong protests

The acquisition of 20th Century Fox added Star and Hotstar to Disney's portfolio of businesses, giving the company a significant presence in India, which will soon become the most populous country in the world, said Iger.

He noted that India is a big market with interesting dynamics notably, a rapidly rising middle class with a strong and growing appetite for media, especially sports.

Iger pointed out that in the last quarter, Hotstar had more than 300m average monthly users, serving 100m daily users and delivering streaming services to 25.3m users simultaneously, which he said is a new world record.

"The platform's broad array of premium sports rights will serve it well over the next five years especially as we expand the service into markets across South East Asia," he added.

While Disney has not seen any impact on its Shanghai Disney Resort in China with the ongoing protests in Hong Kong or the US-China trade war, Iger said the Disneyland in Hong Kong has not been spared.

“In Hong Kong, we have seen an impact of the protests. Obviously, they are significant in nature,” he explained.

“While the impact is not reflected in the results that we just announced, you should expect that we will feel it in the quarter that we're currently in, and we'll see how long the protests go on. But there's definitely been a disruption that has impacted our visitation there.”

The theme parks unit's overall operating income rose 4% to US$1.7bn, but declined at parks in the US. The company attributed the drop to expenses for a "Star Wars"-themed expansion at California's Disneyland and lower attendance.

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