Disney To Launch Disney- And ESPN-Branded Streaming Services, Altering Netflix And BAMTech Deals

Look out Netflix: Disney says today that it will end its theatrical distribution deal with Netflix beginning in 2019 to feed its releases to a new Disney-branded streaming service launching that year.

The company also announced that its ESPN-branded streaming service, which it had previously discussed, will launch in early 2018.

“We’re going to go for significant distribution,” CEO Bob Iger told analysts. Although he declined to discuss pricing, he says the company will take “a reasonable approach” — and has internally weighed “whether our pricing strategy could have an impact one way or the other” on cannibalizing customers from existing pay TV services.

He calls the digital initiatives “a significant strategic shift for us.”

“We’ve got this unbelievably passionate base of Disney consumers worldwide, and in virtually all of our businesses — except theme parks — we’ve never had the opportunity to connect with them directly or know who they are,” he says. “It’s high time we got into the business…Once we do, the monetization possibilities are extraordinary for this company.”

Indeed, he adds, “the profitability, the revenue generating capability of this initiative is substantially greater than the business models we’re currently being served by.”

What’s more, the change “sets this company up well no matter what changes occur in the media ecosystem.”

Both will be powered by BAMTech’s technology: Disney agreed to pay $1.58 billion for the 42% stake owned by MLBAM, Major League Baseball’s interactive media and Internet company. Disney already owns 33% and is accelerating part of the agreement that enabled it to buy a majority of the company’s equity.

The Disney-branded service will be “the exclusive home in the U.S. for subscription-video-on-demand viewing of the newest live action and animated movies from Disney and Pixar,” the company says.

Iger told analysts to think of this as a global service. Decisions about which countries to enter will vary “based on existing distribution agreements and different market dynamics,” Iger says.

There’s no decision yet on whether to include Marvel and Lucasfilms releases.

“There’s been talk about launching a proprietary Marvel service and Star Wars service,” Iger says. “But we’re mindful of the volume of product that would go into those services. And we want to be careful about that. We’ve also thought about including Marvel and Star Wars as part of the Disney-branded service. But there we want to be mindful of the Star Wars fan, the Marvel fan, and to what extent those fans either overlap with Disney fans or are completely separate and incremental to Disney. So it’s all in discussion.”

The 2019 slate, to go on the new service, will include Toy Story 4, the sequel to Frozen, and The Lion King from Disney live-action.

The company adds that it also will “make a significant investment in an annual slate of original movies, TV shows, short-form content and other Disney-branded exclusives for the service.”

It will include library content from its Disney and Pixar libraries as well as Disney Channel, Disney Junior and Disney XD television programming.

There might be a provision for users who want to own or rent productions to download them.

“This [BAMTech] acquisition and the launch of our direct-to-consumer services mark an entirely new growth strategy for the Company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands,”  Iger says.

The announcements came as Disney released its June quarter earnings. Company shares are down 4.0% in post-market trading. Netflix is down 2.8%.

The ESPN-branded digital subscription service will be accessed via its app.

Disney says that it will include “approximately 10,000 live regional, national, and international games and events a year, including Major League Baseball, National Hockey League, Major League Soccer, Grand Slam tennis, and college sports. Individual sport packages will also be available for purchase, including MLB.TV, NHL.TV and MLS Live.”

It will also have news, highlights, and scores.

Iger says that the service will be “even more robust than the one we had anticipated.” He has not briefed ESPN’s cable and satellite distributors on his online sports plans. ESPN remains “a must-have service” for them, he says.

If they disagree, then Disney has options. Iger says that under its contracts “if we wanted to bring ESPN direct [to consumers] we could.”

Disney will consider buying sports rights just for the digital platform, he says.

The CEO calls the new service “an offensive move” as opposed to a defensive one.

The online service, and purchase of BAMTech, “does give us optionality in the future” as people increasingly access video from the internet.

The BAMTech deal is subject to regulatory approval. When it closes, Iger will become chairman of its board with . MLBAM and NHL remaining as minority stakeholders.

ESPN and Disney will have full control over the productions on the digital services.

Disney says that the BAMTech transaction will be “modestly dilutive” to earnings for two years — with more dilution depending on how much it spends on the new services and content for them.

Disney made its announcements just as it released its earnings for the June quarter.

Net income at $2.37 billion was down 8.9% vs the period last year, on revenues of $14.24 billion, down 0.3%. Analysts expected the top line to hit $14.42 billion.

Adjusted earnings at $1.58 per share beat estimates for $1.55 — but included an income tax benefit from the adoption of new accounting rules for employee share-based awards.

Cable network revenues fell 3% to $4.09 billion; ESPN had five fewer NBA playoff games than it did last year and a more expensive contract. Operating income fell 23% to $1.46 billion due to ESPN’s “higher programming costs, lower advertising revenue and severance and contract termination costs.”

The ABC-led Broadcast operation was up 4% to $1.78 billion, although operating income fell 22% to $253 million. Here, too, the company cited “lower advertising revenue, a decrease in the cost charged to ESPN for programming…and higher programming costs” along with lower ratings.

“We definitely had some ratings challenges at ABC,” Iger says. “We haven’t taken advantage of the [ad] marketplace as much as we could have because of our ratings issues. The first thing that’s got to change is that we’ve got to have better performance.”

Theme park revenues were up 12% to $4.9 billion with operating income up 18% to $1.17 billion, mostly due to improvements overseas.

The studio’s revenues fell 16% to $2.3 billion, with operating income down 17% to $639 million. Last year’s results included home video sales for Star Wars: The Force Awakens, and box office revenues for Captain America: Civil War, The Jungle Book, and Finding Dory.

Also listed in Disney’s latest quarterly earnings report was a $177 million expense related to the settlement of litigation, which might be the undisclosed settlement reached earlier this year in the “pink slime” lawsuit, or the $100 million deal to settle the antitrust class action brought by animation workers. No details of that expense were disclosed today.