Disney shares drop as
investors weigh risks of new streaming plans
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[August 10, 2017]
By Lisa Richwine and Supantha Mukherjee
(Reuters) - Walt Disney Co's plan to launch
its own digital movie and sports services means the world's largest
entertainment company must learn how to attract streaming video
subscribers and keep them hooked in a highly competitive market.
In a major strategic shift, Disney announced on Tuesday it would launch
a sports-themed ESPN streaming service next year followed by a similar
offering with Disney and Pixar movies and television shows in 2019.
While many analysts lauded the effort's long-term goals, uncertainty
about Disney's ability to make up for lost revenue from Netflix Inc <NFLX.O>
and other sources worried investors. Disney shares closed down 4 percent
Most believe Disney needed to respond to the migration of viewers from
pay-TV packages to digital options sold a la carte, a shift that has
hurt the company's cash cow, ESPN.
But Disney will encounter new hurdles selling directly to consumers. The
company has relatively little experience with selling subscriptions,
although it does operate a digital service in Britain called DisneyLife.
It will also have to invest in technology. As part of the plan announced
on Tuesday, Disney said it would spend $1.58 billion to acquire majority
ownership of BAMTech, the company that streams professional U.S.
baseball and will provide the tech powering the new streaming services.
Disney will stop providing new movies to Netflix starting in 2019. At
the time the deal was announced in 2012, analysts estimated Disney would
reap roughly $350 million a year from Netflix.
If Disney charged $5 per month, it would need about 5.8 million
subscribers to match the income from Netflix, or 2.9 million subscribers
at $10 per month.
"The Disney product is taking a very successful and settled part of the
business model (pay TV economics for films) and putting it at risk in
the hopes of building an asset with more long-term value," Cowen and Co
analysts wrote in a research note.
Netflix, the dominant streaming service, has amassed 104 million
customers worldwide over a decade. CBS Corp's <CBS.N> newer digital
subscriptions, CBS All Access and its Showtime offering, are on track to
have a combined 4 million subscribers by the end of this year, the
company said on Monday.
Potential customers for Disney's movie subscription include roughly 25
million U.S. households with children ages two to 14, plus up to 60
million Disney and Pixar fans, according to Moody's Investors Service
analyst Neil Begley.
[to top of second column]
A Mickey Mouse figure and other items are on display during a press
preview for the upcoming auction "Walt Disney's Disneyland" at Van
Eaton Galleries in Sherman Oaks, California, U.S., June 1, 2017.
REUTERS/Mario Anzuoni/File Photo
"It takes time to build up," Begley said. "If within five to six years they were
able to get even 15 to 20 percent of that footprint, that would be considered
Disney will likely start with a low price to entice users to try the new
offering and could eventually charge between $6 and $9 per month, Begley
The company will incur additional costs including an undisclosed investment in
exclusive content, plus spending on technology, marketing and customer service.
Still, it will be able to spread those costs across multiple streaming services.
"They have significantly more upside here," Begley said.
KEEP THE CUSTOMER SATISFIED
Disney also will have to keep customers after they sign up. Unlike pay TV,
streaming services can easily be canceled online at any time.
Nineteen percent of U.S. broadband households canceled at least one streaming
service in the past year, compared with 3 percent that dropped a pay-TV service,
according to data from a Parks Associates survey.
Still, with a stable of popular franchises such as "Frozen" and "Toy Story,"
Disney holds a strong position to keep viewers.
"Disney has an advantage that they are a recognized brand," Parks Associates
analyst Brett Sappington said. "People will come to pay for that."
Disney believes its new approach will deliver "substantially greater" profits
and revenue over the long term than its current business models, Chief Executive
Bob Iger said on a post-earnings conference call.
One advantage of BAMTech is that it will let Disney learn more about the
behavior of its fans in order to tailor offerings, Iger said.
(Reporting by Supantha Mukherjee in Bengaluru and Lisa Richwine in Los Angeles;
Editing by Saumyadeb Chakrabarty, Peter Henderson and Bill Rigby)
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