As Disney Enters Streaming Era, Plain-Old TV Helps Ease Shift

(Bloomberg) -- Walt Disney Co. is embarking on a mission to become a streaming-TV company, challenging Netflix Inc. head-on. But for now, it’s traditional TV that’s holding up better than expected.

Soaring sales and profit at the ABC network and local TV stations helped Disney beat analysts’ forecasts for the first quarter -- and overcome another tough stretch for the ESPN sports network. The entertainment giant credited higher fees from pay-TV services, rising ad revenue and more sales of programs to other companies.

Disney has warned that fiscal 2019 will be a tough year as the company takes over most of 21st Century Fox Inc. and develops programs for three online video services: ESPN+, Disney+ and Hulu. But its diverse business groups, from parks and hotels to movies and home entertainment, are softening the blow for investors.

“This is a bet on the future of our business,’’ Chief Executive Officer Bob Iger said on a conference call.

The question now is how painful the streaming shift will be. Disney will have to pull shows and movies from platforms like Netflix as it works to build its own offerings. Already, that’s having an impact. Company executives said film and TV profit from selling shows to competitors like Netflix will drop by $150 million this year. Another cloud: A shift in the Easter holiday and changes in how Disney recognizes revenue will cut theme-park profit in the current quarter by $125 million.

Disney also continues to lose cable customers. Subscribers dropped by about 1 percent in the period ended Dec. 29, Chief Financial Officer Christine McCarthy said on the call.

Disney shares rose less than 1 percent to $113 in extended trading after the results came out. They’re up 2.8 percent this year, trailing the gain for the S&P 500 Index.

Heavy Spending

Earnings for the quarter fell to $1.84 a share in the quarter, excluding some items, Disney said, reflecting the tough climate in cable TV and heavy spending to develop video services that can compete with Netflix. But that still handily beat analysts’ estimates of $1.54 a share.

Revenue also came in a bit higher than predicted, despite being flat from a year earlier: At $15.3 billion, it beat projections of $15.2 billion.

Profit at Disney’s largest business, media networks, grew 7 percent as the Burbank, California-based company continued to battle viewer losses. ABC was the star for the quarter, with earnings growing 40 percent and revenue advancing 12 percent. That was enough to counter a drop in cable TV profit.

Losses at the direct-to-consumer unit, the home of Disney’s nascent streaming services, tripled to $136 million. The company cited the ramp-up of ESPN+, losses from streaming technology services and costs associated with the imminent launch of Disney+. Losses at the Hulu streaming business narrowed.

Marvel, ‘Star Wars’

The company plans to launch Disney+, a service featuring films and TV shows from its Marvel, Pixar and “Star Wars” brands, later this year. Over the next few months, Disney will complete the $71 billion acquisition of Fox assets, a deal that will give the company majority control of the Hulu streaming service, as well as many other channels and film franchises.

Parks have been Disney’s profit mainstay as the company navigates this transition. Earnings from the division grew 10 percent, buoyed by the domestic parks operation. Revenue advanced 5 percent, Disney said. Profit at the movie studio fell 63 percent from strong year-ago levels.

The parks division will get a boost this year from opening new Star Wars lands in Orlando, Florida, and Anaheim, California.

Iger said it shouldn’t be hard to build buzz around the attractions.

“Maybe I should just tweet, ‘It’s opening!’ and that would be enough,” he said.

To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Rob Golum

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