Presto! One Little Line Transforms Disney’s Results

(Bloomberg Opinion) -- By adding one little line to its financial reports, Walt Disney Co. has managed to change its image from that of a traditional media company feeling the deleterious effects of cord-cutting, to an innovative streaming giant. And this is months before it even launches the product central to its streaming strategy.

Disney posted results for its latest quarter late Tuesday, and for the first time included a line item for its nascent direct-to-consumer business. As of now, the division mainly comprises Disney’s interests in Hulu and BAMTech, its international channels and its ESPN+ sports-streaming service that was released last April. These assets generated $918 million of revenue – just 6 percent of Disney’s overall sales – and lost $136 million during the period, mostly due to the cost of investing in streaming. But eventually, this business will be led by Disney+, the company’s soon-to-come version of Netflix. 

While Disney+ doesn’t launch until late 2019, there’s already been plenty of buildup. The fact that a company as powerful as Disney, and as meticulous and reticent with its plans, is entering the streaming wars is enough to put competitors on notice before anyone even sees a prototype of the app. More important, it’s ushered in a welcome shift in sentiment for Disney. Its stock had fallen behind market benchmarks in recent years amid declining viewership for some of its TV networks, a trend that hurts advertising sales, traditionally part of the lifeblood of a media company. 

This isn’t Disney’s first crack at streaming. There’s a little-noticed product in the U.K. called DisneyLife, which has served as the testing ground for Disney’s streaming strategy since 2015. CEO Bob Iger has talked in the past about the lessons learned from DisneyLife, such as the technical complexities of running the service on different devices and operating systems, and the importance of getting the subscription price right. Ultimately, that experience led to the purchase of Disney’s stake in BAMTech, a streaming-technology company, because Iger recognized that its team had the technological know-how Disney lacked.

All of this helps to instill investors’ confidence that the company is taking the right approach with the Disney+ app, though it remains to be seen how the direct-to-consumer business will impact Disney as a whole. As I said in November, having a streaming service will complicate decisions, including where to air certain content and concentrate resources. That may create tensions across the Disney empire at a time when the company will be grappling with the disruptive integration of its $71 billion purchase of 21st Century Fox Inc.’s film and TV-entertainment assets, all while trying to sort out a succession plan for Iger, who turns 68 this month. 

Disney has scored a public-relations victory by becoming a streaming company overnight without the streaming product that’s at the center of its plans. But the hard work comes when Disney+ faces off against Netflix, AT&T Inc.’s suite of streaming services, and the dozens of other TV-viewing products already out there or on the way. Until then, that new little line on its financial statements - however powerful for re-shaping its identity - doesn't tell investors much.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

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