Disney Q3 2017 Earnings – How They Affect You
Only a few weeks after their historic D23 announcements, Disney offered a few more bombshells this week, and the forum that they chose for these revelations was the surprise. During the fiscal third-quarter earnings report for The Walt Disney Company, the company unveiled huge plans for its future, some of which will fundamentally alter the way that Disney fans consume media.
The Numbers
Let’s start with the basics. Wall Street panicked a bit after Disney released its financials for the calendar second-quarter/fiscal third-quarter. Disney stock suffered through its worst day in more than a year due to the announcement. What was so bad?
Disney disappointed stockholders by confirming that net income fell nine percent from the same quarter in calendar 2016. In other words, Disney earned nine percent more money in the fiscal third-quarter last year (hereby referenced as third-quarter) than it did in 2017. This was the period from April 1st to July 1st of 2017.
In exact terms, Disney earned $14.28 billion with net income of $2.60 billion for this timeframe in 2016. This year, earnings were nearly identical at $14.24 billion, but operating income fell to $2.37 billion.
Presumably, you’re a Disney fan reading this article to learn about park stuff and Disney entertainment. So, you’re probably confused and worried right now. Don’t be! Yesterday was actually one of the greatest days in the history of The Walt Disney Company. Read on to find out why.
Disney Parks Are Doing Great
The reason for Disney’s decline in revenue isn’t from the Parks & Resorts division. This section of The Walt Disney Company crushed expectations. Third-quarter revenue was almost $5 billion, a 12 percent increase. A lot of that growth came from international parks, particularly Shanghai Disney Resort. Disney stated that 13 million guests have now visited the newest Disney theme park.
Disney’s American parks did great as well. Attendance was up eight percent at Disneyland and Walt Disney World. Even better, per-room spending increased eight percent as well. Effectively, Disney had more customers who were, in turn, spending more money.
The only downside was that resort occupancy declined a modest two percent. Then again, the primary rise for this decline was Disney’s commitment to improvements. Refurbishments and hotel room conversions lessened the total room inventory for the quarter. Otherwise, occupancy was virtually even year-over-year.
Pandora Ain’t Cheap
The one change at Walt Disney World was that expenses increased during the quarter. There’s a perfectly logical reason for that. The introduction of Pandora – The World of Avatar meant that Disney was paying a larger operating cost during the quarter.
The first year for a new themed land is always the most expensive due to marketing expenditures, and so this cost will decrease in future quarters/years as Disney stops advertising it.
ESPN’s the Problem
Given this information, you’re probably wondering why Disney stock fell. Everything looks good, right? Well, Disney continues to have a lodestone on its ledger. That’s the former breadwinner, the ESPN cable channel family.
Disney executives made the unfortunate decision to extend lots of contracts just before the cable television medium collapsed. The structure of those contracts means that Disney will pay various sports leagues like the NBA more in future years even as ESPN advertising revenue craters.
In the most recent earnings report, Disney confirmed the fear of many analysts. Their cable networks earned three percent less than last year, and the posted numbers fell far short of projections. ESPN is earning less while spending more. It also suffered one-time fees for well-publicized severance packages of on-air talent. Disney has problems with ESPN, but they think they’ve found a solution…
Goodbye Netflix, Hello Disney Streaming!
The huge news in the earnings report was Disney’s shocking announcement that the company won’t renew its contract with Netflix. Starting in 2019, Disney plans to host its own streaming service, a competitor to Netflix.
In the short term, this announcement changes nothing for you. All Disney programming will remain on Netflix through the end of 2018 and even beyond that point in some instances. The current agreement gives Netflix a license for Disney motion pictures released from 2016 to 2018.
For example, Captain America: Civil War and Rogue One, the top two worldwide box office performers of 2016, are currently available on Netflix. They’re even available in 4k/HDR, the best possible digital display format. Star Wars: The Last Jedi, a December 2017 release, will also become a part of the Netflix catalogue next year. Star Wars Episode 9, however, is a 2019 release. As such, Netflix won’t have the digital rights to stream it.
Instead, Disney will keep the streaming rights to its 2019 releases and everything afterward. What Disney has decided is that cable television in its current form is a dying medium. I occasionally cover cable television analysis for a couple of sites, and I can say with confidence that the data supports this philosophy.
Why Is Disney Doing This?
Currently, cable companies pay carrier fees to various cable networks. In exchange, they have the right to air these channels by using fiber-optic cable and satellite transmissions to relay the signals.
In recent years, bandwidth issues have enabled streaming services to produce content that doesn’t merely match the quality of cable carriers. It actually vastly exceeds them.
Many cable companies broadcast television programs at either 720p or 1080i. New televisions are capable of displaying 4k, which is effectively four times as good. Services like Amazon Instant Video and Netflix can broadcast in 4k, meaning that you get a vastly superior picture via the internet than a cable carrier. Cable companies connect improve their current technology without investment huge amounts of money in improving infrastructure. By the time they made these changes, wireless streaming might have surpassed the technology anyway. Cable companies aren’t good enough, and paying to get better might cost a lot of money with no tangible benefit.
Programming Disney Flix
You understand why Disney is looking to make a change. Rather than continue to license Netflix to show their products, they have a different strategy. Disney wants the whole pie rather than the piece of it that Netflix gives them in the current deal.
By airing a Disney version of Netflix, The Walt Disney Company can draw on their vast library of content, some of which goes all the way back to the 1920s. By the time the Disney streaming service debuts, some of its animated shorts will be 90+ years old.
The REAL Disney Channel
Basically anything Walt Disney had a hand in making becomes fair game. Also, a lot of the content currently airing on ABC or owned by ABC Studios is a part of the Disney library. That includes popular Freeform titles as well. Here’s an incomplete but informative Wikipedia list of ABC Studios properties.
Everything that you see listed here is a viable part of the Disney streaming service. The only catch is that they can’t broadcast anything that another streaming service has a contractual license to broadcast. And yes, this includes Marvel productions. Current series like Daredevil and Jessica Jones are Netflix originals paid for by Netflix. They will stay there. If Disney wants to make a Captain America series, however, it has the right to do so on its service. The same is true of a live-action Star Wars series. Or a television show based on The Incredibles.
The sheer volume of the potential here is probably blowing your mind. One of the reasons why speculators linked Apple and Disney earlier this year was Disney’s massive content library. Content creation/ownership is the expense that’s going to escalate in future years. Netflix has already committed $15 billion toward it, and that amount will rise now that they have to fill the crater-sized hole left by Disney.
When Disney executives read those Apple rumors, they realized they didn’t need anybody else. They could already do their own service. It would solve multiple issues at once. Here’s why…
BAM!
Last year, Disney quietly spent $1 billion to buy a third of BAMTech, a technology company best known for running MLB.tv and the WWE Network’s streaming services. Yesterday, Disney revealed that they’d purchased controlling interest and a 75 percent overall stake in the business. Disney spent $1.58 billion more to acquire this ownership stake.
Their goal is simple. They want to become the host of their own streaming service. They’re not paying anyone else to run the Disney Flix network (or whatever name they choose for it). Instead, other services like WWE Network will now pay THEM to perform that service. Disney’s BAMTech is another savvy acquisition that should rival Pixar and Star Wars in terms of long-term financial benefits.
Streaming Out of the Cable Business
Best of all, Disney can now do the inevitable. They can create an ESPN streaming service that will charge consumers a set fee each month. In exchange, Disney promises more than 10,000 live events broadcasts. Rather than rely on cable carriage fees and advertiser revenue, ESPN will monetize itself through individual subscriptions. This streaming service will become what ESPN has been for the past several decades: the preeminent means of watching sports. In the process, they’ve created a safe landing out of the (current form of the) cable television industry.
Disney had planned the ESPN channel for a while. The Disney streaming service is the big reveal. Disney’s goal isn’t to replace Netflix. No, that’s not grand enough. Disney wants to REPLACE Netflix. Walt Disney’s company has created content for much longer, and they’ve done a much better overall job of it.
In 2019, you’ll have the option to have a Netflix subscription minus Disney movies, or you can buy the Disney catalogue for a similar price instead. Included in that are massive 2019 releases like the live-action remake of The Lion King and the much-anticipated sequel to Frozen.
From Disney’s perspective, they see a consumer trend that favors “renting” an entire catalogue of films rather than buying ones. The historical business model of selling Disney titles for a period of time and then placing them in the Disney Vault is no longer viable. They plan to replace it with a streaming service that will include all of Disney’s animated television programs, live action series, and classic Disney films.
From your perspective, you won’t pay $20 a pop for Disney films. Instead, you’ll pay a monthly fee for this service (at what should be a competitive price to Netflix) and have access to an unprecedented catalog of Disney entertainment. As Netflix’s movie and television libraries continue to shrink due to content cost, Disney will appear as a competitor with a deeper, superior entertainment library.
Yesterday, Disney effectively announced the future of Disney media consumption. As a Disney fan, your world just changed, but you won’t realize it until 2019.
