Disney is ending its film distribution agreement with Netflix, will launch a stand-alone platform

 

 

Disney is ending its film distribution agreement with Netflix, will launch a stand-alone platform

 

Walt Disney Co. is ending its film distribution agreement with Netflix for new releases in one of the boldest moves a traditional studio has taken against the leading digital platform.
The Burbank company instead will launch a new Disney-branded direct-to-consumer streaming service in 2019. The decision represents a major shift in strategy for Disney, which for years has worked with Netflix to distribute its content — including hit films and original television shows.
Disney said Tuesday that it would end the Netflix distribution agreement beginning with the 2019 calendar year theatrical slate. Original television shows such as Marvel Studios’ “Jessica Jones” and other existing programming would not be removed from the service, according to Disney.
Disney also is paying $1.58 billion for a 42% stake in Bamtech, the streaming video company that is developing both the Disney-branded stand-alone streaming service and a similar offering for ESPN. The latter service will debut in early 2018. Disney already owned a piece of Bamtech: It had acquired a 33% stake in the company, which was created by Major League Baseball, in August 2016.
Disney shares closed up about a half-percent to $106.98 on Tuesday. But the stock dropped more than 3% at one point after the closing bell.
The Netflix decision comes as major studios and networks have expressed growing concern over the rising clout of the Los Gatos-based company, which has siphoned viewers from linear television, changed consumers’ viewing habits and threatened studios’ traditional business model. Shares of Netflix lost more than 3.5% at one point in after-hours trading on Tuesday. In regular trading, the stock had dropped more than 1.5% to close at $178.36.
“U.S. Netflix members will have access to Disney films on the service through the end of 2019, including all new films that are shown theatrically through the end of 2018,” a Netflix spokesperson said in a statement. “We continue to do business with the Walt Disney Co. globally on many fronts, including our ongoing relationship with Marvel TV.”
The company has been riding a wave of enthusiastic investor sentiment after it posted strong growth for the second quarter that ended in June, surpassing 100 million subscribers worldwide during the period.
Netflix has attributed robust subscriber growth to its strong content slate, which includes new seasons of popular series including “House of Cards,” “Orange Is the New Black” and “Master of None.” This week, it acquired comic book publisher Millarworld and signed a deal to do a six-episode talk show with David Letterman.
Despite Netflix’s increased emphasis on self-produced shows like “Stranger Things,” the majority of content viewed by its subscribers remains programming that Netflix licenses from other studios, including Disney. Netflix is expected to spend at least $6 billion this year on content, up from $5 billion last year. That includes money it pays other studios to license shows and movies.
Also on Tuesday, Disney reported a third-quarter profit of $2.4 billion, down 9% from a year earlier. It delivered earnings per share of $1.51, and revenue of $14.2 billion, which was essentially flat compared to a year ago.
The company failed to deliver on analysts’ expectations, who’d predicted earnings per share of $1.55 on revenue of $14.5 billion, according to Factset (adjusting for a one-time charge related to a legal settlement, Disney earned $1.58 per share).
Disney’s media networks unit, which houses ESPN and ABC, had a tough quarter, reporting segment operating income of $1.84 billion, which was down 22% compared to last year. The unit’s operating income declined on a year-over-year basis for the fifth quarter in a row. Within the cable networks group, which includes ESPN, segment operating income was down 23% to $1.46 billion. Disney attributed the drop-off in part to higher programming costs and lower advertising revenue at ESPN.
Those issues exemplify the tough spot Disney finds itself in with ESPN.
ESPN needs to grow its revenue base to keep up with the escalation of sports rights costs at a time when a traditional revenue source — cable affiliate fees — is under threat by so-called cord cutters and the move to smaller TV packages offered by providers. ESPN has lost more than 10 million subscribers since 2010, according to Nielsen data.