Disney's ambitious streaming plans take big bite out of profits

LOS ANGELES — Becoming a streaming colossus is mighty expensive: Disney reported a 66% decline in quarterly profit Thursday, the result of digging deep into its pockets to pay for Disney Plus, a Netflix-style movie and television service that arrives Tuesday.

Losses in the Disney division that houses streaming totaled $740 million in the quarter, compared with a loss of $340 million in the same period last year, the company said. Wall Street was relieved it was only that much: In August, Disney had predicted losses in the $900 million range. As a result, Disney shares climbed by more than 5% in after-hours trading.

“We’re making a huge statement about the future of media and entertainment,” Robert A. Iger, Disney’s chief executive, said of Disney Plus during a conference call with shareholders Thursday. The service will be dedicated to movies and shows from Disney, Pixar, the “Star Wars” franchise, National Geographic and Marvel.

Some analysts expect Disney Plus to have 8 million subscribers by the end of the year and roughly 18 million by the end of 2020. Disney, no doubt wanting even more, has been running its marketing engines nonstop and offering discounts to people who enroll before the service goes live. Verizon customers can even get a year free.

Iger spent much of the call emphasizing the importance of streaming to Disney, which also owns ESPN Plus, now with 3.5 million subscribers, and Hulu, which has 28.5 million. Hulu will become home to the FX cable network library — complete seasons of about 40 series, including “American Horror Story” — starting in March, Iger announced. FX will also begin making shows that run exclusively on Hulu, including a feminist drama called “Mrs. America” starring Cate Blanchett.

Disney is trying to become less dependent on cable channels like ESPN, which are in decline because of cord-cutting, and move into the rapidly growing realm of online video, a direct-to-consumer business defined by Netflix.

As major media companies have reported earnings this week, new concerns have emerged about cord cutting. People are canceling cable and satellite hookups at an accelerating rate. Discovery Communications, reporting its third-quarter results Thursday, said that its total subscriber count had fallen 4% compared with a year ago. Disney also had a 4% subscriber decline, according to Michael Nathanson, a founder of the MoffettNathanson research firm. Disney’s cable portfolio includes FX, Freeform, Disney Junior, ESPN and National Geographic.

For its fourth fiscal quarter, which ended on Sept. 28, Disney reported a profit of $785 million, a decline from $2.3 billion a year earlier. Excluding one-time items, including $314 million in layoff costs (from integrating the businesses bought from Rupert Murdoch in the spring), per-share profit for the most recent quarter totaled $1.07, beating analyst expectations. Revenue climbed 34%, to $19 billion, also exceeding forecasts.

“The Lion King,” remade using hyper-realistic visual effects, and “Toy Story 4” pushed Walt Disney Studios to more than $1 billion in profit, a 79% increase from a year earlier. But it was another troubled quarter for 20th Century Fox, the film studio that Disney bought from Murdoch. Its losses totaled $120 million because of box office duds like “Ad Astra,” a sci-fi movie starring Brad Pitt, and “The Art of Racing in the Rain,” a film about a racecar driver and his dog.

Disney’s theme park and consumer products operation had quarterly profit of $1.38 billion, a 17% increase driven largely by higher licensing fees for “Frozen” and “Toy Story” merchandise. Disneyland posted improved financial results, but attendance at the California resort fell for the second quarter in a row — a surprise given the opening in May of a 14-acre “Star Wars”-themed expansion. Some people may be delaying visits, Iger said, noting that Disney decided to open the new “land” in phases; it will be fully operational in January.

Overseas, attendance increased at Disneyland Paris, but plunged at Hong Kong Disneyland, which has suffered because of political protests there. If the demonstrations continue, operating income at the Hong Kong resort could decline by $275 million in the coming year, Disney said.

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