Disney’s 20th Century Fox Film Purchase Continues to Underwhelm Financially

Less than six months into Disney’s protracted $71.3 billion acquisition of 20th Century Fox Film and related assets, including Fox’s Hulu stake, the mega transaction continues to underwhelm on the bottom line.

Fox Studios generated a $120 million loss for Disney in the most recent fiscal quarter — driven by box office disappointments Ad Astra, Dark Phoenix and The Art of Racing in the Rain, according to CFO Christine McCarthy.

“The loss from the Fox Studio business was $100 million higher than the loss we estimate the business generated on Q4 last year,” McCarthy said on the Nov. 7 fiscal call.

The CFO attributed consolidation of Hulu’s operating losses (about $1.5 billion for fiscal year) and inter-segment eliminations that resulted in an adverse impact to segment operating income of about $170 million.

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“We estimate the acquisition of [20th Century Fox] and the impact of taking full operational control of Hulu had a total dilutive impact on our Q4 [earnings per share] before purchase accounting of $0.47 per share,” McCarthy said.

Indeed, Fox generated about $260 million in combined ticket sales from six movies halfway through 2019, which was $100 million less than just the opening weekend of Disney/Marvel’s Avengers: Endgame.

Dark Phoenix had the lowest box office of any “X-Men” franchise movie, which resulted in Disney taking an impairment charge on the film.

The results continue what CEO Bob Iger lamented in the previous quarter about Fox’s performance being “well below where it had been, and well below where we hoped it would be when we made the acquisition.”

And the outlook isn’t getting better anytime soon.

McCarthy expects an operating loss in the current first quarter (ending Dec. 31) of about $60 million at the Fox studio, compared with about $30 million operating income in the previous-year period.

“We estimate the acquisition of Fox and the impact of taking full operational control of Hulu will have a dilutive impact on our Q1 earnings per share before purchase accounting of about $0.30 per share,” she said.

McCarthy remains hopeful the Fox acquisition will be accretive to EPS before purchase accounting for fiscal 2021.

 

Disney+ Launching in Western Europe March 31, 2020

Disney’s high-profile subscription streaming video service is launching in the United States, Canada and Holland on Nov. 12. The platform will be rolled out across Western Europe (United Kingdom, France, Germany, Italy and Spain) on March 31, 2020.

CEO Bob Iger made the announcement during the company Nov. 7 fiscal webcast, saying test runs in Holland had proved successful.

“Even without access to our full library or any original content, the service connected with users across all four quadrants, male and female, adults and kids, driven by the breadth of our content and the affinity people of all ages have for it,” Iger said about the previously disclosed Dutch tests.

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He said Disney has spent the last few years “completely transforming” the company through strategic acquisitions [i.e. BAMTech, 20th Century Fox, Hulu] and organizational changes to focus the resources and creativity across the entire company on delivering an “extraordinary” DTC experience.

Disney’s direct-to-consumer segment is projected to lose upwards of $850 million in the current first quarter through ongoing investments in Disney+ and consolidation of Hulu — the latter ending the fiscal year with 28.5 million subscribers.

“We’re making a huge statement about the future of media and entertainment and our continued ability to thrive in this new era,” Iger said.

Disney+ Going to Amazon Fire TV, Samsung, LG Smart TVs; FX Upping Production for Hulu

In a major PR boost for its over-the-top platforms, Disney CEO Bob Iger Nov. 7 said the company’s pending SVOD service, Disney+, would be available on Amazon Fire TV, in addition to Samsung and LG smart televisions when the service launches on Nov. 12.

Separately, Iger said the FX Network would begin to stream original and catalog programs on Hulu as Disney plans to expand the SVOD service overseas.

The FX catalog includes about 40 original series earmarked for Hulu, with new episodes available to stream the day after airing on the FX Network.

This is the first time a cable network has made its programming available for streaming just hours after initial broadcast.

“This is a watershed moment,” analyst Richard Greenfield with LightShed Partners, said on Twitter.

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FX will continue to honor existing distribution deals with Netflix and Amazon Prime Video before migrating them to Hulu.

Other FX shows include “Atlanta,” “Better Things,” “Fargo,” “Mayans,” “Pose,” “Snowfall” and “What We Do in the Shadows.” New titles include “The Last Man” and “Breeders.”

Iger said cable network FX programming, such as “American Horror Story,” “The Americans,” “American Crime Story,” “A Teacher,” “The Old Man,” and “Devs,” would feature significantly on Hulu.

Twentieth Century Fox’s super hero franchise “Deadpool” will also stream on Hulu.

Iger said Fox Searchlight would also produce original programming for Hulu — despite the studio’s existing output deal with HBO. The CEO hinted that agreement may be changed in the near-term to facilitate Hulu’s planned expansion into the United Kingdom.

Disney Doubles Direct-to-Consumer Segment Loss to $740 Million

Acquiring control of Hulu and launching a branded subscription streaming video service is expensive.

Disney Nov. 7 reported it lost $740 million in its nascent direct-to-consumer (DTC) business unit in the fourth quarter (ended Sept. 30) — more than double the $340 million operating loss in the previous-year period.

DTC oversees Disney’s foray into over-the-top video distribution, which includes the acquisition of backend support technology provider BAMTech.

The segment generated revenue of $3.4 billion compared to revenue of $825 million last year. For the fiscal year, DTC revenue topped $9.3 billion compared to revenue of $3.4 billion in the previous period.

Operating loss skyrocketed to $1.8 billion in the fiscal year compared to an operating loss of $738 million last year.

The increase was due to the consolidation of Hulu (from Comcast), costs associated with the upcoming launch of Disney+ and ongoing investment in ESPN+, which was launched in April 2018 and has more than 3.5 million paid subscribers. The losses were partially offset by a benefit from the inclusion of the 20th Century Fox businesses driven by income at Star India.

Disney+, which launches on Nov. 12, is not expected to turn a profit until 2024.

CFO Christine McCarthy said Disney’s direct-to-consumer segment is projected to lose upwards of $850 million in the current first quarter through ongoing investments in Disney+ and consolidation of Hulu — the latter ending the fiscal year with 28.5 million subscribers.

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Separately, Disney said studio revenue increased 52% to $3.3 billion and segment operating income increased 79% to $1.07 billion.

Higher operating income was due to an increase in theatrical distribution results, partially offset by a loss from the consolidation of the Fox businesses. The increase in theatrical distribution results was due to the performance of The Lion King, Toy Story 4 and Aladdin in the current quarter compared to Incredibles 2 and Ant-Man And The Wasp in the prior-year quarter.

Operating results at the Fox businesses reflected a loss from theatrical distribution driven by the performance of Ad Astra, Art of Racing In The Rain and Dark Phoenix, partially offset by income from TV/SVOD distribution.

“We’ve spent the last few years completely transforming The Walt Disney Company to focus the resources and immense creativity across the entire company on delivering an extraordinary direct-to-consumer experience,” CEO Bob Iger said in a statement. “We’re excited for the launch of Disney+.”

Disney+ Running Starz Banner Ad in Exchange for Streaming Rights to its Own Movies

Disney CEO Bob Iger says he has no regrets licensing pay-TV rights to original movies for big dollars to Netflix and Starz.

Then came Disney+ and the rush to over-the-top video distribution.

Disney’s massive push to bridge the SVOD divide with Netflix (and Amazon Prime Video) through a branded SVOD service stocked with original movies and TV shows ran into legal challenges since many Disney movies were earmarked for competing distribution channels through pre-existing license agreements.

Thus, getting the company’s singular corporate initiative in 2019 to launch on time reportedly required some creative legal maneuvers behind the scenes.

Disney+ and ESPN+ will run banner ads for the Lionsgate owned Starz pay-TV and standalone SVOD service in exchange for exclusive streaming rights to Star Wars: The Force Awakens, among other titles.

Harrison Ford in ‘Star Wars: The Force Awakens’

The $6.99 Disney+ service had been touted as ad-free. And indeed, there will be no Starz advertising within Disney+ and ESPN+ platforms.

First reported by The Verge and confirmed by Disney, the banner ad will limited to the log-in page and is part of a revised license agreement enabling Disney+ to have access to original movies previously slated for Starz.

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“I think as you can see from what we’re making available, and from seeing some of the titles that we’re making available at launch, there’s been a lot of effort that went into bringing it all back together so that we could make it available on the service,” Michael Paull, head of Disney streaming services, told The Verge in August.

“It’s clear that, from a library perspective, while there’s certainly a lot of volume, the recent studio slate will not fully be available at any one time because of the existing deals and it would take time for those rights, ultimately, to revert back to us,” Iger said last summer.

Agnus Chu, head of content at Disney+, contends license agreements can sometimes be split up “100 different ways.”

“Where it’s been licensed to, who it’s licensed to, and for how long, that gets very complicated,” he said.

Bob Iger: Home Entertainment Key to Pixar Acquisition, Movies to Netflix, Disney+ Launch

With Walt Disney Co. CEO Bob Iger in the final years at the helm of the global media brand, the executive has been making the media rounds peddling his memoir, The Ride of a Lifetime.

In an interview with BBC Studios, Iger recounts many aspects of his life and career, including discussions with the late Steve Jobs about acquiring Pixar Animation, which counted the Apple co-founder as its majority stakeholder at the time.

But before that $7.4 billion transaction could be approached, Iger said he had to develop a relationship with the often mercurial Jobs. According to Iger, it was his willingness to put select Disney and ABC TV shows on the upstart Apple iTunes platform, which had just started selling videos, including an iPod capable of playing video in addition to music, that paved the way toward the 2006 Pixar acquisition.

“Steve was immediately impressed with my knowledge of  [iTunes], or my interest in it, my willingness to disrupt using technology current business models, [and] my ability to do a deal very quickly without too much bureaucracy,” Iger said.

The iTunes pact helped migrate the home video industry from purely packaged media distribution to transactional video-on-demand and electronic sellthrough.

As of January 2017, iTunes offered more than 35 million to 40 million songs, 2.2 million apps, 25,000 TV shows and 65,000 films.

Through June 30, 2019, digital sales and rentals of movies and TV shows topped $2.2 billion, according to DEG: The Digital Entertainment Group.

Iger said the key is “owning and controlling content that is so valuable, so important, so loved by consumers that they’ll access it, buy it almost anyway they possibly can.”

Separately, Iger confirmed the pending Disney+ subscription streaming service would be launched in Western Europe within the next year. Calling over-the-top video distribution a “nascent market,” Iger said there remains plenty of room for other players besides Netflix and Amazon Prime Video to succeed.

“You have to launch [your OTT product] when the technology is right and when you have enough content. It takes time to get both of those right,” he said.

The executive reiterated that he does not consider Netflix to be a rival to Disney+, calling the SVOD pioneer a “volume play” service with a lot of quality in it.

“They created the market in the direct-to-consumer space in video — and brilliantly, by the way,” Iger said.

At the same time, he doesn’t regret licensing Disney movies exclusively to Netflix in 2012 — a landmark deal that helped broaden Netflix’s appeal on a global basis.

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“It was an enormously profitable deal for us at a time when we had no ability to launch a Netflix-like service,” he said. “We didn’t have the technology and we didn’t have enough content. We’ve never second-guessed the decision.”

Iger said Disney+ will offer much less volume of content than Netflix, which he contends makes the service less of a direct competitor.

“There may be room for people to have more than one [SVOD] subscription,” Iger said. “I don’t think we know how large the global market is for these products yet.”

When asked about the proliferation of Marvel-themed movies released by Disney, Iger said the comic book brand is as popular as ever. He admitted that Disney has released too many “Star Wars” movies over a short period of time.

“I have not said that they were disappointing in any way. I’ve not said that I’m disappointed in their performance. I just think that there’s something so special about a ‘Star Wars’ film, and less is more,” he said.

High-Profile SVOD Newcomers Spearhead Crowding Market

As widely reported, Apple and Disney are launching separate high-profile branded SVOD services next month, with NBC Universal slated to do the same next year.

The moves prompted AT&T to announce a public unveiling on Oct. 29 of WarnerMedia’s subscription streaming video platform HBO Max — months before its early 2020 launch.

Each new service has a lot riding as parent media/tech companies forge full-steam ahead into crowding over-the-top video waters heretofore controlled by Netflix, Amazon Prime Video and Disney-owned Hulu domestically.

On the retail end, consumers now face myriad inexpensive SVOD services delivering original and non-exclusive content. When combined, the choices can be overwhelming and expensive.

“Options are great for consumers when it comes to deciding what to watch,” said Peter Katsingris, SVP of audience insight at Nielsen. “But they’re also decidedly complicated for an industry that continues to fragment and search for unique ways to influence their behavior and perhaps steer eyeballs toward their network, program, service or brand.”

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Indeed, Disney CEO Bob Iger calls the pending $6.99 Disney+ service “the most important product the company has launched” in his 14 years as chief executive.

Disney expects to attract 60 million-to-90 million subscribers for Disney+ through 2024, which would be more than half of Netflix’s current 158 million global subs. It is giving away the service to Verizon’s unlimited data subs as part of a promotion.

Apple is targeting more than 900 million iPhone users worldwide through various incentives for the $4.99 Apple TV+.

Short-form video competitor Quibi ($4.99) from DreamWorks Animation founder Jeffrey Katzenberg and former Hewlett-Packard CEO Meg Whitman, inked a partnership with T-Mobile, securing access to the telecom’s 83 million subscribers.

The crush of pending streaming video services prompted Netflix CEO Reed Hastings last month to tell a British audience to expect “a whole new world starting in November” following the SVOD invasion, which includes Hulu’s U.K. market expansion.

“Scale will be key in the [direct-to-consumer] space, but clearly the coming year is just the first phase in this era,” David Sidebottom, analyst with Futuresource Consulting, told the IBC365 platform. “D2C services will likely evolve, with their parent companies continuing to evaluate the benefits of D2C vs. third party [content license] agreements.”

“This will be particularly the case as services expand on an international basis, where legacy agreements, existing scale distribution partners and differing levels of SVOD uptake will be factors in their evolving D2C strategy,” he said.

Michael Pachter, media analyst at Wed bush Securities in Los Angeles, believes that with the surge of original content and catalog exclusives such as “Friends” and “The Office” migrating online, consumers have more reasons to choose OTT.

“If all that was happening was incremental services being offered, consumers might feel bamboozled,” Pachter said. “Instead, so much content is shifting to OTT services that many consumers will opt to subscribe to more than one service.”

Pachter says exorbitant pay-TV contracts paved the way for OTT video, with online TV offering a less expensive premium channel option.

“I expect cord cutters to look at rabbit ears and multiple SVOD services as a substitute. That’s why DirecTV lost 2 million subs since AT&T bought them,” he said.

More importantly, Pachter says that with Netflix losing Disney/Fox, NBC Universal and Warner Bros. content, consumers will feel compelled to try new services offering recognizable programming and/or favorite shows.

Indeed, the analyst believes Netflix will lose around two-thirds of its content (measured in viewing hours) and will have a tough time replacing that with content of similarly perceived quality.

Disney+ has an enormous library of content not available anywhere (Snow White, Fantasia, etc.) that will find its way to their service; the studio is also going to put its recent movies there and take those away from Netflix.

“That tells me that Disney+ gets to 30 million subscribers relatively quickly,” Pachter said.

He believes that Apple TV+, with just 12 original shows, will struggle with non-iPhone users unwilling to pay for limited content.

“Until Apple TV+ gets critical mass, there is no way they will be competitive,” Pachter said.

The analyst is “pretty confident” the HBO Max model will work, if it transfers existing HBO Now subscribers for a free probationary period lured by original content.

“If it’s $3 to $4 per month, they’ll get 10 million subs immediately and probably get to 80% conversion [from HBO Now] in a few years,” Pachter said.

Disney Stops Running Netflix Ads on its Networks

The streaming video wars are heating up.

With Disney set to launch a branded $6.99 subscription streaming video service (Disney+) on Nov. 12, it has reportedly begun circling the wagons around its media brands — denying Netflix ads from airing on select entertainment networks.

Netflix, in a shrewd marketing move, had apparently upped running ad-spots specifically on Disney networks.

Impacted properties include ABC (notably the Oscars), FX, Freedom and National Geographic. Disney will still accept Netflix advertising on ESPN since the SVOD pioneer does not stream live sports.

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In a statement first reported by The Wall Street Journal, Disney said that as the “direct-to-consumer business has evolved, with many more entrants looking to advertise in traditional television, and across our portfolio networks … [it has] “reevaluated our strategy to reflect the comprehensive business relationships have with many of these companies, as direct-to-consumer is one element.”

While rival media/tech companies also ready proprietary streaming services, it is unknown if their marketing has been impacted by Disney’s move.

But then they aren’t Netflix, which with more than 150 million subscribers worldwide, dominates the SVOD ecosystem.

In 2017, Disney began pulling back original movies (i.e. Star Wars, Pixar) and select Marvel programming from Netflix as it began assembling Disney+. The move was noteworthy considering the two companies in 2015 inked a landmark distribution deal making Netflix the exclusive pay-TV distributor for Disney movies.

In a related move, Disney CEO Bob Iger removed himself from the board of Apple as the tech giant readies a reboot of its Apple TV platform to include subscription streaming video and original content.

 

Bob Iger: ‘If Steve (Jobs) Were Alive,’ (Disney, Apple) Would be Combined Companies

Pending retirement and 20/20 hindsight can do wonders for the printed page.

With his departure from The Walt Disney Co. set for 2021, CEO Bob Iger has already authored a memoir on his long-running stint heading the world famous brand.

The book, “The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company,” is available everywhere Sept. 23, including Amazon.

In excerpts disclosed on Vanity Fair’s website, Iger delves into his relationship with late Apple co-founder Steve Jobs and how he was stunned to find out 10 minutes before announcing Disney’s $7.4 billion acquisition of Pixar in 2006 that Jobs’ cancer had returned.

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Iger suggests that had Jobs lived (he died in 2011), he believes — surprisingly — that the two would have facilitated a merger of sorts between Disney and Apple.

It’s an interesting revelation, if not unrealistic considering who Jobs was.

The mercurial executive was a majority shareholder of Pixar and a member of Disney’s board. He was also notoriously self-centered in his vision for Apple and the world revolving around it — not the other way around.

While fighting a return of terminal cancer (despite being one of the richest people on Earth) would cloud anyone’s judgment, when it comes to streaming video and content IP, Jobs’ insolence toward the emerging distribution model and owning content was glaring.

Despite pioneering music, TV show and movie distribution through iTunes, Jobs infamously dismissed Apple TV as a “little hobby,” to be re-evaluated in the distant future.

That attitude contributed to Apple (with more than $200 billion in cash) sitting on the sidelines as Iger-led Disney swooped in to buy Pixar, Marvel Studios and Lucasfilm (Star Wars) — the latter two properties for a combined $8 billion.

Disney has made more than $18 billion on its Marvel investment. The first four Star Wars movies produced by Disney-owned Lucasfilm have already paid for that acquisition. And Pixar’s Toy Story 4 is the fourth film from that studio to top $1 billion at the global box office.

It seems doubtful that had Jobs lived, Apple would have jumped into content ownership. Jobs’ successor Tim Cook has only now decided to push Apple TV into the SVOD ecosystem.

Indeed, Iger, in his book, said Jobs had grown frustrated dealing with the Disney culture and former CEO Michael Eisner.

“Among his many frustrations was a feeling that it was often too difficult to get anything done with Disney,” Iger wrote.

Yet, today Apple has ratcheted up original content, spending Netflix-like billions on programming featuring ‘A’-list talent such as Jennifer Aniston and Reese Witherspoon.

The move has generated headlines but comes as Disney, AT&T/WarnerMedia, Comcast and Viacom all bow separate and competing over-the-top video platforms.

Instead of being an innovator as it was with the PC, iTunes, smart phones and tablets, Apple is chasing the competition, a reality noted earlier this year by Netflix’s Ted Sarandos.

“We’ve been competing with 500 channels of cable and penetrated nearly every household in the world for a long time,” Sarandos told the media in March. “So, it’s the same stable of competitors [Apple, Disney, AT&T, Viacom]; just very late to the game.”

 

Subs Dive Lower

Halloween may be Oct. 31, but the real thriller in Hollywood will hit in November.

Disney+ and Apple TV+ are in a sub battle to the pricing floor. After Disney+ announced its Nov. 12 launch at $6.99 a month, with special offers dipping below $4 a month, Apple TV+ Sept. 10 an­nounced it would launch its SVOD service Nov. 1 (more than a week before Disney) at $4.99 a month, below regular pricing for Disney+ and approaching the special offer cost.

Not coincidentally, Disney CEO Bob Iger resigned from the Apple board the same day.

The two services, vying to take on the likes of streaming giants such as Netflix (with pricing starting at $8.99 a month) and Amazon Prime (a free add-on to its shipping fee), seem to have made the calculation to charge practically nothing for premium streaming content.

The moves could further lower con­sumers’ perceived value of content in general. Over the years, studios have fought outfits that devalued their con­tent. Now, Disney and several others are joining some of the low-priced markets they previously vilified — and undercutting them.

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Certainly, entering the streaming market offers additional value other than subscription revenue. Disney and others will gather a treasure trove of data on their customers, and perhaps will find new ways to better target and monetize content.

Giving away a library of titles for the price of a gallon of milk each month is certain to attract con­sumers, but it’s a gamble that could undermine the value of the studios’ core product.