Streaming Red: Disney’s OTT Venture Down a Fiscal Black Hole

NEWS ANALYSIS — Disney bought Marvel Studios in 2009 for $4 billion. It bought Lucasfilm (“Star Wars”) for another $4 billion three years later.

The acquisitions helped Disney reign supreme at the box office in 2018, 2017 and 2016, according to data from BoxOfficeMojo. And it has a commanding lead in 2019 thanks to Avengers: Endgame.

At the same time, the Mickey Mouse company is set to lose more than $2 billion on streaming investments — “Disney Streaming Services” (formerly BAMTech), Vice Media, ESPN+ and Hulu — before it even launches its much-ballyhooed new $6.99 monthly SVOD service Disney+ in November.

Earlier this year, Disney CFO Christine McCarthy said ESPN+ is projected to lose $650 million annually through 2020. The company just wrote-off more than $300 million on its minority stake in Vice Media.

And the much-hyped Disney+ SVOD platform is not projected to become profitable until 2024 — three years after CEO Bob Iger plans to retire.

“Streaming requires a strong stomach for losses, especially as you are playing catch-up,” Rich Greenfield, analyst at BTIG Research, told CNBC earlier this year.

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Down the OTT Rabbit Hole

As Disney saw Netflix growing exponentially worldwide — much of it based on streaming movies and TV series based on Marvel intellectual property, it switched its business focus from SVOD enabler to over-the-top provider.

Indeed, Iger says OTT video is the company’s No. 1 focus in 2019, regardless of the financial hits to the bottom line.

Hulu, which Disney majority owns along with Comcast, lost $580 million in 2018, while BAMTech, the backend tech firm acquired from Major League Baseball Advanced Media in 2017, spearheaded another $470 million operating loss for the company’s new direct-to-consumer and international operating unit (which also includes home entertainment).

And the fiscal hits continue.

DTC & International lost $393 million in the most-recent fiscal quarter (ended March 31), up from $188 million loss in the previous-year period. Through the first half of the fiscal year, DTC has lost $529 million, twice as much was lost in 2018.

“We expect our direct-to-consumer businesses to have an adverse impact on the year-over-year change in segment operating income,” McCarthy said in an understatement on the May 8 fiscal call.

Disney, of course, can arguably absorb the losses. It generated a $12.5 billion profit on almost $60 billion in revenue in 2018. That was before closing the 21st Century Fox transaction, which could help Disney reach $100 billion in revenue.

At the same time, the Fox acquisition upped Disney’s long-term debt from $18 billion to about $52 billion. Disney is also expecting about $2 billion of cost synergies absorbing 20th Century Fox Film Corp. and related businesses.

Thus far, Wall Street appears supportive, contending the Disney brand has the best chance of narrowing the SVOD divide with Netflix.

“I think Wall Street is at least accepting of the fact that we’re doing this, that it’s the most important thing we’re doing,” Iger told Barron’s in January. “And while I won’t say they’re cheering us on, they’re definitely giving us the room to prove that we can do it.”

Disney Takes $353 Million Write-Down on Vice Media

Lost in the hubbub of Disney’s financials, pending SVOD service launch and Avengers: Endgame largesse: a $353 million write-down for Vice Media — the Canadian digital media company that airs programming (“Vice News Tonight”) and “Vice” on HBO and a branded Viceland channel.

Vice Media corporate partners include AMC Networks, co-founder Shane Smith and investor group TPG Capital.

It’s second fiscal write-off Disney has taken on the media property it pumped $500 million into in 2015 in an effort to target millennials and young adults with demo-specific content. It was once valued at more than $5 billion.

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The Wall Street Journal last week reported Vice had secured $250 million in debt funding from investors led by George Soros.

A Vice spokesperson told Business Insider the company remained “on target” to meet current fiscal targets.

“Our new executive team’s strategic plan is well underway and with the recent capital raise, we will continue investing in the long-term growth of our five global businesses — television, studio, digital, news and our advertising agency, Virtue,” the rep said.

Hulu, Vice Media Ink First Content License Deal

Hulu and Vice Media  have signed their first-ever content licensing agreement. The pact — Viceland’s first SVOD partnership — begins June 8 and will increase Hulu’s library of unscripted programming with 15 series, including all past episodes of the Emmy nominated “Gaycation” and “Woman,” as well as, “F*ck, That’s Delicious.”

“Our viewers love watching thought-provoking reality series … and partnering with Viceland is yet another way we’re building … unscripted programming,” Lisa Holme, VP of content acquisition at Hulu. Said in a statement.

The deal makes Hulu the exclusive SVOD home to Oscar and two-time Emmy nominee Ellen Page’s “Gaycation,” feminist Gloria Steinem’s “Woman,” rapper-chef Action Bronson’s “F*ck, That’s Delicious,” and the meta-comedy, “What Would Diplo Do?,” starring James Van Der Beek as the titular music superstar. Other shows include: “Abandoned,” “Black Market,” featuring Michael K. Williams, “Bong Appétit,” “Cyberwar,” “Hamilton’s Pharmacopeia,” “Hate Thy Neighbor,” “Huang’s World” and “Weediquette.”

“Viceland is a key part of expanding on Vice’s ongoing commitment to create the most compelling and unique content young viewers can’t find anywhere else,” said president Guy Slattery.

Launched in 2016, Viceland has produced hundreds of hours of original content reaches a young audience with lifestyle-focused series examining all elements of culture, from music, food, and fashion to technology, sex, drugs, and beyond.  The channel, while still in its infancy, has seen the second highest year-over-year growth across all of television among 18-49 viewers with a 26% lift.