Walt Disney Co’s shares fell 5 percent on Wednesday to their lowest in eight months as investors doubted whether the world’s biggest entertainment company can succeed with its plan to launch its own streaming services rather than rely on Netflix Inc to reach online viewers.
Disney announced its plans on Tuesday alongside quarterly results showing further subscription losses as it struggles to keep hold of viewers defecting to online streaming services offered by Netflix, Time Warner Inc’s HBO and others.
Under its plan, Disney will stop providing new movies to Netflix starting in 2019, a deal analysts at RBC Capital Markets estimate earns Disney more than $100 million a year. Some on Wall Street have doubts that Disney can easily replicate that revenue stream.
“The Disney product is taking a very successful and settled part of the business model (pay TV economics for films) and putting it at risk in the hopes of building an asset with more long-term value,” Cowen and Co analysts wrote in a research note.
Disney said the new services would be based on technology provided by video-streaming firm BAMTech, in which the media company is increasing its stake to 75 percent by paying $1.58 billion.
“This may initially create angst with investors as Disney gives up a ‘bird in the hand’ from Netflix, invests in BAMTech, content and probably accelerates pay TV subscriber declines,” RBC Capital Markets analysts wrote in a client note.
Though the cost of the move will hurt the company’s profit in the near term, the strength of the company’s content may help it succeed in the long run, some analysts said.
“With best in class copyrights and brands, and with IP rights to a plethora of sports content, it seems management has decided to play offense,” Evercore analysts wrote in a client note.
The company’s entertainment empire stretches from Disney and Pixar animation studios, home to blockbusters such as “Frozen” and “Jungle Book”, to “Star Wars” producer Lucasfilm and Marvel – the studio behind “Iron Man” and “Spider-Man”. It also includes theme parks, resorts and ESPN.
The new Disney-branded streaming service will follow a similar offering from ESPN that will be available starting in 2018. ESPN would be a mix of streaming and pay TV.
ESPN’s growth prospects have been a cause for concern for investors as the unit had been steadily losing subscribers amid rising expenses for sports rights.
“We view the ESPN announcement as probably Disney’s best chance of at least limiting, if not reversing, the margin pressure on its network business from subscriber and viewership attrition,” Cowen and Co analysts said.