Disney's Streaming Push Seen Paying Off in the Long Run

Walt Disney Company's plan to plunge into a crowded streaming services market, dominated by pioneer Netflix, could bring some initial pain, but the strength of the company's content is expected to help it pull through in the long run.

Shares of the world's biggest entertainment company were down 6 percent in premarket trading on Wednesday, a day after Disney said it would stop providing new movies to Netflix starting in 2019.

"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 plan to go online marks an aggressive stance even as the company struggles with subscription losses as users defect to online streaming services such as Netflix and Time Warner Inc's HBO.

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.

While most analysts said the move was encouraging, it is expected to affect results in the near term.

"This may initially create angst with investors as DIS gives up a 'bird in the hand' from Netflix (easily $100+mm per year), invests in BAMTech, content and probably accelerates pay TV subscriber declines," RBC Capital Markets analysts wrote in a client note.

Disney's 2019 slate of movies such as Frozen 2 and Toy Story 4 will not be available to Netflix subscribers, but other Disney-produced content such as the Marvel Defenders series will stay with Netflix.

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.

This strategy likely attempts to balance ESPN's strong pricing power as it enters a renewal cycle with distributors this quarter, while capitalizing on rising consumer demand and access to streaming content, Morgan Stanley analysts said.

ESPN's growth prospects were 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.

As video streaming is becoming increasingly ubiquitous, it was only a matter of time before Disney launched its own service, analysts said.

"The future of the media business is clear and Disney's strategic pivot will better position the company for the long-term," Morgan Stanley analysts said.

© Thomson Reuters 2017