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Disney: Opportunities Abound with Fox Acquisition, D2C Streaming Service

Disney continues to be encouraged by the initial consumer reaction to its ESPN Plus direct-to-consumer (D2C) streaming video service and remains bullish about the opportunities provided by both its coming Disney-branded D2C streaming service and purchase of a large chunk of 21st Century Fox’s film and TV assets, according to Disney CEO Robert Iger.

“It’s still early days” for ESPN Plus, which launched in the spring, but “conversion rates from free trials to paid subscriptions are strong and subscription growth is exceeding our expectations,” he said Aug. 7 on an earnings call for Disney’s third quarter (ended June 30). “ESPN Plus will become even more compelling to fans across the sports spectrum as we continue to expand the content and enhance the user experience,” he said, but didn’t provide any subscriber data.

Iger focused mainly on the Fox and D2C opportunities during the call. “Not cited was the relatively disappointing result” for the “Star Wars” standalone film “Solo,” whose “global box office take was around 40%” of what the 2016 film “Star Wars: Rogue One” was, Pivotal Research Group analyst Brian Wieser said Aug. 8 in a research note.

The launch of the Disney-branded D2C service remains “on track” for late 2019 and the company already has “numerous original projects currently in various stages of development and production for this platform, including the world’s first live-action ‘Star Wars’ series and new episodes” of the “Star Wars: Clone Wars” animated series, Iger told analysts on the call.

The “robust content pipeline” for the Disney D2C service also includes theatrical movies such as the upcoming live-action version of “Lady and the Tramp,” as well as new series based on popular Disney intellectual property from across the company, including Disney Channel’s “High School Musical” and Pixar’s “Monsters, Inc.,” he said.

Disney is also “moving forward with brand new Marvel content,” while the Fox acquisition “brings even more opportunity to create original programming” for the Disney D2C platform, he said, adding: “We’ll share more details about our” Disney D2C plans at an investor presentation “in the near future.”

Disney is still “working to secure the remaining regulatory approvals in a number of international territories” for the Fox deal, he noted, telling analysts: “The assets we’re buying fit perfectly with our plans to substantially grow our intellectual property portfolio and to bring our products to market in ways that consumers, as well as the creative community find extremely compelling.”

Total Disney third-quarter revenue grew 7% from a year ago, to $15.2 billion from $14.2 billion in Q3 last year. Profit increased to $2.9 billion ($1.95 a share) from $2.4 billion ($1.51 a share). Media Networks revenue grew 5% to $6.2 billion. The only Disney business segment that had a revenue decline was Consumer Products & Interactive Media (down 8% at $1 billion).

Studio Entertainment revenue jumped 20% to $2.9 billion and operating income in that division increased 11% to $708 million, “driven by growth in domestic theatrical distribution due to the performance” of “Avengers: Infinity War” and “Incredibles 2,” CFO Christine McCarthy told analysts on the call. “Infinity War” grossed more than $2 billion globally, “making it Marvel’s highest-grossing film of all time,” while “Incredibles 2” became the “top domestic grossing animated film ever and has generated over $1 billion in global” box office as of the call, she said. She predicted “Incredibles 2” will end its theatrical run as Pixar’s highest-grossing film.

Disney’s Q3 results were “relatively consistent with” Pivotal Research Group’s “underlying view on the business, which we think will be better-positioned vs. others in the media industry following the Fox transaction,” Wieser said in his research note. But he said: “We also think that financial downsides – tepid growth in media networks affiliate revenues, declines in ad revenues, higher costs for content (as well as marketing and content delivery) – will represent drags on overall growth in profitability in years ahead.”