Even as CEO Bob Iger announced ambitious plans to create a streaming platform capable of going head-to-head with Netflix Inc. (NFLX) - Get Netflix, Inc. (NFLX) Report and a standalone platform for ESPN, Iger has taken criticism that the world's largest entertainment company has mismanaged its television properties.
Disney shares have slipped 5.3% since it delivered quarterly earnings on Aug. 8 that revealed declining subscribers at ESPN, slowing advertising sales at ABC and uneven box-office sales for its movies. Disney's cable TV group posted a 7% decline in ad sales as the pace of quarterly subscriber losses at ESPN quickened to nearly 3%.
And on Monday, Disney suffered a major blow to its programming plans for ABC when Netflix announced the signing of superstar TV-serial creator Shonda Rhimes and her production company, Shondaland, to a multiyear deal. ABC, which Iger acknowledged on an Aug. 8 investor conference call already faces "some ratings challenges," will have to act quickly to offset the loss of Rhimes, creator of "Grey's Anatomy" and "Scandal."
"Disney will probably need to invest in the kind of content that Shonda Rhimes does," said Ezra Kucharz, a New York media consultant and former adviser to CBS Corp. (CBS) - Get CBS Corporation Class B Report CEO Leslie Moonves. "That's content that skews a little older and a little more mainstream."
Indeed, Iger said Disney will increase spending on original programming, both in TV and film, to prepare for the the launch of its entertainment streaming service, sending media analysts scrambling to lower their net income forecasts.
Netflix, of course, is doing the same. Ted Sarandos, its content chief, told Variety in a story published Tuesday that the company plans to spend an eye-popping $7 billion in 2018 to make and license original programming.
Sarandos has little choice but to invest billions into programming it can control. Disney's announcement that it won't license new Disney and Pixar films to Netflix starting in 2019 follows similar decisions by Scripps Networks Interactive Inc. (SNI) not to renew its licensing deal as well as statements by executives at Twenty-First Century Fox Inc. (FOXA) - Get Fox Corporation Class A Report and Time Warner Inc. (TWX) that they plan to reduce the amount of content they send the streaming service.
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Netflix's poaching of Rhimes, and the decision by "Walking Dead" creator Robert Kirkman to leave AMC Networks Inc.
for Amazon.com Inc.
, further underscore the effect the world's largest tech companies are having on the entertainment industry as they use TV serials and movies to bolster their core businesses.
Like Apple Inc. (AAPL) - Get Apple Inc. (AAPL) Report , which recently released its version of "Carpool Karaoke," Amazon has had real success leveraging "Transparent" and "Manchester by the Sea" to attract subscribers to its Prime program. Similarly, Alphabet Inc.'s (GOOGL) - Get Alphabet Inc. Class A Report YouTube has entered the direct-to-consumer game with its YouTube TV, and Verizon Communications Inc. (VZ) - Get Verizon Communications Inc. Report has said it will build a standalone service that transcends its Go90 platform.
AT&T Inc. (T) - Get AT&T Inc. Report , which already owns DirecTV, will get very involved in the content game if it closes on its $85.4 billion acquisitions of Time Warner. And don't forget Comcast Inc. (CMCSA) - Get Comcast Corporation Class A Report , which owns just about everything.
"Newer digital entrants are forcing companies like Disney to adapt to change, but Hollywood is accustomed to this," said longtime Hollywood observer Jason Squire, a film professor at the University of Southern California's School of Cinematic Arts and editor of "The Movie Business Book." He added: "The tide moves in, and the tide moves out. This is all part of the gambling aspect of entertainment."
But Disney, more than any media company, and that includes Netflix, has the means to weather a spending war for top talent and the race to build profitable streaming services, said Peter Csathy, founder of media tech business advisory firm CREATV Media. Unlike Netflix, Disney has multiple businesses -- theme parks, films, consumer products -- that will provide both the cash flow and the marketing platforms to attract the millions of subscribers needed to offset the overarching declines in pay-TV, he added.
"Disney will be able to amortize these costs over all of their businesses, whereas a Netflix only has one business -- it has a streaming service," Csathy said. "As the numbers become even more massive to create original content, Disney or Amazon or Apple or Google, [which] have all these revenue streams, are better [able] to withstand that long term than a Netflix."
Indeed, Netflix has taken its lumps recently as well. Shares of the streaming service have declined nearly 6.5% in the past week on the realization that it won't have high-profile Disney content 17 months from now. In one of the most revealing comments of the most batch of quarterly conference calls, Fox co-chairman Lachlan Murdoch on Aug. 9 said, "Monolithic, global exclusive deals with Netflix are troublesome."
Disney's Iger couldn't have said it any better.
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