(Bloomberg Opinion) -- In the movie of Walt Disney Co.’s dramatic journey to become a full-fledged streaming company, last quarter wasn’t even the opening previews. It was the time when investors were merely buttering their popcorn.
Disney on Wednesday reported revenue and earnings per share for the three months through March that exceeded analysts’ estimates, as ESPN reaped higher fees from cable-TV providers and guests of the company’s theme parks and resorts spent more money during their stays.
The results were upbeat, but at the same time they do little to distill Disney’s current state of affairs. That’s because they cover a period of time that doesn’t include the three game-changing events of its year – perhaps its lifetime:
the record-crushing release of “Avengers: Endgame” in April, the openings of its Star Wars: Galaxy’s Edge destinations at Disneyland this month and Disney World in August, and the coming launch of the Disney+ streaming app on Nov. 12, the product at the center of CEO Bob Iger’s vision for the future of Disney.
Even Iger’s prepared comments in the earnings release glossed over the latest quarter and instead focused on what’s to come:
We’re very pleased with our Q2 results and thrilled with the record-breaking success of “Avengers: Endgame,” which is now the second-highest grossing film of all time and will stream exclusively on Disney+ starting December 11th.
In the less than two weeks that “Avengers: Endgame” has been playing in theaters, ticket sales have already surpassed $2.27 billion globally. That’s just a few hundred million dollars away from leapfrogging “Avatar” as the biggest film of all time. It’s also the centerpiece of an extraordinary slate from Disney this year, with “Aladdin” and “Toy Story: 4” hitting the box office in just a few weeks, followed by “The Lion King,” “Artemis Fowl” and “Maleficent: Mistress of Evil.” Then, “Frozen 2” and “Star Wars: The Rise of Skywalker” will take fans through the holiday season.
It’s such a feat that I’ve questioned whether Disney is setting a bar it may not reach again, or at least not for a long time. The company said this week that the release of “Avatar 2” – a franchise it now owns thanks to the acquisition of 21st Century Fox’s film assets – has been delayed until the end of 2021. And after “The Rise of Skywalker,” its next “Star Wars” movie isn’t until December 2022. The sparser schedule of blockbusters aside, Disney is also putting all of its new films on Disney+ instead of licensing them for big bucks to Netflix Inc. and others.
It’s just one example of how Disney’s bet on streaming will hurt other lines of revenue in the coming years, shortfalls that Disney+ won’t be able to offset until its subscriber count reaches mass and turns profitable. By the company’s own projection, Disney+ won’t start making money until 2024. Last quarter, the newly formed direct-to-consumer and international division lost $393 million, reflecting the cost of investing in Disney+ and ESPN+, as well as Hulu continuing to bleed money.(1)
Adding to the effects Disney’s shift will have on its financial results, there’s also the potential impact on culture and morale. The businesses that have long been core to Disney may instead start to function more like veins supplying content and resources to the new heart of the company: digital-video apps. While the Disney team sorts through this new process, it’s also working to integrate the assets and employees that came from its $85 billion Fox deal, which closed in March. (Fox Corp. reported its own results after the close of trading on Wednesday, its first time doing so as a slimmed-down entity focused entirely on news and sports.(2))
Disney’s latest period was good, yet relatively insignificant given all the changes afoot. But take your seats, because the feature presentation will soon begin.
(1) Disney owns most of Hulu and is reportedly in talks to buy out Comcast Corp.’s remaining stake, a deal that may notcome together quickly or easily but is a key step in Iger’s strategy.
(2) The strength of Fox News helped earnings blow analysts’ estimates out of the water, showing why the Murdochs saw value in a breakup that would put the spotlight on its news channel.
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Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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