(Bloomberg) — Walt Disney Co., once again shaking up the media industry, said it will stop selling movies to Netflix Inc. and begin offering ESPN sports programming and family films directly to consumers via two new streaming services.
Disney’s online entertainment service will being in 2019, the Burbank, California-based company said Tuesday in a statement. Starting next year, an ESPN online service, which the company had said was in the works, will feature 10,000 live events a year, including Major League Baseball, hockey, soccer and tennis, as well as college sports.
Investors didn’t have to look far to find out why Disney suddenly chose to upend its business. The company reported a rare drop in revenue and profit — from falling ad sales at ESPN and a decline at the film division. The moves show how seriously Chief Executive Officer Bob Iger views the threat from streaming services like Netflix and Amazon.com Inc. and their impact on conventional pay-TV.
“Our direct-to-consumer services mark an entirely new growth strategy for the company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands,” Iger said in the statement.
Shares of Disney fell as much as 2.6 percent to $104.25 in extended trading after the announcements. Netflix, which is losing a key supplier, lost 3.5 percent $172.15.
The ability to stream some of Disney’s most valuable sports and films without a cable TV subscription shows how rapidly the business is changing. The new Disney entertainment service will feature Disney films, as well as new programs and content from the company’s Disney Channel library. Those will include movies from the Disney studios and Pixar, but not Marvel or Lucasfilm, the producer of “Star Wars.”
The immediate fallout for Netflix is minimal, though investors may fear other Hollywood studios will move against the company and more carefully restrict what they sell to the online service. Netflix will spend more than $6 billion on programming in 2017, much of it from other media outlets, and has a long term budget of $15.7 billion.
“U.S. Netflix members will have access to Disney films on the service through the end of 2019, including all new films that are shown theatrically through the end of 2018,” Los Gatos, California-based Netflix said in a statement. “We continue to do business with the Walt Disney Company on many fronts, including our ongoing relationship with Marvel TV.”
To jumpstart its new services, Disney is buying control of BamTech, the streaming arm of Major League Baseball, in which it previously held a one-third stake. The company is paying $1.58 billion to raise its stake to 75 percent. Disney said it plans to market the Disney and ESPN streaming services directly to consumers, in app stores and from authorized pay-TV providers.
To address the concerns of pay-TV services, Iger said on a call with investors that none of the programming currently on ESPN would be on the online service. Plans for the two services have major ramifications for pay TV providers like Comcast Corp. and AT&T Inc.’s DirecTV. Subscribers pay more than $7 a month for ESPN, making it the most expensive basic cable channel and a major reason why consumers sign up for pay TV.
As if to underscore the growing threat to its business, Disney on Tuesday also reported fiscal third-quarter sales that missed analysts’ estimates, because of shrinking ad sales at ESPN and lower results from its film division.
Sales were little changed at $14.2 billion in the period ended July 1, Disney said, and trailed analysts’ estimates of $14.4 billion. Profit fell to $1.58 a share, beating the $1.55 average of analysts’ projections.
Profits at the company’s cable networks division fell 23 percent to $1.46 billion, due to higher programming costs and lower ad revenue.
Disney warned last year that fiscal 2017 would be difficult, hurt by rising costs to televise National Basketball Association games and fewer films being released by its studio.