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Disney to Forgo $150 Million in Fiscal 2019 as it Prepares to Launch Disney Plus

Disney will forgo about $150 million in content licensing revenue in its current fiscal year as the company prepares for the launch of Disney Plus later this year.

During Disney’s quarterly earnings conference call on Tuesday, Disney CEO Bob Iger and chief financial officer Christine McCarthy offered a few details about the financial ramifications of Disney’s plan to launch a global streaming service by year’s end. Investors have been pressing for information about how Disney will offset the loss of revenue from movies and TV shows that it would traditionally sell to third-party outlets.

McCarthy cited $150 million as the expected loss of operating income for the fiscal year from forgone licensing revenue. That lost operating income will be felt in its media networks and studio divisions. She noted that the upcoming “Captain Marvel” theatrical release will be the first new Disney movie title that will not go through a typical after-market sale windows, but rather be held back as an exclusive offering for Disney Plus. McCarthy said the bulk of the $150 million for this year will fall in the second half of the 2019 fiscal year, which ends Sept. 30.

Disney will also incur significant expenses in launching Disney Plus and creating original content for the platform. Iger emphasized that Disney is taking the long view with the decision to adjust some of its business models to support Disney Plus and other streaming services. He likened it to Disney’s historic significant investments in its theme parks. Disney has scheduled an Investor Day presentation for April 11 to offer more details on its expenditures for Disney Plus and other streaming initiatives.

“The investments we’re making on the technology side and increasing our incremental content are all designed for the long term. This is the equivalent of deploying capital to build out theme parks,” Iger said. “This is a bet on the future our business. We are deploying our capital so that the long-term growth of this company is stronger than it would have been without these investments.”

Iger further stressed that Disney, with its wealth of IP assets and production capabilities, is well-positioned to take the company in this new direction without incurring enormous additional costs.

“We have in the Walt Disney Company not only a collection of brands, but we have the talent relationships and production capabilities that (support) nicely our output. We do not have to invest that much in overhead or infrastructure to do that. We can leverage our people and the capabilities of all of our media businesses to grow the product for the new platforms very efficiently.”

Iger said he was encouraged by the growth trajectory of ESPN Plus, the streaming offshoot of the cable sports powerhouse that launched last year. ESPN Plus has grown to 2 million subscribers, up about 600,000 subs in just five months, in part because of the popularity of the UFC bouts carried on ESPN Plus.

“ESPN’s primary (TV) platforms are fantastic marketing tools for the direct-to-consumer service. We will use Disney’s strong marketing platforms for the Disney Plus service,” Iger said.

Disney last year reorganized its company segments to reflect the big push into direct-to-consumer programming services. In its first quarterly earnings report that breaks out the new direct-to-consumer and international division, Disney said the unit posted a loss of $136 million on revenue of $918 million.

Iger also told Wall Streeters that he expects the FX Networks team to create content for Hulu once Disney’s $71.3 billion acquisition of 21st Century Fox is completed. After Disney buys Fox, it will control 60% of Hulu, which Iger sees as an adult-oriented streaming platform that can be offered a la carte or as a bundle with Disney Plus and ESPN Plus.

“We foresee FX developing and producing a product for the Hulu platform in particular,” Iger said. “There is ample opportunity for FX to produce more programming and leverage its relationships in the creative community for Hulu.”

Iger’s comments about Hulu come one day after FX Networks chief John Landgraf discussed at length his view of the content marketplace during his presentation to reporters at the Television Critics Association winter press tour in Pasadena, Calif. Landgraf indicated that his team was energized by the prospect of the FX brand riding the tailwind of the streaming business.

Iger also said Hulu would eventually “look more aggressively” at launching its service in international markets.

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