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7 February 2019

BAMTech ready for mammoth Disney+ task, as it guzzles cash

Disney’s Direct-to-Consumer & International segment suffered an operating loss surge of 224% to $136 million for the closing quarter of 2018, primarily hit by costs associated with developing Disney+ and ramping up ESPN+. Having already guzzled $1 billion+, the pressure is mounting for Disney+ and the excuses are stacking up.

The house of mouse fan club fervently defended the company’s results, again prompting a widespread Disney vs Netflix debate. One report in particular waxed lyrical about how Disney will prevail due to having multiple revenue streams compared to Netflix’s one. These are cinema (a dying business), licensing movies to traditional TV networks (a dying business) and selling DVDs (a nearly dead business). Let’s make one thing clear here – this is a streaming war and Netflix has an insurmountable head start.

Next quarter’s outlook projects another operating loss, rising to $200 million. Again, Disney expects the continued ramp-up of ESPN+ and ongoing development of Disney+ to have an adverse impact on operating income, with about two thirds attributable to ESPN+. Granted, streaming services notoriously take time to generate profit, but with Disney making a song and dance out of ESPN+’s subscriber uptake, doubling in size over the last five months to 2 million paid subscribers, when does Disney expect to make money from it? It won’t tell us, but what we do know is that the incremental rises in programming costs are not nearly enough to offset the increase in advertising revenues.

The same unanswered question applies to Hulu, with Iger saying during the company’s earnings call this week, “The goal obviously is to operate Hulu profitably and we’re not going to say how long that might take.” The expectation is that Hulu will eventually be rolled into Disney+ once Disney becomes a 60% owner through the Fox deal, although Iger spoke favorably about the benefits of segmenting streaming into the three flavors of sports, general entertainment, and family programming. But to avoid convolution, the plan is to allow users to sign up for all three with the same credentials and same payment details – all powered by the same BAMTech technology platform. Of course, the more streaming services from Disney you take, the more discount you get.

Another argument we have seen is that Disney’s considerable content clout and studio production capabilities will devastate Netflix. Really? Well how come Disney has already licensed a number of third party programs to bulk up its service, including some properties from CBS? And because the Fox acquisition is yet to close, Disney can’t take advantage of its output capabilities and is sweeping up titles to mix up its portfolio. As impressive as the Disney brand is, the new streaming service was never going to survive on Disney content alone.

But our favorite element of the Disney empire and one which is becoming an increasingly vital cog, is BAMTech. Disney was never renowned for its technology prowess prior to buying up BAMTech, and apparently the streaming technology division is ready to take on the task of running Disney+ when it launches later this year. Disney said BAMTech’s platform has proved to be reliably stable during peak live streaming consumption on the ESPN+ service, and the technology easily handled the volume of over 0.5 million people signing up during a single 24-hour period.

BAMTech’s ability to handle a substantial number of simultaneous transactions sounds an impressive feat, with Iger saying there were instances before a major recent UFC fight that BAMTech was taking in or making just under 15,000 transactions a minute, and the stability of the platform is critical at times like that.

“The fact that we have a technology platform that’s working, a user interface that’s working, the ability to sign consumers up en masse, the use of the primary platforms to promote the new platform in what we believe will be a strong price to value relationship with Disney and then the strength of all the brands, I think it all adds up to a very, very positive picture ahead of the launch of the Disney service, which is going to come toward the end of this calendar year,” said Iger.

Total revenue for the fourth quarter was down marginally by $48 million to $15.3 billion, with Media Networks the best performing division, up 7% to $5.9 billion, while Parks, Experiences & Consumer Products grew 5% to $6.8 billion. Studio Entertainment revenue took a 27% blow, declining to $1.8 billion, and Direct-to-Consumer & International revenue dropped 1% to $918 million. Total net income nosedived 37% to $2.8 billion, although this was higher than expectations.