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Analysts: Despite short-term uncertainty, Disney OTT set for long-term growth

Walt Disney Co.'s upcoming streaming platform is already generating higher than expected costs, but analysts remain bullish about the company overall and its new digital strategy.

Disney executives said this week that investments in the company's planned and existing streaming services — including the upcoming Disney+ platform, ESPN+ and Hulu LLC — will drive a $900 million operating loss in Disney's direct-to-consumer and international segment in the fiscal fourth quarter, up sequentially from a $553 million segment loss in the June quarter. The $900 million figure well outstripped analyst expectations, with Morgan Stanley analyst Benjamin Swinburne having forecast a $640 million loss prior to the earnings release.

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While costs are running higher than Wall Street expected, Moody's credit analyst Neil Begley said the company's direct-to-consumer strategy is appropriate to lead in the digital-distribution space going forward.

Fitch Ratings analyst Patrice Cucinello agreed, pointing to Disney's move to aggregate its brands under a corporate "skinny-bundle" with a $12.99 service that includes Disney+, Hulu and ESPN+.

"We view the shift to direct-to-consumer as strategically necessary, and I view how aggressively they're going after it as positive," Cucinello said. Fitch will likely leave Disney's debt ratings unchanged, despite the expanded operating-loss guidance, she added.

Given the low price point of Disney's digital platforms, losses are likely to persist into the foreseeable future, but analysts said those losses are necessary to achieve scale. Disney will offer a massive content catalog at a price point cheaper than AT&T Inc.'s upcoming HBO Max offering and comparable to a standard Netflix Inc. subscription. Analysts expect the new offering to rapidly gain streaming market share on a value basis alone, as Netflix did in the early days of its digital video strategy.

Disney CEO Bob Iger said Disney+ will ultimately become the exclusive streaming service for the company's vast library of movies and TV series, including titles acquired from Disney's March acquisition of 21st Century Fox Inc. assets. It will also house National Geographic content; all upcoming Disney, Pixar, Marvel and Star Wars movies; and a "robust slate of high-quality original programming from the creative engines that drive our entire company," according to the CEO.

The company's strategic investments in Fox and its streaming strategy with Disney+ will "take some time to gestate," Moody's Begley said, but he noted, "I think this company is able to walk and chew gum at the same time."

While Begley believes Disney's direct-to-consumer offers may result in subscriber erosion for the company's traditional pay TV networks, he said the move to digital platforms is inevitable.

"That genie is not going back in the bottle," Begley said.

Disney executives seem prepared to put long-term streaming success above short-term fluctuations in quarterly earnings. "Much of our focus is on integrating Fox's assets and leveraging them, along with our Disney businesses, to move quickly into the direct-to-consumer space. Nothing is more important to us than getting this right," Iger said.

Disney's direct-to-consumer and international segment registered a more than fourfold rise in revenues to $3.86 billion in the fiscal third quarter, up from $827.0 million in the year-ago period. All in all, corporatewide June quarter revenue grew 33.0% year over year to $20.25 billion.

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