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Disney execs say separate streaming services better fit for today's viewers

While streaming giant Netflix Inc. bundles all of its programming into one service, Walt Disney Co. executives said their strategy to package the company's vast content reserves into separate direct-to-consumer products is a better fit for today's consumers.

The company plans to market its Disney-branded streaming service, slated to bow toward the end of 2019, differently from that of Hulu LLC, in which Disney will hold a 60% stake pending its deal to purchase myriad 21st Century Fox Inc. assets. Meanwhile, executives said ESPN+ is turning in some solid early returns since its April launch.

"We don't really want to go to market with an aggregation play that replicates the multichannel environment that exists today," said Disney Chairman and CEO Bob Iger on the company's Aug. 7 earnings call. "We feel consumers are more interested in essentially making decisions on their own in terms of what kind of packages they want."

That being said, Iger noted that if a consumer wants all three streaming services, Disney sees "an opportunity to package them from a pricing perspective."

Asked about how the Disney-owned streaming offerings might impact upcoming negotiations with legacy pay TV providers, Iger said traditional affiliates are "very, very interested in distributing our DTC products, as they do right now for Netflix."

Iger said the legacy distributors are realizing that over-the-top subscription video-on-demand products are here to stay and will either compete with or complement more traditional TV platforms. "So, we don't really see it complicating our negotiations with the primary distributors," Iger said.

During its fiscal third quarter ended June 30, Disney reported a 7% increase in companywide revenues to $15.23 billion, up from $14.24 billion in the corresponding year-earlier period. Segment operating income grew 5% year over year to $4.19 billion from $4.01 billion.

Revenues at the company's media networks segment advanced 5% to $6.16 billion, with operating income off 1% to $1.82 billion. Cable networks revenues increased 2% to $4.19 billion. Cable operating income declined 5% to $1.38 billion, behind a loss at BAMTech, tied to ongoing investments in the technology platform, including costs associated with the April launch of streaming service ESPN+. Freeform (US) sustained erosion from lower ad revenues related to declining viewership and higher marketing costs. ESPN (US) benefited from higher affiliate rates, countered by a subscriber decline. Ad revenues at the sports programmer retreated 3% with lower average viewership and one fewer NBA Finals game.

Broadcasting revenues increased 11% to $1.97 billion as operating income advanced 43% to $361 million. The latter surged behind higher program sales of "Designated Survivor," "How to Get Away with Murder" and "Grey's Anatomy," affiliate revenue growth linked to higher rates and a 3% increase in advertising sales at ABC (US), as higher rates overcame lower impressions. Results were also shaped by higher programming costs from "American Idol" and "Roseanne."

Parks and resorts revenues increased 6% to $5.19 billion, with operating profit ahead 15% to $1.34 billion. Results included an unfavorable impact from the timing of the Easter holiday season as only one week fell in this year's fiscal third quarter, versus both weeks in the 2017 span.

Studio entertainment revenues rose 20% to $2.88 billion, leading to 11% amelioration in operating income to $708 million. The latter was bolstered by gains in domestic theatrical distribution from the successes of "Avengers: Infinity War" and "Incredibles 2" in the just-completed quarter, versus "Guardians of the Galaxy Vol. 2" and "Cars 3" in the comparable 2017 period.

The consumer products and interactive media unit saw revenues decrease 8% to just over $1.0 billion and operating income decline 10% to $324 million. Operating profit was buffeted by lower income from licensing revenue around "Spider-Man" and "Cars," partially countered by an increase in "Avengers" products. Comparable retail stores sales also decreased, blunted to some extent by lower costs at the games business.

Net income available to the Disney company reached $2.92 billion, or $1.95 per share, from $2.37 billion, or $1.51 per share in the third quarter of fiscal 2017. After excluding the impact of U.S. tax law reforms and certain other items, the company said EPS for the quarter ended June 30 came to $1.87.

The third fiscal quarter S&P Global Market Intelligence consensus estimate for normalized and GAAP EPS was $1.95.

Shares of Disney fell in after-hours trading following the earnings release.