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Disney to debut new OTT services, reports more quarterly declines at ESPN

Investors turned sour on Walt Disney Co. shares Aug. 8 after the company reported another quarter dragged down by its ESPN (US)-branded sports networks. Meanwhile, executives announced new digital products and signaled a new path for the company's video efforts.

Disney plans to take control of video technology firm BAMTech LLC with an additional $1.58 billion investment and use the technology to launch at least two over-the-top streaming video services: an ESPN multisport platform in early 2018 and an entertainment service in 2019. The ESPN service will include optional add-on packages across a range of sports, and it will include an authenticated access portal for current pay TV ESPN subscribers.

CEO Bob Iger said the company has not yet had conversations with its current pay TV distributors concerning the ESPN service.

"We have all the confidence in the world in our ability to strike deals that are favorable to the company, given the strength of the product that we offer. ... If you look very specifically at ESPN, we still see it as a must-have service for the multichannel providers because of the array of product that ESPN has licensed and what they produce as original programming," Iger said on the company's Aug. 8 earnings webcast.

The Disney-branded entertainment platform will include "the newest live-action and animated movies from Disney and Pixar" as well as exclusive original television series and short-form content. The company will terminate content agreements with Netflix Inc. that apply to the Disney and Pixar content it intends to distribute on the new platform, but it does not expect to terminate other Netflix agreements, like those pertaining to ABC (US) content.

When asked about the company's global ambitions considering Netflix distributes in many international markets, Iger noted that Netflix does not have global rights to Disney movies. "They bought opportunistically in certain markets," he said.

"We'll ... roll out the service in multiple markets outside the United States, but it will vary from market to market based on existing distribution agreements and different market dynamics. But I think you have to think about a Disney-branded direct-to-consumer subscription service as a global product, even though we're being more specific today about launching a domestic product in the latter part of 2019," he said.

The company has not made a decision about its Marvel and Star Wars content and is considering launching a stand-alone service for this programming as well as continuing to license it to OTT distributors like Netflix, the executive said.

For both the ESPN and Disney OTT services, Iger said the company would make the apps available for partnerships with MVPDs and other distributors to deliver in package deals.

The company will likely see increased expenses related to the transition and new studio content created for the new platforms, Iger said, and it will reveal more details on the specific financials during subsequent earnings calls. The new platforms will open up new lines of revenue for Disney, he added, including the ability to leverage consumer-level data on Disney, Pixar and sports fans. Ultimately, "the profitability, the revenue-generating capability of this initiative is substantially greater than the business models that we're currently being served by," he said.

The announcements come as Disney reported big fiscal third-quarter declines in its cable networks division, driven by ESPN.

Net income attributable to the media and entertainment giant came to $2.37 billion, or $1.51 per share, compared to $2.60 billion, or $1.59 per share, down 9% year over year on an aggregate basis and 5% year over year on a per-share basis. A 22% operating income decline in the company's media networks segment, which includes cable networks, weighed on profitability. The company said higher programming costs, lower advertising revenue and contractual expenses at ESPN, partially offset by affiliate revenue growth, were responsible for the lower cable networks income.

The company reported non-GAAP adjusted EPS of $1.58, down 2% from $1.62 reported in the prior-year quarter.

The consensus GAAP and adjusted EPS estimates for the fiscal third quarter were each $1.55, according to S&P Capital IQ.

Disney reported total revenues of $14.24 billion for the quarter, compared to $14.28 billion in the 2016 quarter.

Shares were trending down almost 4% in after-hours speculation as the webcast drew to a close.