By Erich Schwartzel
Walt Disney Co.'s hit movies, led by "The Lion King" and "Toy Story 4," once again helped drive strong quarterly results. But the company is largely looking beyond the theater for its future, focusing instead on reasons for folks to stay home.
Disney Chief Executive Robert Iger has spent billions of dollars buying franchises, from the Avengers to Star Wars -- brands that will soon be put to the test when Disney launches Disney+, its putative streaming rival to Netflix Inc.
"We're making a huge statement about the future of media and entertainment," Mr. Iger said on a conference call with Wall Street analysts Thursday.
Highlighting the company's dueling priorities, Disney's theatrical-movie division posted a 52% rise in revenue and 79% jump in operating income in the three months ended Sept. 28.
Overall, Disney's profit slumped by more than half to $1.05 billion, hurt by a sharp rise in costs stemming in part from the Disney+ production costs. But its shares rose in after-hours trading as earnings beat analysts' expectations.
Despite the company's box-office riches, a streaming-first mentality now pervades the company, if Mr. Iger's remarks were any indication. Disney's film and television divisions are producing hundreds of hours of programming not only for Disney+ but also a 19-month-old ESPN streaming service and Hulu, a third service that Disney now controls after its $71.3 billion acquisition of the 21st Century Fox entertainment assets.
A team of newly hired engineers have built out an interface and technical underpinning to withstand millions of subscribers. Former partners like Amazon.com Inc. are now streaming rivals, forcing Disney to negotiate deals that get its service onto as many platforms as possible.
In trying to turn every home into a Mouse House, Disney's streaming launch is a long-game attempt to allay concerns Wall Street began expressing in 2015 when Mr. Iger acknowledged subscriber losses at ESPN, the company's most profitable division. The prospect of long-term decline at the cable sports network delivered a shock to Disney's share price, since investors focused on the company's vulnerability to Netflix despite record-setting performances at the box office and in theme parks.
Disney is preparing a trio of streaming services to appeal to more than its core family demographic; and no deal was more instrumental to the strategy than its absorption of Fox. The integration of those assets continued on Thursday when Mr. Iger announced that Fox's FX network will begin producing programming for Hulu.
Hulu will become the service where Disney sends its more mature shows and movies. Episodes from original FX shows will be available on Hulu one day after they premiere, including new shows from "Ex Machina" director Alex Garland and another starring Cate Blanchett. Other Fox brands like Fox Searchlight, the studio label behind Oscar winners like "The Shape of Water," will also develop shows and movies for the service.
The ESPN streaming service and Hulu will be sold as a bundled collection for $12.99 a month.
Disney seems to be borrowing elements of Netflix's playbook for Disney+. The service will allow users to download shows and movies for later viewing, and multiple user accounts are to be permitted on each household subscription.
But Disney is also diverging in significant ways. All Disney+ programming will be family-friendly, and episodes will premiere one at a time, more akin to traditional broadcast or cable television than to Netflix's binge-it-all approach. Mr. Iger has also said he wants Disney+ to have a user interface that feels more personally tailored than Netflix's algorithm-driven model.
Industry insiders expect Disney+, which will cost $6.99 a month, to siphon some users from Netflix, whose most popular offering goes for $12.99. Netflix in October missed its subscriber-growth target in the U.S. and overseas for a second consecutive quarter.
Netflix lost domestic subscribers for the first time in nearly a decade two quarters ago, and in its latest quarter added 517,000 stateside users -- short of its expectation of 800,000.
By getting into streaming, Disney has gone from a company that provided other platforms -- including Netflix -- with marquee entertainment, and into a rival competing for subscribers.
The awkwardness was highlighted last month in a recent dispute with Amazon over terms to carry Disney apps on Fire TV devices. Mr. Iger said Thursday that the two companies had reached a deal to carry Disney+ on the Amazon devices when it launches next week.
That is a significant gain for Disney+, since Amazon had 29% of the U.S. market for streaming-media boxes in the second quarter, according to Strategy Analytics, behind only rival Roku Inc.
Subscribers on Tuesday will see a combination of classic Disney programming coming out of "the vault," including older movies like "Swiss Family Robinson" or "The Little Mermaid." That fare will be combined with newer releases from Marvel Studios and original programming based on some of Disney's most popular franchises, like the Star Wars spinoff "The Mandalorian" and a new series based on the 2006 made-for-television movie "High School Musical."
Star Wars is yet another example of a franchise divided by Disney's streaming strategy. While "The Mandalorian" is the most notable original offering on Disney+, the theatrical releases of the franchise will go on "a bit of a hiatus" following the December release of "Star Wars: The Rise of Skywalker," Mr. Iger said, acknowledging the struggle some of the Star Wars titles have had at the theatrical box office.
Disney's total revenue increased to $19.1 billion, slightly missing analysts' consensus estimate. Revenue jumped 22% to $6.5 billion at the company's media networks, which include ESPN, and 52% to $3.3 billion at its studio entertainment division.
Excluding certain items, earnings were $1.07 a share, higher than the 94 cents a share expected by analysts polled by FactSet.
Shares of Disney rose 4.5% to $139 in after-hours trading.
Depressed tourism in Hong Kong, driven by the anti-China protests that have filled the city's streets in recent months, led to a significant decline in attendance at Hong Kong Disneyland. If current trends hold, the location could post a revenue decline of $275 million in the current fiscal year, compared to just-ended fiscal 2019, said Disney finance chief Christine McCarthy.
--Allison Prang and Dana Mattioli contributed to this article.
Write to Erich Schwartzel at email@example.com