Rosenblatt On Why Disney's Distribution Deals Matter

Walt Disney Co DIS is making a bold move by launching its own over-the-top streaming service, and a critical part of the success of that service will be negotiating distribution deals.

The streaming service may be the right move for Disney in the long-haul, but Rosenblatt Securities analyst Alan Gould said Thursday that it may be years before investors see an earnings tailwind from the service.

According to Gould, Disney will bear the brunt of the up-front costs of streaming in fiscal 2020. He estimates earnings per share will take a 30-cent hit that year (see Gould's track record here).

In the meantime, Disney’s direct-to-consumer deals with traditional TV companies will be critical and could be costly as well. Gould reported that more than half of the multichannel distribution deals that Disney currently has in place are set to expire by the end of 2019, starting with its deal with Altice USA Inc ATUS’s Cablevision.

“Disney is looking for both price and distribution increases, likely including increasing the minimum distribution of ESPN, carriage of the ACC Network which is being launched in the fall of 2019, and the SEC Network which was launched in 2014, has approximately 62 million subscribers, and is carried by all distributors except the legacy Cablevision systems,” Gould wrote.

The renewal date for the Cablevision deal is reportedly Sept. 30, and Gould said the terms of the renewal could serve as a bellwether for how costly the upcoming round of deals will be for Disney. Gould said investors should expect a move in Disney stock based on how the market perceives the terms of the Cablevision deal.

For now, Rosenblatt maintains a Neutral rating and $110 price target for Disney stock.

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