This week, Disney (NYSE: DIS) announced lower annual revenue and profits for the first time in seven years. A weaker movie release slate, as compared to the prior year's blockbuster run, contributed to reduced operating results in fiscal year 2017. But the bigger impact came from the accelerating move by TV fans away from the broadcast media ecosystem that's been such a reliable source of Disney's strength.

Let's take a closer look at the results.

Image source: Disney.

What happened

Three of Disney's four operating segments reported lower sales and profits in the fiscal fourth quarter compared to the year-ago quarter, with the parks and resorts business being the one positive outlier. The studio entertainment and consumer products & interactive media divisions both shrank for the same reason: The performance of Pixar's Cars 3 failed to lift ticket sales and licensing demand when compared to a prior-year period that had help from the hit Star Wars, Frozen, and Finding Dory franchises.

Disney's media networks division faced the biggest challenges, with operating profit falling 12% to $1.475 billion. That slump was powered by continued subscriber declines at ESPN and other cable network properties, and it more than offset a healthy increase from the parks and resorts business. Disney's overall operating income fell 6% for the year, compared to a 7% increase last year.

In a conference call with Wall Street analysts, CEO Bob Iger noted that unusual events, including the cancellation of one of its animated films, Gigantic, and the impact of Hurricane Irma on Walt Disney World, depressed profits during the quarter by about $275 million. However, even after adjusting for these events, Disney would have reported roughly 4% lower operating income for the year.

Iger and his team highlighted important operating wins in that call, including the fact that its Shanghai Disney theme park booked a surprising, early profit. "I'm pleased to note that Shanghai Disney Resort generated positive operating income during its first full fiscal year of operations, which comfortably surpassed our expectations of breakeven," Iger said.

Looking ahead

Disney has set itself up for better performance in fiscal year 2018. In fact, the entertainment giant has a strong film launch calendar in place, beginning with the recent Thor: Ragnarok hit that's already passed $500 million in box office receipts. Following that, the company has three more Marvel movies on the way this year, two from Pixar, and a major new chapter in the Star Wars franchise.

In the meantime, Disney's main priority is building a direct media relationship with its viewers that's not shackled to the shrinking pool of pay-TV subscribers. That initiative begins with an ESPN-branded sports service set to launch early next year. After that, the company intends to roll out a broader streaming service that will be the exclusive home to its most valuable content, including feature film releases soon after they conclude their theatrical runs.

Disney has ambitious plans for this service, targeted for launch in late 2019, given that no company besides Netflix has been able to build a healthy global subscription offering at that scale.

It's no coincidence that Disney's streaming launch is set for the period when its exclusive content deal with Netflix expires. Those valuable properties, plus the brands and franchises that Disney develops over the next two years, will determine whether its subscription offering allows the media giant to make a fundamental pivot into internet-delivered, on-demand content.

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Demitrios Kalogeropoulos owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.

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