Disney's Channels: Kids Are Tuning Out -- Update

Walt Disney Co.'s biggest business, cable TV, is stalling. And the problems go well beyond ESPN.

The sports network's struggle to adapt to a rapidly changing media landscape has garnered much of the attention from investors and analysts.

But ratings have fallen significantly at Disney's biggest brands reaching children, teens and young adults, led by Disney Channel and Freeform. Those two channels each has lost about four million subscribers over the past three years, bringing them to around 90 million apiece.

The troubles are twofold: a lack of hits and the broader move by audiences away from traditional television to digital alternatives. The shift to streaming services such Netflix Inc. and web-based platforms like Google's YouTube is particularly pronounced among younger viewers targeted by these Disney networks.

Channel executives say they are trying to improve programming and determine how aggressively to make the leap to mobile and online formats.

"We see the migration," said Disney Channel President Gary Marsh. "One of the challenges is trying to serve the viewership where they're going as opposed to trying to drive them where we want them to go."

Disney Channel programming is focused on children, while Freeform, which changed its name from ABC Family in January of 2016, is aimed at teenagers and young adults.

Cable TV has long been Disney's biggest business, accounting for 30% of its revenue and 43% of profits last fiscal year. About 26% of cable revenue and profits come from entertainment networks like Disney Channel and Freeform, Morgan Stanley estimates, while the rest is generated by ESPN. (Disney doesn't disclose the breakdown).

Even though Disney Channel is considered a relatively costly channel for cable companies, it doesn't command the large subscription fees that ESPN does.

Also at stake for Disney is the exposure its TV channels offer for toys, clothes and other products that the company relies on for hundreds of millions of dollars annually in revenue.

As consumers "cut the cord," Disney's once fast-growing cable business has slowed down. Cable revenue is flat and operating income down 6% in the first half of the current fiscal year, which has alarmed Wall Street.

Disney Chief Executive Robert Iger has said that strengthening online accessibility for television programs is a priority and that the company is preparing to offer its channels, in part or whole, directly to consumers online rather than just through costly cable packages.

Profits for Disney Channel and Freeform are driven in part by long-term contracts with cable companies, but the erosion in ratings is likely to ultimately hit the bottom line unless the networks can generate substantial new digital revenue.

Both channels are considering when, not whether, to launch direct-to-consumer apps, similar to Time Warner Inc.'s HBO Now.

"There's no doubt in my mind that the company will pursue that," Mr. Marsh said, adding that such an option could be unveiled in the near future.

For the first six months of this year, the commercial-free Disney Channel's ratings among in its core 2-11 and 6-14 demographics fell 23% in prime time and 13% and 18%, respectively, during the full day, compared with the same period a year ago. Ratings are also down at the smaller Disney Jr. and Disney XD networks, which fall under Mr. Marsh's Disney Channel umbrella.

Making the transition to online and mobile platforms is a delicate dance. Distributors like Comcast Corp. and AT&T Inc.'s DirecTV pay high subscription fees that currently account for a large chunk of the Disney networks' profits. They are wary of too much content being available outside of the pay-TV ecosystem.

Online video currently carries fewer ads and generates significantly less revenue than network programming, particularly if it is available to people who don't subscribe to cable.

Still, Freeform President Tom Ascheim said digital viewing for the channel has doubled in the past two years as his network has put its shows online, including full seasons of popular programs like "Famous in Love."

Such a strategy could mean a short-term hit to ratings and revenue but Mr. Ascheim said, "When we look out a bunch of years from now, digital gets bigger than linear. That feels real clear."

On the Disney Channel, some new shows, such as "I Didn't Do It" and "Best Friends Whenever" didn't click with kids, which contributed to the ratings decline.

"We haven't had the breakout hits in the last year or so," Mr. Marsh said.

Disney Channel is betting on "Raven's Home," a spinoff of its hit "That's So Raven." It also has a sequel to its smash original movie "Descendants."

Canceled shows on Freeform include the dramas "Guilt" and "Dead of Summer," which both were darker than the network's "Pretty Little Liars" and "Famous in Love."

Freeform's prime-time viewership among people aged 12-17 was down 25% from January through June. For the 18-34 demographic, the drop was 20% over the same period.

Both Freeform and Disney Channel are confident that their new slate of shows will lift ratings. Freeform is now targeting young men along with women. Next season, it plans to debut "Cloak and Dagger," its first show from sister unit Marvel. The deal took some persuading, given Marvel's concerns that Freeform wasn't accustomed to the high budgets Marvel's shows require.

The first couple phone calls were, `Hello...click,' said Karey Burke, Freeform's executive vice president of programming and development, who convinced Marvel that her network would spend the big bucks necessary.

Write to Joe Flint at joe.flint@wsj.com and Ben Fritz at ben.fritz@wsj.com