By Ben Fritz
A conference call to discuss Walt Disney Co.'s financial results
Tuesday became a forceful defense of ESPN in an age of cable
cord-cutting, reflecting Wall Street's concerns about the future of
one of the media world's most lucrative brands.
While granting that sports powerhouse ESPN has experienced "some
subscriber losses" that he declined to specify, Disney Chief
Executive Robert Iger repeatedly argued that the channel will
remain in a strong position thanks to long-term rights to the
National Basketball Association, college football playoffs and
other programming, and to the value to advertisers of programming
that is primarily watched live. The combination, Mr. Iger said in
his opening remarks, "adds up to a very strong hand and gives us
enormous confidence in ESPN's future no matter how technology
transforms the media business."
Still, as consumers shift to less costly "skinny packages" or
abandon cable altogether, Disney is feeling the effect. The company
previously said its cable business, primarily driven by ESPN, would
achieve "high single digit" operating income growth on a compound
basis between fiscal 2013 and 2016. But due in part to lower
subscriber levels, that figure will end up in the "mid-single
digits," said Chief Financial Officer Christine McCarthy. The
strong U.S. dollar also had an effect, Ms. McCarthy added.
Mr. Iger said he doesn't see "dramatic declines" in basic cable
subscriptions over the next five years that would necessitate
launching an "over the top" product that allows consumers to
purchase ESPN through the Internet without a package of other
channels. However, he did say that new deals with cable and
satellite companies give Disney the option to make such a move
"should we conclude that becomes the more attractive opportunity
for us."
Wall Street's concerns about ESPN's future come as the cable
network has been dropping big name talent like Bill Simmons and
Keith Olbermann in an effort to trim costs as it loses subscribers.
Advertising revenue at the sports network was down 3% in the
quarter ended June 27, which Disney attributed to a difficult
comparison with last year, when the men's World Cup aired.
Cable has accounted for 46% of Disney's operating income so far
this fiscal year, making the stakes in ESPN's evolution quite high.
The company combines ESPN's results with those of other, smaller
networks such as Disney Channel and ABC Family.
Overall, cable-networks revenue grew 5% to $4.14 billion in the
three months ended June 27, Disney's third financial quarter;
operating income was up 7% to $2.1 billion. Contractual rate
increases at Disney Channel and ABC Family, as well as sales of
their programs to subscription video on-demand services,
helped.
Total revenue for Disney rose 5% in the quarter to $13.1 billion
and net income was up 11% to $2.5 billion.
The company's movie studio remained a particularly strong
performer, with revenue up 13% to $2 billion and operating income
up 15% to $472 million. Impressive box office returns for
"Avengers: Age of Ultron," "Inside Out" and "Cinderella" more than
made up for the fizzle of "Tomorrowland" and the studio continued
to benefit from its share of "Frozen" merchandise sales.
The only weak spot came from Disney's interactive group, where
revenue was down 22% to $208 million and operating income fell from
$29 million a year ago to break-even. Sales of the company's
flagship "Infinity" videogame and interactive toys are down, Disney
said, a worrisome trend. New "Star Wars"-inspired Infinity products
will launch this fall, though the results may be obscured as the
company will combine its interactive and consumer-products units in
the new fiscal year, which begins in late September.
Though Disney doesn't provide specific guidance, Ms. McCarthy
did provide a warning to investors about fiscal 2016. Because the
company wasn't able to purchase currency hedges at rates as
attractive as it did a year ago, the strong U.S. dollar will lower
operating income next fiscal year by about $500 million, she
said.
Next fiscal year will be a critical one for the company, as it
launches its first "Star Wars" movie in December and opens its
theme park in Shanghai next spring.
Disney shares closed up 1% at $121.69 before results were
released Tuesday, but fell more than 6% in after-hours trading.
Write to Ben Fritz at ben.fritz@wsj.com
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