Disney Q2 numbers underline media networks struggles | Major Businesses | Business
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Disney has delivered another quarter of double-digit EPS growth for its fiscal second quarter, driven by the strong performance of its studio and parks/resorts divisions — but its cable TV networks continue to struggle thanks to troubles at ESPN.

ESPN 14 May 2017Executives were quick to take a bullish stance on the situation, and talked up the network’s upcoming streaming service.

The results from 10 May showed that overall revenue came in at $13.34 billion for the three months ended 31 March. That missed Wall Street estimates of $13.45 billion, but was still up over the $12.97 billion in revenue in the year-ago quarter.

The good news for the media giant is that it saw a fantastic quarter at the box office, with the hit live-action remake of Beauty and the Beast grossing nearly $1.2 billion worldwide since its 17 March release, and Rogue One: A Star Wars Story still raking in sales in January and February. Meanwhile, ABC is holding steady, with broadcasting revenue up 14% year-on-year to $344 million for the House of Mouse.

But for all of that, the company’s media networks division saw disappointing results, with operating income falling 3% to $2.2 billion, even though revenues increased 3% annually to $5.9 billion. To blame is mostly ESPN, which has lost more than 12 million viewers since 2011.

As basic cable subscribers dwindle, Disney has been trying to stay out ahead of the issue: ESPN has carriage on Sling TV, DirecTV Now, PlayStation Vue, YouTube TV and the live TV service from Hulu.

“When we saw that trend beginning, we took immediate steps to start contending with it ... and that included negotiating deals with all the new over-the-top providers to include ESPN in every one of their subs,” said Disney chairman and CEO Bob Iger in a call with analysts. “From a per-sub pricing standpoint, these new services are just as valuable to us as existing platforms. They’ve concluded that launching new platforms without ESPN is very challenged. Launching with ESPN enables them to penetrate the marketplace in ways they wouldn’t have been able to without it.”

That said, he conceded that ESPN’s anchor tenancy on skinny TV packages isn’t making up for losses from traditional cable and satellite packages. He also acknowledged that mobile viewing is on the upswing, and many consumers are watching game clips on their phones (usually shared on platforms like Twitter and Facebook) instead of settling in to watch an entire hour of SportsCenter.

"We’re not sitting on our hands,” Iger said. “There is nothing we can really do to slow that down. It’s important for us to participate in it, and that’s what we’re doing."

There could be a bright chapter for ESPN ahead, as Disney plans to unveil a standalone ESPN-branded streaming service later in the year, with millennial-focused content. The multi-sport subscription streaming service is being conceived as primarily a pay-per-view vehicle that will act as a complement to the live feed; Iger said that there are "no current plans to offer a replica of the ESPN cable channel online to those who don’t subscribe to cable.”

As for its linear strategy, the network is also wrestling with higher programming and sports rights costs. Specifically, it spent more due to the first year of ESPN’s new NBA contract underway, and higher production costs from three college bowl games that weren’t in the comparable quarter last year. This, combined with the subscriber erosion, all conspired to impact margins for the sports network in the quarter — a state of affairs that shows no sign of turning around.

Disney senior EVP and CFO Christine McCarthy admitted that the lower ratings means that ad sales for ESPN in the current quarter are "pacing down,” reflecting the "softness that we’re seeing in the overall advertising marketplace". McCarthy added that there is a "strong demand for NBA and other live sports”.

Last month, ESPN laid off 100 anchors and reporters in a cost-control effort — but Iger played down the impact of the headcount reduction.

"A lot has been said about cost reductions at ESPN,” he noted. “We’re managing that business efficiently. We always have, we always will. Obviously, there’s been a greater need to do it given challenges in the near term, but frankly what we’ve been doing, in terms of scale and size, is not that significant given that ESPN has 8,000 employees and we reduced by 100 employees. I don’t take it lightly but, the number gets these headlines ... it wasn’t a particularly significant reduction."