Beneath Disney's Success, Cracks Are Starting to Show
Bloomberg News
Is everything as it should be at Disney (DIS) - Get Report --or are we in fantasy land?
CEO Bob Iger wants everyone to chill out about ESPN and recognize that the popular sports channel remains a valuable and highly-profitable business.
Like the little girl in Disney's blockbuster film Inside Out, Iger is hoping investors will see the bright side of ESPN rather than worry about declining subscribers and recent cutbacks and layoffs.
"The [ESPN] brand is stronger than ever thanks to the largest array of sports properties in the industry and ESPN's well-earned reputation among sports fans for consistently over-delivering, especially when it comes to live sports," Disney chief offering officer Tom Staggs said in a Thursday conference call with investors.
For the past three months, speculation about ESPN's subscriber numbers has weighed on Disney stock. Iger triggered that concern in August by telling investors that ESPN was experiencing "modest" subscriber declines. That comment seemed to imply that cord-cutting was accelerating, putting the entire pay-TV bundle in jeopardy.
For Disney executives, the company is doing fine: the movie studio is producing big budget franchise films like the upcoming Star Wars sequel Star Wars:The Force Awakens, and the theme park unit is putting finishing touches on a $6 billion park in Shanghai. But even the most Disneyfied executive knows that not all fairy tales have a happy ending.
But Disney's most recent earnings shows just how the best-laid plans sometimes need a little help. Although the entertainment giant handily beat Wall Street's estimates for its $1.20 earnings per share, its $13.5 billion in quarterly revenue missed those estimates. The result was that Disney's stock fell in after hours trading.
Other cracks may be showing in Iger's Magic Kingdom. Operating profit margins tightened in the theme park units, due in large part to lower attendance and fewer hotel rooms booked at its Hong Kong theme park. And earnings were essentially flat at the studio, despite churning out two of the year's biggest hits Inside Out and Ant-Man.
And despite Disney's protests to the contrary, ESPN is clearly in a transition that likely will mean slower growth and slimmer margins. Disney's cable unit, which is dominated by ESPN, showed an impressive 12% hike in revenue and a 30% increase in operating income.
But scratch the surface and most of ESPN's growth came from the start last year of the SEC channel for the football crazed conference. Without it, Disney acknowledged, some of its other ESPN channels lost subscribers. Ratings were also lower.
Staggs was quick to emphasize that ESPN aired half of cable's top 50 shows in 2015 and that ESPN has sprinted to digital where he said 94.4 million people spent 10.3 billion minutes on ESPN mobile and other digital platforms in September alone.
Even so, Disney is spending a lot of money to lessen ESPN's impact on its income statement. It's plunking down around $3 billion for its half of the Shanghai Disneyland resort complex set to open next year, it's stepped up production of big budget films from its Pixar and Marvel action hero units, and it has three Star Wars films in theaters between now and 2017.
"Star Wars The Force Awakens is six weeks away and already we the impact and value in various parts of our business," said Iger. Rides are planned at the theme parks and consumer products are already hitting the shelves, Iger said.
Anyone who has ever seen one of Disney's classic animated films knows that none of them have ever been without its bumps and occasional crises midway through the action. Maybe that's where the company is right now. Usually the hero wins out. But that's in the movies.