Rising costs ate into earnings at Walt Disney Company's largest division, its media networks unit, which includes ESPN, the Disney Channel and ABC, the company said Tuesday. While sales rose 13% to $5.81 billion, operating income dropped 2%.
Disney blamed higher programming and production costs at ESPN, which pays billions for rights to air live sporting events. Profit jumped 90% at ABC, thanks to higher affiliates fees, the sale of shows like "Daredevil" to Netflix, and advertising revenue. Those gains were partly offset by higher marketing costs around hyping new series, the company said.
One emerging challenge for Disney is so-called skinny bundles. Verizon Communications is selling a new pay-TV package called Custom TV that doesn't require customers to pay for ESPN. Disney has sued to stop Verizon, which says its contract allows it to offer the service.
At the same time, Disney doesn't see skinny bundles as attractive to consumers, CEO Robert Iger said on an earnings call to discuss its earnings.
Disney, which typically reports quarterly results after markets close, moved its announcement to Tuesday morning to allow its executives to attend the funeral of SurveyMonkey CEO David Goldberg, who died unexpectedly over the weekend. Mr. Goldberg's wife, Facebook Chief Operating Officer Sheryl Sandberg, is a Disney board member.
The company reported overall second-quarter profit that beat analysts' estimates, led by growth at its theme parks and continued sales of "Frozen" toys in a period that lacked a major movie blockbuster.
Revenue at the world's largest entertainment company rose 7% to $12.5 billion, above the $12.3 billion projection.
Price increases in California and Florida helped boosted profit at Disney's theme parks by 24%. The company is benefiting from investments made during leaner years to attract guests who are spending more in an improved economy. "Frozen" merchandise sales drove a 32% rise in consumer-products profit, and bolstered a film unit whose biggest release was "Cinderella."
"'Frozen' was once again called out in the consumer product segment, as well as studio entertainment," Benjamin Mogil, an analyst with Stifel Nicolaus, wrote in a research note. "One of the main themes of Disney has been that its studio operations continue to be in a league onto themselves as evidenced by these results."
Under Mr. Iger, the company acquired Pixar, Marvel and Lucasfilm, and with a revived Disney Animation they're providing characters that can be used for everything from theme-park attractions to pajamas.
"Frozen," released in late 2013, is still selling toys for the company, lifting results in consumer products as well as the film studio, which shares in revenue derived from its movies. Profit at the consumer-products unit rose to $362 million, on a 10% increase in sales, to $971 million.
The studio's biggest new release in the period was "Cinderella," which generated almost $495 million at the global box office. While a success, it was no "Frozen." Profit at the unit fell 10% from a year earlier, when the studio was churning out DVDs from Arendelle.
The company is releasing several major films this year, including "Avengers: Age of Ultron," which made its debut in U.S. and Canadian theaters last weekend and generated $191.3 million, the second-largest movie opening of all time. To date, the film has grossed $630 million worldwide, according to Box Office Mojo.
Still on tap this summer are "Inside Out," Pixar's first film in two years, and "Ant-Man," another Marvel spinoff. Later in the year, Disney releases its first movie from Lucasfilm, "Star Wars: The Force Awakens."
"Interest in 'Star Wars: The Force Awakens' is unlike anything we've seen before," Mr. Iger said on a conference call with investors. The second teaser trailer for the film has been viewed more than 200 million times.
At the theme parks, Disney in February raised the price of a daily admission to its Magic Kingdom Resort in Orlando, Florida above $100 for the first time. Profit at the division expanded to $566 million, on a 13% rise in sales.
"We're most excited about prospects outside the U.S., with the opening of Shanghai Disneyland next year," Chief Operating Officer Thomas Staggs said on the call. He said the Shanghai park won't produce a positive financial impact until after 2016.
~ Bloomberg News ~