By Ben Fritz
Skyrocketing sports-rights costs caught up to ESPN last quarter,
providing a setback in an otherwise stellar quarter for Walt Disney
Co.
Hit by a combination of higher costs for Major League Baseball
and World Cup soccer, as well as a shrinking subscriber base for
ESPN and certain timing issues, operating income at Disney's cable
networks group fell 7% to $1.9 billion during the quarter ended
June 28. It was the only one of the company's business units not to
report double-digit, or higher, growth in operating income.
Driven by everything from "Frozen" DVD sales to price increases
at domestic theme parks to higher sales at Disney Stores and a
turnaround at the interactive media unit, Disney generated higher
earnings per share in the first three quarters of its fiscal 2014,
which ends in September, than in any previous full fiscal year,
Chief Executive Robert Iger said on a conference call.
Net income in the quarter grew 22% to $2.2 billion, and revenue
was up 8% to $12.5 billion.
Cable networks revenue was up just 1% to $3.9 billion, also the
lowest of any segment of the company. Along with higher costs,
Chief Financial Officer Jay Rasulo said ESPN's subscriber losses
were "modest" and "mostly economically driven," presumably from
people switching to cheaper cable packages or abandoning pay
television altogether.
Affiliate revenue--the money paid to Disney by cable and
satellite companies to carry ESPN--grew in the mid-single-digit
percentages last quarter, affected by contractual provisions. Such
fees are a key driver of ESPN's business. Mr. Rasulo said that
figure should return to its normal high-single-digit growth rate in
the current quarter and continue at that pace through 2016.
Comparisons to the same quarter last year were hurt by nearly
$100 million less in deferred revenue recognition as well as the
sale last summer of ESPN's United Kingdom business.
Disney's film studio enjoyed another blockbuster quarter, with
operating income more than doubling from the year-earlier period to
$411 million and revenue up 14% to $1.8 billion. Home-entertainment
sales of "Frozen" were the biggest reason, as well as the animated
musical's ongoing success at the overseas box office, particularly
in Japan, and the healthy theatrical runs of "Captain America: The
Winter Soldier" and "Maleficent" in the spring.
This past weekend's strong opening of the Marvel movie
"Guardians of the Galaxy" continued a yearlong streak without a
major flop for Disney's studio.
In what could be a strong driver of growth for the unit in the
future, Mr. Iger said Disney is working on designs that will result
in a "far greater Star Wars presence in our parks."
Increased attendance and higher spending per guest drove growth
at Disney's domestic parks that more than offset weakness at
Disneyland Paris, the company said. Wireless wristbands called My
Magic Plus that launched at Disney World last year and help
visitors to plan rides and pay for items will contribute to the
theme-parks unit's profitability for the first time in the current
quarter, said Mr. Iger.
Shares in Disney, which have risen 14% this year, were down 1%,
to $86.75, in 4 p.m. trading Tuesday, before financial results were
released.
Write to Tess Stynes at tess.stynes@wsj.com
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