SBD/February 6, 2013/Finance

ESPN's Rising Costs Lower Earnings For Disney; Iger Plans To Keep Raising Fees

Disney yesterday posted lower earnings “due in part to the rising costs of acquiring TV sports rights for its ESPN division,” according to Grover & Zeidler of REUTERS. Net income “fell 6 percent" to $1.38B from $1.46B, and net income per share “fell 4 percent to 77 cents a share from 80 cents a share for the company's fiscal first quarter.” Revenues “rose 5 percent to $11.3 billion" from $10.78B a year earlier. Reuters analysis showed that Wall Street was “expecting revenues" of $11.2B. Disney said that operating income at its cable networks decreased $15M to $952M for the quarter "due to a decrease at ESPN, partially offset by growth at its Disney Channel, ABC Family and A&E Television Networks” (REUTERS, 2/5). In N.Y., Brooks Barnes reported ESPN had a “significant impact on Disney’s quarter, with programming expenses increasing for football and basketball.” Those costs “held back results for Disney’s media networks unit, which houses the cable sports behemoth; operating income there increased a tepid 2 percent" to $1.21B (NYTIMES.com, 2/5). CABLEFAX DAILY reports ESPN’s rising programming costs “reflected rate increases for college football and the NFL, as well as an increase in the number of NBA games due to the lockout in the prior year” (CABLEFAX DAILY, 2/6). In L.A., Dawn Chmielewski reported Disney’s results “also included a $219-million gain from the sale of its 50% interest in ESPN Star sports in India to its joint venture partner, News Corp.” (LATIMES.com, 2/5).

HEADING HIGHER: Disney Chair & CEO Bob Iger said the "price increases that we have for ESPN are primarily increases that we believe reflect the continued value proposition for ESPN, for the distributor and for the advertiser … and we’ll be able to continue to raise ESPN’s rates." Iger: "We don’t do so in any cavalier fashion. We’ve been investing in its programming and in the production and believe that value proposition is still there strongly.” He noted programming costs were high this quarter because of the "increase in rights fees" for college football. Iger: “But if you look at the year, the costs for ESPN’s programming will start to flatten out. We also have some distribution deals whose increases don’t kick in until after the first quarter” (“Closing Bell with Maria Bartiromo,” CNBC, 2/5). SNL Kagan data shows that ESPN currently “charges distributors $5 per household per month -- the most of any network.” But Iger “defended higher rates for ESPN, saying customers are getting more for their money through add-ons such as the WatchESPN mobile app” (N.Y. POST, 2/6).

CAUTION GOING FORWARD? CNBC’s Kelly Evans noted ESPN "used to be one of the reasons that analysts always favored Disney" and wondered if the net's down quarter is a "reason for caution going forward?” Reuters L.A. bureau Cheif Ron Grover noted the “company said it is not, they say it’s a one quarter thing (and) that they had some programming costs from college football and other things that they’ve had to put into this quarter." Grover: "As a result, this quarter for ESPN was not very good. They say that’s temporary, they say they’ve got a lot of good deals coming up, cable channels are going to pay them more” (“Worldwide Exchange,” CNBC, 2/6). CNBC’s Jim Cramer said it looks like ESPN is now "back to where we thought, so people are very comfortable paying up for these prices” per share of Disney (“Squawk Box,” CNBC, 2/6). Cramer added, "ESPN is a fabulous brand. ... They are a news organization -- primarily -- of information that you can’t get elsewhere and can’t DVR” (“Squawk on the Street,” CNBC, 2/6).

BAILING OUT? The FINANCIAL TIMES’ Matthew Garrahan reports Disney is "'exploring an exit' of ESPN from the UK” after the net “incurred losses and lost key sports rights contacts.” ESPN “launched to great fanfare in the UK three years ago and made an immediate impact, buying a package of rights” to live EPL soccer and “setting itself up as an alternative to British Sky Broadcasting, which holds most of the rights.” However, ESPN “lost out in the auction for the next three seasons when it was outbid by BT.” It also recently “lost mobile rights when it was outbid” by News Corp. A source said that coverage included in ESPN’s current EPL contract, which expires at the end of the current season, “will not be affected.” ESPN’s departure “would leave the UK sports market a less competitive field” (FINANCIAL TIMES, 2/6).
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