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Disney Shares Slide After Q2 Earnings Report Shows Declines In ESPN Revenue, Subscribers

Disney shares "plummeted" late yesterday following its Q2 earnings report, as the company "noted a decline in both ESPN subscribers and the sports network’s advertising revenue," according to Elaine Low of INVESTOR'S BUSINESS DAILY. But Chair & CEO Bob Iger said he sees a "very robust marketplace and a very strong upfront" season ahead for both ABC and ESPN. ESPN "didn’t consume the Q2 call as it did during the previous quarter." But Iger said that the channel’s inclusion in OTT bundles "correlated with some 'very encouraging sign-ups.'" Instead, the focus of the Q2 call "drifted to Hulu," and Iger "put Hulu’s recently announced live-TV package as a 'best of cable approach.'" ESPN revenue in Q2 rose, "but advertising revenue notably decreased." Disney said that affiliate revenue growth for ESPN was "partially offset by a decline in subscribers" (INVESTORS.com, 5/10). In L.A., Daniel Miller notes Disney's cable division, which houses ESPN, recorded operating income of $2B, up 12% from a year ago. But revenue for the group was down 2% to $4B (L.A. TIMES, 5/11). At presstime, shares of Disney were trading at $101.98 per share, down 4.3% from the close of business yesterday (THE DAILY).

WHAM, BAM: Iger declined to address ongoing reports the company intends to invest in MLBAM’s BAM Tech unit. But Iger said baseball’s digital operations have long gained his notice. “I’m not really going to make a specific comment on our interest in acquiring a stake in (BAM Tech),” Iger said. “I will say we have been very impressed with their product. It’s obviously quite evident if you engage with Major League Baseball on digital platforms. It’s probably among the best out there” (Eric Fisher, Staff Writer).

I'LL BE WATCHING: The WALL STREET JOURNAL's Tess Stynes notes Wall Street analysts were "most interested in so-called skinny packages that cost less and offer fewer channels, and what effect they might have" on Disney and, in particular, ESPN. Iger declined to offer any specifics. but said that products such as Dish Network’s Sling TV and Sony's Vue have been "'very encouraging' and contributed incremental subscribers for ESPN during the quarter." Iger: "We’re also in discussions with a number of entities, some current distributors coming forward with new packages and some completely new distributors" (WALL STREET JOURNAL, 5/11). USA TODAY's Roger Yu notes ESPN's ratings "have been a concern for investors, contributing to Disney's falling stock price for much of last year." ESPN's programming costs, which have been "rising steeply in recent years due to heightened demand for live sports programming, dipped because only one college football playoff game was aired on the network during the quarter, compared with seven in the year-ago period" (USA TODAY, 5/11).

WHO'S NEXT? In N.Y., Brooks Barnes notes the first question posed to Iger in his post-earnings conference call "involved succession." Outgoing Disney COO Thomas Staggs, who "had been the favored internal candidate" to succeed Iger, last month announced plans to step down. Iger also reiterated that he has "no 'current plans' to extend his reign beyond a previously stated retirement date" of June '18. Meanwhile, it is "extremely rare for Disney to fall short" of earnings expectations, and the company’s detractors will "most likely use the disappointing results to further a negative premise: Disney’s traditional engine -- television -- is no longer reliable" (N.Y. TIMES, 5/11).

SETTLE UP
: ESPN and Verizon yesterday announced the "settlement of a lawsuit that accused Verizon of breaching its contract with the sports network when it created a new cable package for its Fios television service last year." In N.Y., Richard Sandomir notes no details of the settlement were announced. The lawsuit "struck at the longstanding practice of bundling channels into broad, increasingly expensive cable packages that consumers have begun to rebel against by abandoning their pay-TV providers and choosing lower-priced Internet services like Netflix, Hulu and Sling TV" (N.Y. TIMES, 5/11).

CHANGING LANDSCAPE
: Tigress Financial Partners Partner & Chief Investment Officer Ivan Feinseth said the "trend is going to continue" of Disney's price reacting to the down numbers from ESPN. But Feinseth added, "Live sports content and live sports commentary has still a strong appeal to advertisers." CNBC's Wilfred Frost said the change in the media landscape is "happening faster and in a more pronounced fashion than I think people expect," but a company like Disney, "because it creates so much content itself, will be fine in the long-term." Frost: "But how much is that margin going to be hit from the overall results because of the traditional, very profitable ESPN subs business?" CNBC's Sara Eisen said, "ESPN was a juggernaut for so long, just the idea of having not great news on it is enough to spook the markets and the entire sector" ("Worldwide Exchange," CNBC, 5/11).

MAKING A COMEBACK?
The WALL STREET JOURNAL's Holman Jenkins writes skeptical analysts say that the cable bundle is "fading fast, and Disney would never be able to replicate the revenues it gets from the bundle by peddling ESPN à la carte to subscribers." This argument "may play a role in Disney’s stock-market wobble since last summer, despite the Star Wars bonanza." It "may be a subtext" in Staggs' departure if the ESPN debate "suddenly has Disney’s board rethinking what it needs from its next chief." Yet there is reason to think Disney and its Wall Street antagonists "are both wrong." An OTT service from ESPN "would not be the money spinner Disney hopes, but the cable bundle isn’t going away." On the contrary, the cable bundle will be "remade in the world that’s coming." Live TV is "also the biggest challenge for the Internet." ESPN could actually "become more central than ever to a new bundle focused on live 'event' programming" (WALL STREET JOURNAL, 5/11).

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