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ESPN A Drag On Disney Q2 Financials; Iger Touts Net's Upcoming OTT Service

Disney reported an 11% jump in profit in Q2, "boosted by several hit films and growth in its theme parks operation," but the company's "closely watched media networks unit, which includes ESPN, had a tough quarter," according to Daniel Miller of the L.A. TIMES. Operating income fell 3% to $2.2B, which the Burbank-based outfit "attributed in part to higher programming costs and subscriber losses during a period of upheaval in the television business." Disney Chair & CEO Bob Iger "extolled ESPN’s forthcoming standalone multi-sport subscription streaming service, which he said is likely to give consumers the ability to pay to view specific sports teams, among other options." Miller notes the service is "scheduled for release by year's end" (L.A. TIMES, 5/10). The WALL STREET JOURNAL's Ben Fritz writes Iger once again spent much of a conference call with analysts and investors "discussing the fate of ESPN," as the net "accounts for the majority of profits in the company’s cable business." Iger said that there are "no current plans to offer a replica of the ESPN cable channel online to those who don’t subscribe to cable," but "conceded 'there is an inevitability to that.'" Iger "touted the presence of ESPN and other Disney networks on new less-expensive 'skinny' TV packages" that are "aimed at young, price-sensitive consumers." But he "conceded they aren’t making up for losses from traditional cable and satellite packages" (WALL STREET JOURNAL, 5/10). VARIETY's Cynthia Littleton noted "higher programming costs in the first year of ESPN’s new NBA contract, higher production costs from three college bowl games that weren’t in the comparable quarter last year, and subscriber erosion" led to a 3% year-over-year decline in operating income for Disney's cable networks division (VARIETY.com, 5/6). At presstime, shares of Disney were trading at $109.26 per share, down 2.5% from the close of business yesterday (THE DAILY).

READING THE TEA LEAVES: Iger yesterday noted Disney was "one of the first to cite trends" in the marketplace regarding a "reduction in the number of expanded basic subs" in the U.S. Iger: “When we saw that trend beginning, we took immediate steps to start contending with it ... and that included negotiating deals with all the new over-the-top providers to include ESPN in every one of their subs." Iger noted live sports are still of "great interest to consumers and to advertisers" ("Closing Bell, CNBC, 5/9). VARIETY's Littleton noted Disney has "been aggressive in making ESPN an anchor tenant on emerging digital MVPD platforms," with carriage on Sling TV, DirecTV Now, PlayStation Vue, YouTube TV and the upcoming srevice from Hulu (VARIETY.com, 5/6).

BLOOMBERG NEWS' Christopher Palmeri writes the quarterly results prove Disney is "struggling to get a handle on the troubles at its largest business -- TV programming" (BLOOMBERG NEWS, 5/10). Iger, when asked about the shift by viewers from traditional shows like ESPN's "SportsCenter" toward the delivery of scores and game clips on smartphones, said, "We’re not sitting on our hands. There is nothing we can really do to slow that down. It’s important for us to participate in it, and that’s what we’re doing." In N.Y., Brooks Barnes notes Iger "used the word 'bullish' several times to describe his feelings about ESPN’s future" (N.Y. TIMES, 5/10). INVESTOR'S BUSINESS DAILY's Elaine Low noted investors "appear to remain nervous about the power of cord-cutting and the state of the traditional pay TV system" (INVESTORS.com, 5/9).

THE BUSINESS OF BRISTOL: USA TODAY's Kevin Spain writes Iger "found himself being asked several questions about ESPN and the recent layoffs that caused such a stir in the sports media world." No one at Disney had "commented on the layoffs" until yesterday's call. Iger: "A lot has been said about cost reductions at ESPN. We’re managing that business efficiently. We always have, we always will. Obviously, there’s been a greater need to do it given challenges in the near term, but frankly what we’ve been doing, in terms of scale and size, is not that significant given that ESPN has 8,000 employees and we reduced by 100 employees. I don’t take it lightly but, the number gets these headlines ... it wasn’t a particularly significant reduction" (USA TODAY, 5/10). CNBC's Julia Boorstin noted Iger's comments on managing ESPN efficiently could "mean more layoffs" ("Fast Money," CNBC, 5/9).

CONTINUING TREND? Disney Senior Exec VP & CFO Christine McCarthy told analysts that ad sales for ESPN in the current quarter are "pacing down." She said that reflects the "softness that we’re seeing in the overall advertising marketplace." McCarthy added that there is a "strong demand for NBA and other live sports" (DEADLINE.com, 5/9). CNBC's Sarah Eisen noted Iger's defense of ESPN is a "similar message" that investors have heard in previous quarters "when ESPN has been the disappointment." CNBC's Mike Santoli added, "“It used to be ESPN was the absolutely predictable machine that you didn’t have to worry about (and) studios were choppy. (But) it’s been the reverse" ("Worldwide Exchange," CNBC, 5/10).

MAPPING THE FUTURE: USA TODAY's Mike Snider writes analysts are "divided" on Disney's forecasts for ESPN. Pivotal Research analyst Brian Wieser noted ESPN's higher programming costs were "partially offset by higher revenue." He "rates Disney as a Sell with a target price this year of $85." Wieser noted risks such as the "hit-driven nature of video content production, perceptions around the 'death' of TV advertising and risks around slow-downs in the pay TV business" (USA TODAY, 5/10). The New Yorker's Ken Auletta said "we don't know yet" whether ESPN will successfully make the transition from the cable bundle to an OTT future ("Squawk Box," CNBC, 5/10).

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