Content

Cable Revs Up Disney and News Corp.

5/12/2006 8:00 PM Eastern

It was good to be a content king last week, with two major media conglomerates — The Walt Disney Co. and News Corp. — reporting strong quarterly growth fueled mainly by their interests in cable networks.

Revenue rose 3%, operating income increased 7% and earnings rose 12% during the fiscal second quarter at Disney.

At News Corp., which released fiscal third-quarter results on May 10, operating income was up 14% to $1 billion, revenue climbed 3.3% to $6.2 billion and earnings more than doubled to $820 million (26 cents per share) from $400 million (13 cents). Driving most of that growth was the cable networks, like Fox News Channel, FX and several regional sports networks, which reported 23% growth in operating income.

It's Good to Be the King
After reporting strong quarterly operating results last week, the stocks of both News Corp. and the Walt Disney Co. reached new 52-week highs.
5/10 High 5/10 Close Previous 52-week High
News Corp. $19.14 $19.12 $19.07
Disney $29.60 $29.58 $29.15
Source: NASDAQ Web site

DISNEY'S $8B QUARTER

For the fiscal second quarter (March 31), Disney's revenue rose to $8.02 billion from $7.8 billion in the prior year and operating income was $1.43 billion, up from $1.34 billion one year ago. Net income came in at $733 million (37 cents per share) compared to $657 million (31 cents) in 2005.

High expectations drove both stocks to new 52-week highs last week. News Corp.'s share price hit $19.14 on May 11 — beating the previous high of $19.07 — before closing at $19.12, up 11 cents for the day.

Disney beat its previous 52-week high of $29.15 on May 10, rising to $29.60 before closing at $29.58, up 2.8% or 81 cents. Disney beat that milestone again on May 11, reaching $30.19 before closing at $30.11, up 53 cents.

Both companies released financial results after markets closed.

Driving most of the growth at Disney was strong performance at its Media Networks division (which includes ESPN, the Disney Channel and the ABC broadcast network), where revenue increased 18% to $3.55 billion and operating income increased 20% to $969 million. Most of that growth was due to the resurgence of the ABC Television Network.

Revenue there was up 28% to $1.8 billion, compared to a 9% increase to $1.8 billion in cable and operating income increased more than four times, to $160 million from $38 million in 2005.

Operating income at the cable networks was up 5% to $809 million.

That performance offset a sluggish quarter at the Studio Entertainment division (where revenue declined 22% to $1.77 billion and operating income fell 39% to $147 million). At Parks and Resorts (which includes Walt Disney World and Disneyland), revenue was up 7% to $2.25 billion and operating income rose 17% to $214 million. Consumer Products revenue was down 3% in the period to $451 million and operating income dipped 8% to $104 million.

On a conference call with analysts, Disney CEO Bob Iger singled out Disney's recent move to place ad-supported episodes of its top broadcast programming — Alias, Lost, Desperate Housewives and Commander In Chief — online, saying that could expand to other properties.

'NETS OF THE FUTURE'

Iger said Disney's focus has been on making ABC, Disney Channel and ESPN “networks of the future” that offer multiple services like commerce, games, music, customization and regionalization.

“I think we've got an opportunity here to take advantage of the trends on the Internet, which [are] growth in advertising, growth in consumption, the popularity of features like user-created videos or community functionality or communications, all with an underpinning of great creativity and strong brands,” Iger said. “As you look at the company's future in this space, you have to focus first on ABC, ESPN and Disney. What follows we're not 100% sure, but this is definitely the focus.”

Iger also pointed to Time Warner Inc.'s Warner Bros. home entertainment group's recent deal to sell and rent some movie and television content online through file-sharing service BitTorrent. Iger said that while he didn't advocate using BitTorrent, the idea appeals to him.

“The whole notion of using [a] peer-to-peer sharing mechanism to move content is one that we have been very interested in and actually have been working on ourselves,” Iger said.

FOX AVOIDING BUNDLE

While Disney moves to new distribution platforms, News Corp. chief operating officer Peter Chernin said that the company is taking its time with the launch of its latest cable offering, Fox Business Channel.

Asked on a conference call with analysts if the business news channel would be bundled with Fox News Channel, Chernin said, “We've gone out of our way not to bundle it.” Discussions with cable operators for the network are on a standalone basis and are going well so far, he said.

Chernin also restated that News Corp. would not launch the new offering until the numbers added up. “We don't want to launch until we have a significant distribution commitment from the cable operators across the country,” he said. “We believe we have enough of a track record that we don't want to have to go through the same investment cycle that we had to go through to launch Fox News or some of our other cable channels. We want to be able to launch with significant distribution and try to get this thing to profitability very quickly.”

September