Disney Gets Slammed on the TV Side

War, sports rights and unpaid bills take a toll on broadcast and cable

Walt Disney Co. TV operations saw a surprising surge in expenses overwhelm strong sales growth during the quarter ended March 31, showing that the parent company's problems run deeper than recession-battered theme parks.

On the sales side, Disney's broadcast and cable operators exhibited little wear from the recession and the war on Iraq, each increasing revenues by 13% for the second fiscal quarter. But the two divisions' earnings were trashed by expenses tied to the war, sports rights and unpaid bills owed by DirecTV's now-bankrupt Latin American DBS operation.

Companywide, Disney's revenues rose 8% to $6.3 billion, fueled by strong TV ad sales, cable license fees and roaring DVD sales. But operating income dropped 8% to $646 million.

At the broadcast division, revenue increased 13% to $1.4 billion, but operating losses ballooned from $13 million to $105 million.

Revenue from cable (principally ESPN and ABC Family) also jumped 13% to $1.1 billion, but operating income rose just 5% to $337 million.

A lot of the problems in TV stem from sports. Loading up on sports sharply boosts revenues. Morgan Stanley media analyst Richard Bilotti estimates that all of ABC's sales gain stems from its coverage of the Super Bowl this year. He also believes that ad sales from ESPN's pickup of National Basketball Association games this year accounted for half the cable group's revenue gain.

But sports is also hugely expensive. One analyst estimated that ABC took a $70 million loss on the Super Bowl. Bilotti projects that ESPN will lose $137 million on NBA games this season (not counting license fees from operators).

Then there's the war. Between news coverage and the loss of advertising in the initial days of the conflict, it will cost the network $65 million-$70 million. About half those costs—$32 million—fell in the March quarter.

In their conference call with security analyst, Disney's top executives tried to be upbeat about the TV business.

"Based on the strength of the current scatter ad market and marketplace intelligence, we believe that the broadcast upfront advertising market in aggregate will exceed last season," said President and COO Robert Iger.

CPMs will increase, he said, "simply by virtue of the fact that ratings are down" for the broadcast networks as a whole. (He noted, however, that ABC's ratings for 2002-03 are up over the prior season.)

"We also believe that the marketplace is strong enough that there will be enough demand for time and network programming. And that will drive increased inventory sales as well."

As expected, ESPN notified cable and DBS operators that it would be taking its annual 20% increase in license fees beginning August. The network, however, is offering to ease that yearly hike if operators commit to long-term carriage of a variety of other ESPN TV and broadband products.

"It's very, very important to focus on the strength that ESPN delivers both to the cable operator and to the consumer," Iger said.

CFO Tom Staggs said that, without the sales gain from the NBA, ESPN's ad sales would have risen about 5%.