The Walt Disney Company’s fiscal third-quarter revenues fell slightly to $5.9 billion, but operating income plummeted 22% to $1.8 billion due to programming cost pressure at ESPN.
Disney’s cable networks revenues fell 3% to $4.1 billion and operating income fell 23% to $1.5 billion. Disney put the lower operating income on ESPN, which was impacted by higher programming costs, lower advertising revenue and severance and contract termination costs. ESPN fended off some of the negatives with higher affiliate revenue despite a decline in subscribers. The programming costs largely came from a contractual rate increase for NBA programming, and lower advertising revenue was due to a decrease in average viewership and lower units delivered.
Disney’s broadcasting revenues fell 4% to $1.8 billion and operating income fell 22% to $253 million. Disney blamed the lower operating income on less advertising revenue, a “decrease in the cost charged to ESPN for programming aired on the ABC Television Network” and higher programming costs. The lower advertising revenues were due to lower network impressions and a decrease in average viewership.
Meanwhile, equity in the income of investees fell 18% to $127 million due to the BAMTech investment and higher losses from Hulu, partially offset by higher income at A+E Television Networks.
Although Disney’s results were once again weighed down by ESPN’s drag on operating income and slumping subscriber numbers, Disney prefaced its earnings report with an update about its plans to go direct-to-consumer with ESPN in order to drive new monetization for ESPN’s pricey content that doesn’t show up on the linear network. Part of that plan involves Disney’s $1.58 billion deal to buy a majority stake in BAMTech and leverage that company’s technology for OTT services.
“Today we announced a strategic shift in the way we distribute our content. The media landscape is increasingly defined by direct relationships between content creators and consumers, and our control of BAMTech’s full array of innovative technology will give us the power to forge those connections, along with the flexibility to quickly adapt to shifts in the market,” said Disney Chairman and CEO Bob Iger in a statement. “This acquisition and the launch of our direct-to-consumer services mark an entirely new growth strategy for the Company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands.”
In addition to the ESPN app, Disney announced plans for Disney-branded direct-to-consumer products that will house Disney and Pixar animated films along with exclusive original movies and series. Disney did include mention of its Marvel and Star Wars films in today’s streaming service announcement.
Disney has talked about launching proprietary services for its Star Wars and Marvel films, and the company has also considered including those services with the upcoming Disney direct-to-consumer service. But Iger said that Disney hasn’t decided yet what will happen with the Star Wars and Marvel content.