Coverage: Disney earnings disappoint, and what to do with ESPN?

Entertainment giant Walt Disney Co. reported earnings that disappointed investors and raised questions about what the company should do with sports cable channel ESPN.

Roger Yu of USA Today had the news:

Earnings per share, after adjusting for some items, were $1.10, short of the $1.16 estimated by analysts polled by S&P Global Market Intelligence.

Revenue fell 3% to $13.1 billion.

“Fiscal 2016 was our sixth consecutive year of record results, highlighted by the opening of Shanghai Disney Resort, the phenomenally successful return of Star Wars, and our Studio’s record-breaking $7.5 billion in total box office,” Disney Chairman and CEO Robert Iger said in a statement.

Revenue pressure at the media networks unit, Disney’s largest unit that operates ESPN, ABC and Disney Channels, continued in the quarter. Its revenue, comprising mostly of advertising sales and content licensing fees by pay-TV companies and other distributors, fell 3% to $5.7 billion.

Much of the unit’s troubles was concentrated in the cable networks. ESPN, its largest cable network, continues to suffer from high production costs and falling ratings as more viewers elect to cut their cable subscriptions.

Akin Oyedele of Business Insider focused on ESPN:

ESPN advertising revenue fell because of fewer impressions and lower rates, Disney said in its earnings statement. Programming costs were also higher, escalated by the costs of Olympics programming, rights to air the World Cup of Hockey, and higher rates for college sports.

And like other cable networks, ESPN is grappling with a consumer shift towards cheaper streaming services and away from cable and satellite bundles. The number of households with the sports network has declined since 2013.

In all, operating income at Disney’s cable networks fell 13% year-on-year to $1.4 billion. Income at parks and resorts was also lower after attendance at Hong Kong Disneyland Resort fell, and weakness at Disneyland Paris.

Walt Disney Walt Resort in Florida experienced sales growth after cost cuts and higher ticket prices.

Matthew Ingram of Fortune reported that the company warned of a weak 2017:

The media and entertainment conglomerate missed its earnings and revenue targets for the fourth quarter, and ESPN was a big reason why. The sports channel, which accounts for a huge proportion of Disney’s profit, saw advertising revenue slide by double digits.

Not only that, but Disney CEO Bob Iger told analysts on the company’s conference call that 2017 will be weak, and will look especially bad compared to 2016. Among other things, ESPN’s programming costs will climb 8% due to a new contract with the NBA that will cost $600 million.

In contrast to these expectations for what he called “modest” growth next year, Iger was happy to talk about the “robust” growth in 2016—a record year for the company—and the outlook for 2018, which he said was equally rosy.

The Disney CEO’s enthusiasm seemed to work its magic on the company’s share price. It was initially off by as much as 3% after the earnings report came out, but by the time Iger had finished talking on the call it had rebounded and was up 3%.