February 9, 2016 / 9:30 PM / 2 years ago

ESPN casts shadow over 'Star Wars' success at Disney

4 Min Read

A character in costume takes part of an event held for the release of the film "Star Wars: The Force Awakens" in Disneyland Paris in Marne-la-Vallee, France, December 16, 2015.Benoit Tessier

(Reuters) - Walt Disney Co's ESPN sports network posted a decline in quarterly profit, overshadowing the blockbuster success of "Star Wars: The Force Awakens," which lifted the company to record income and topped Wall Street expectations.

Investors nervous about the future prospects for Disney and other older media companies sent its shares down 3.5 percent to $89.21 in after-hours trading.

The media networks unit that includes ESPN, the Disney Channels and ABC recorded a 5.6 percent decline in operating income to $1.41 billion. That was due in part to higher programming costs and a subscriber decline at ESPN, which offset an increase in advertising revenue.

Disney Chief Executive Bob Iger offered a spirited defense of ESPN on a conference call, describing an "uptick" in customers in the last couple months. Investors and analysts worry that Disney and other media companies are being abandoned by "cord cutters," especially younger viewers unwilling to pay for cable TV bundles of television channels.

"This notion that either the expanded basic bundle is experiencing its demise, or that ESPN is cratering in any way from a subscriber perspective, is just ridiculous," Iger said. "Sports is too popular."

"We fully expect our media networks, including ESPN to continue to deliver bottom-line growth, which means ad revenue growth will continue to outpace spending," he added.

Disney is in discussions with distributors about featuring ESPN in more of the slimmed-down channel packages, Iger said, as well as other new offerings. ESPN is part of Dish Network Corp's Sling TV, and earlier customer losses were due largely to ESPN's absence from some other skinnier TV packages, he said.

For the December quarter, ESPN faced higher programming costs due to a change in the timing of college football bowl games, and the strong dollar also hurt results, Disney said.

Concerns about rising expenses for sports rights coupled with subscriber defections have left investors unsure about ESPN's growth prospects, said Evercore ISI analyst Vijay Jayant.

"Not everyone is a sports fan and willing to pay for sports," Jayant said.

That unease has been weighing for months on media stocks. Viacom Inc shares on Tuesday fell 21 percent after missing Wall Street sales estimates for a fifth straight quarter.

The hero of Disney earnings was "Force Awakens", the first "Star Wars" movie produced by Disney after it bought Lucasfilm in 2012. The stellar launch of the movie helped the studio business almost double its operating income to $1.01 billion.

Disney's U.S. theme parks reported higher spending and attendance, boosting operating income for the parks and resorts unit by 22 percent in the quarter to $981 million.

The company's overall net income rose to a record $2.88 billion in the fiscal first quarter, or $1.73 per share, from $2.18 billion, or $1.27 per share, a year earlier.

On an adjusted basis, the company earned $1.63 per share, that handily beat analysts' average estimate of $1.45 per share, according to Thomson Reuters I/B/E/S.

Revenue rose 13.8 percent to $15.24 billion in the first quarter ended Jan. 2, which beat analyst expectations of $14.75 billion.

Additional writing by Peter Henderson; editing by Rodney Joyce, Bernard Orr

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