ABC to the Rescue

Disney's broadcast unit takes a star turn, raising revenues for the company while its higher ratings pull it closer to CBS

What does Walt Disney Co. (DIS) CEO Bob Iger do when he has some downtime? Watch Desperate Housewives on his computer. Iger says he logged onto in the hours before his company reported its second-quarter earnings on May 9.

Iger isn't alone in hustling to catch ABC shows. Indeed, Disney's long-suffering ABC network has become the power that is making the Mouse roar these days. And, if Iger is correct, the network will likely be a big hit later in May, when advertisers and network executives begin the annual "upfront" negotiations in New York for shows that will air in September.


  Propelled by such hits as Desperate Housewives, Grey's Anatomy, and Lost, Disney's broadcast unit boosted revenues of 28% for the quarter, to $1.8 billion. Its operating income more than quadrupled, jumping to $160 million in the second quarter from $38 million in the same period a year ago.

That made the broadcast unit the big winner for a company whose studio and consumer products units showed earnings declines and whose theme park growth slowed from the prior quarter. Overall, Disney reported that revenues rose 3% for the quarter, to $8 billion, slightly less than analysts expected. Net income increased 12%, to $733 million, from a year earlier, which was more than Wall Street had forecast.

ABC was clearly the star. The network's ratings are up 9% so far this year, making it a close second to CBS only three years after it was limping along in third place. The growth has been nearly as strong among the younger viewers that advertisers crave. In addition, Iger says that the network now delivers more higher-income viewers (defined generally as those making more than $75,000 a year)."We're thrilled by ABC's potential, and we're in a solid position going into the upfronts," Iger said.


  Disney Chief Financial Officer Tom Staggs said the strength of the shows has so far translated to the so-called "scatter market" -- that is, to ads that are sold to companies that need to buy one quickly -- which he says have increased in the double-digit range in recent months.

Disney's earnings did not include the financials of Pixar Animation, the red-hot animation studio Disney acquired. That deal closed on May 5. As part of the transaction, Steve Jobs, Pixar's chairman and the chief executive of Apple Computer (AAPL), joined Disney's board. Jobs also became the company's largest shareholder, with a 6.3% stake valued at $3.9 billion. That's more than three times the stake of Disney heir Roy Disney.

There has been much speculation about what kind of impact Jobs will have on Disney from such a prime perch. With his grasp of technology and content, he could help turn the company into leading laboratory for the new age of media. (see BW Online, 2/6/06, "Steve Jobs' Magic Kingdom").


  Iger has already shown a willingness to be aggressive in embracing new technology trends. Last October, he made Disney the first media company to offer TV shows for Apple's video iPod (see BW Online, 10/13/05, "The New Guns in Apple's Arsenal"). And in April, he unveiled a trial in which people will be able to download from the same TV shows that it provides to cable companies and affiliates, including Desperate Housewives and Lost (see BW Online, 4/11/06, "Disney's Internet Adventure").

Disney's stock, which is up a hefty 25% since September, rose by 2.8% in anticipation of the earnings announcement. It rose another 32 cents in after-market trading. At least some of the recent spike no doubt is related to what is expected to be a strong "upfront" for ABC. Last year, the network saw its take increase by 30%, to $2.1 billion, and it's likely to be in line for nearly as big a bump this season.

Also driving the stock is the likelihood of a strong summer at the box office, with Disney set to release its next film, Cars, from Pixar on June 9, and the Johnny Depp pirate movie Pirates of the Caribbean: Dead Man's Chest, which is scheduled for release on July 7. That should help a studio with earnings that declined by 39% in the most recent quarter from a year ago.

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