Disney Studio Q2 Operating Income Plummets 97%5 May, 2009 By: Erik Gruenwedel
The quality of packaged media and theatrical releases at The Walt Disney Co. in the second quarter (ended March 28) failed to measure up to releases a year ago.
Studio entertainment revenue, which includes Walt Disney Studios Home Entertainment, fell 21% to $1.4 billion, with operating income freefalling 97% to $13 million from $377 million last year.
The studio said home video results for High School Musical 3: Senior Year, Beverly Hills Chihuahua and Bolt compared unfavorably to prior-year releases of Enchanted, The Game Plan and Oscar-winner No Country for Old Men.
In addition, theatrical releases Bedtime Stories, Race to Witch Mountain and Confessions of a Shopaholic performed unfavorably compared to prior-year releases National Treasure 2: Book of Secrets, Hannah Montana/Miley Cyrus: Best of Both Worlds and Enchanted.
In a conference call with analysts, a somber CEO Bob Iger called the studio results “disappointing,” adding that it was too early to write off the results as just due to the economic recession.
“It’s about the choice of films and execution of the films chosen for production,” Iger said. “It is not the marketplace, it's our slate.”
He said Disney would continue to expand its relevance and popularity of its brands online in an effort to combat piracy and diversify revenue without negatively impacting brands and release windows. The CEO said he felt confident that if Disney doesn't put its product out on the Web, consumers would find ways to find alternative content online.
“The movie theater isn’t going away, neither is broadcast television, but the same can also be said of new media,” Iger said. “We must be where our consumers are going. We are better being in that space than not being in that space.”
The CEO said changes created by digital technology and consumer habits would continue to impact costs associated with movie production and marketing. He said there exist dual markets for consumers willing to purchase content electronically and others willing to stream it with advertising.
When asked why Disney didn’t choose YouTube over Hulu for its repurposed content, considering the social video site’s significant advantage in user traffic, Iger said Hulu’s branding as an aggregator of long-form video was more appealing than YouTube’s reputation for short-form video.
“YouTube has to be sold as a long-form play,” Iger said. “We were impressed with the progress that Hulu made from a consumer perspective.”
Sanford Bernstein analyst Michael Nathanson wondered whether the rush to put repurpose content online with little or no incremental revenue in return was worth alienating packaged media, including Blu-ray Disc.
"I'm still not quite sure about the economic tradeoffs here vs. traditional consumption," Nathanson said.
CFO Tom Staggs said he expects difficult results in the third quarter due to year-over-year home video and theatrical titles. The studio remains upbeat for the fourth quarter and into 2010, which include releases Up from Pixar Animation, Toy Story 3, G-Force, A Christmas Tale, Prince of Persia, Sorcerer's Apprentice, Alice in Wonderland and The Princess and the Frog, among others.
Pali Capital analyst Richard Greenfield said that despite significant segment declines throughout the company, studio entertainment remained the single biggest driver for Disney’s 78% year-over-year earnings ($691 million) decline.
“The economy has nothing to do with Disney making bad movies,” Greenfield said in a note. “In fact, the creative struggles are even more concerning given how strong domestic box office has been year-to-date.”
The analyst said Pixar’s upcoming release, Up, would disappoint at the box office relative to last year’s Wall-E due to the film’s skew toward older viewers.
“[It's] visually stunning but may struggle to break $500 million in worldwide box office,” Greenfield wrote.
Overall, Disney net income fell 46% to $613 million, from $1.1 billion last year. Revenue dropped 7.2% to $8 billion, from $8.7 billion last year.