Disney's Big Character Test
Disney's Studio Entertainment unit posted a second quarter operating loss of $84 million in May on it sci-fi epic dud John Carter, which prompted the unit's head Rich Ross to step down. Even counting the success of The Avengers, Miller Tabak analyst David Joyce expects the division to post declining revenue in 2012, on the loss.
Meanwhile, as of fiscal 2011, over 30% of Disney's revenue and 40% of its operating income came from its cable networks, fueled by ESPN sports programming. But with costs to broadcast the NFL's Monday Night Football rising in 2014, among other sports programming price increases, ad rates at ESPN will need to rise just as fast for Disney to maintain margins at its single biggest profit center.
Because of spending for initiatives like Shanghai Disney and the uncertainty of future ESPN margins, Matthew Harrigan, an analyst at Wunderlich Securities says that Disney is expensive on a free cash flow basis. "Are we at peak margins for ESPN?" wonders Pyykkonen of Wedge Partners.
Those spending and future margin concerns underscore just how crucial it is for Disney to be correct in its assumptions on the benefits of owning Pixar and Marvel.
In Disney's May earnings call, Iger highlighted Marvel and emerging market joint ventures as keys to an international push, citing limited inroads for ESPN abroad. "
While Disney may be venturing in unchartered territory for a media conglomerate in proving the benefits integration, there's reason to believe that after replacing former CEO Michael Eisner with tremendous success, Iger could still get hit by the media mogul's curse.
Of the $200 billion in writedowns that media companies took between 2000 and 2009, the first paragraph of The Curse notes that those losses on M&A and spending pushes into new corners of the media world, "reflects the level of desperation among media moguls faced with new competitors, new technologies, and new customer demands."
For now, Disney investors may yet believe in its synergy magic, as they breathe a sigh of relief on a successful opening of Brave, one of Pixar's riskiest plotlines yet.