Disney Seeks Digital Ad Growth To Counter Linear Weakness

The Walt Disney Co. grew total revenues by 13% to $21.8 billion in its fiscal second quarter ended April 1, but Linear Networks were a drag, with revenues falling 7% to $6.6 billion. Domestic channels were down 4% to $5.6 billion and international channels were off 18% to just over $1 billion.

CEO Bob Iger called out some high points in his opening remarks for the company’s quarterly conference call with analysts Wednesday, but he clearly sees digital streaming growth as the future driver.

“The first round of the NBA Playoffs was the most watched ever across Disney’s media networks and we’ve been averaging five million viewers throughout the first 22 games — up 15% versus the comparable point in last year’s playoffs,” Iger noted

“ABC continues its run as the number one entertainment broadcast network for the fourth consecutive season,” he added.

But the upfront is no longer primarily about TV and cable networks.

“We see that there’s going to be a substantial growth in digital advertising in this upfront — I mean quite substantial,” Iger said.

“What we see going on in linear networks, and I’m not telling you anything that you don’t know, we’re seeing both sub declines and advertising weakness — and its created some worrisome circumstances for us because it’s obviously having such a negative impact on the economics of that business — and that’s forcing us to look at the cost structure of those channels, which also really comes down more than anything to spending on programming,” the CEO said in his Q&A session with analysts.

“The decline of the business, by the way, is something that we predicted starting in 2015 and ’16. Which is why we got into the streaming business to begin with. But the decline that we’re seeing puts even more pressure on us to turn that streaming business into a profitable growth business for us,” Iger said.

“We’re very bullish about leaning into digital advertising. We’re bullish about how we’re positioned there. We’re bullish about Disney+ and Hulu — and that combination, by the way. We think that by making Hulu available as a one app experience [with Disney+] will increase engagement and increase our opportunity for serving digital ads and growing our advertising business,” he said of Disney’s focus.

CFO Christine McCarthy laid out details for the traditional TV and cable networks.

“At Linear Networks, results were consistent with guidance given last quarter, driven by decreases of approximately $800 million at our domestic Linear Networks and $160 million at our international Linear Networks. Domestic results decreased at both cable and broadcasting.

“At cable this was largely due to higher sports programming and production costs, which were driven by the timing of costs for the College Football Playoffs and the NFL, as discussed last quarter, in addition to NBA contractual rate increases and higher sports production costs. Lower broadcasting results reflect a decrease in advertising revenue across the ABC Network and our owned television stations,” McCarthy said.

Domestic linear ad revenue declined 10%, although ESPN was up 2%, and she said the sports advertising marketplace is currently stable.

“The overall entertainment marketplace has been challenging. While the weakness has moderated somewhat, we anticipate that some softness may continue into the back half of the fiscal year,” the CFO warned.