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Disney And Time Warner Hopeful For 2010

Posted on Tuesday, Nov 17th 2009

A recent report estimates that previous quarter’s global ad spend fell 9.9% over the year. By region, North American spend fell 13% over the year, compared with a drop of 21% in Central and Eastern Europe; 11% in Africa, the Middle East and Western Europe; and 3% in Asia-Pacific. Only Latin American spend grew, at a mere 0.6%. And while ad spend is expected to improve in 2010, the numbers aren’t very encouraging. 2010 is expected to grow at a marginal 0.5% over the year. Analysts expect television, cinema, and outdoor advertising to lead the growth in 2010. It is little wonder that Disney and Time Warner, two media players that recently announced their results, still have depressed ad revenues. Even so, the two companies are seeing pockets of success and are directing a lot of their energies toward improving content.

Disney (NASDAQ:DIS) again, exceeded expected Q4 results with revenues growing 4% to $9.87 billion and EPS growing to $0.46 from $0.40 earned a year ago. The market was looking for revenues of $9.31 billion with EPS of $0.41. Disney attributed its higher margins to improved results at cable network ESPN and syndication sales of the ABC programs “Grey’s Anatomy” and “According to Jim.”

By segment, Disney’s media network saw revenues rise 14% to $4.7 billion driven by strong performances from ESPN and ABC. In the parks division, revenues fell 4% over the year to $2.8 billion. Studio revenues grew 3% to $1.5 billion, but the segment is incurring an operating loss of nearly $13 million a quarter. The consumer products segment saw revenues fall 6% to $0.65 billion.

For the year, revenues fell to $36.1 billion with an EPS of $1.76 compared with $37.8 billion revenues and EPS of $2.28 earned a year ago.

ESPN continued to be Disney’s biggest growth story, and the network attracted its largest audience numbers ever this quarter. The purchase of Premiere League soccer rights in the U.K. earlier this year, and the local sports portals established in key cities, including Chicago, Dallas, and Boston are helping ESPN to drive viewership. The network is also showing encouraging growth on the digital front, and both the ESPNU network and the ESPN360 online subscriptions doubled in the last year. Within mobile, ESPN had recently launched a score center application for the iPhone that has already had 4 million downloads, of which 2 million are regular users. The application is advertiser supported and has already started to generate real revenues.

Disney is beginning to see some improvement in the local ad market despite having witnessed a 15% drop in ad revenues this quarter if one excluded the extra week. In the current quarter, network scatter pricing has already improved at 20% above up-front pricing levels and they are witnessing the biggest option pick-ups for Q2 in the past 10 years.

However, the company was disappointed by the continued poor performance of the studio division, and are executing a major restructuring. Disney is focusing aggressively on reducing the costs of producing, marketing, and distributing films. Additionally, the company is working on improving content, and recently announced its intention to acquire comics giant Marvel for nearly $4 billion. With Marvel’s list of superheroes that includes the Iron Man, Thor, and the Incredible Hulk added to the Disney and Pixar animation film collections, Disney may have a competitive advantage over other players. The company hopes to attract more teenage boys to its viewership through this acquisition, and they believe that 2010 will be a better year for the studio. Besides improving the operations, the company hopes put a series of box office flops behind it through the release of the sequels to “Toy Story,” “Cars,” and “The Pirates Of the Caribbean.”

In the parks and resorts division, attendance grew 10% in Q4 in domestic parks, driven by the extra week in the quarter and by promotional offers. Excluding the impact of the extra week, overall attendance was up 3% over the year. Disney’s promotional packages are, however, leading to lower room spending; per capita guest spending at the domestic parks decreased by 10% and per room spending at the company’s domestic resorts fell 7% over the year. Meanwhile, Disney was finally given government approval for the Disney theme park in Shanghai, giving the company access to mainland China’s population of 1.3 billion.

Meanwhile, Disney is grooming its management to take over Bob Iger’s role in the future. The present CFO, Tom Staggs, is now set to become chairman of the theme parks and resorts unit, while Jay Rasulo, the present chairman of the parks unit, would become CFO. The company also appointed Rick Ross as the new head for the studio division.

While Disney did finally decide to acquire, I don’t think that merely adding superheros to their existing list of movie characters will be the move that will drive better performance. Disney should have been looking at acquiring teen-focused social networking sites such as Xanga, Hi5, Tagged, and Piczo or gaming related sites such as Yardbacker or PicksPal instead.

The stock is trading at 52-week highs of $30.54 with a market capitalization of $57 billion.

This quarter, Time Warner (NASDAQ:TWX) also managed to exceed expectations. Q3 revenues of $7.1 billion fell 6% over the year and met the market’s expectations. EPS of $0.61 managed to surpass the market’s expected $0.56 earnings.

The networks segment sales rose to $2.87 billion from $2.73 billion as 9% growth in subscription revenues was offset by a 1% fall in ad sales. Movie studio revenues fell 4% driven by a continuous fall in DVD sales. Time Inc, the company’s biggest brand, saw revenues fall 18% driven, by a 22% drop in advertising revenues.

But the soon-to-be-separated AOL was the biggest drag on performance; sales fell 23% to $0.78 billion . The decline in the revenues was led by a 29% drop in subscription revenues and a 18% drop in advertising revenues. AOL ended the quarter with 5.4 million U.S. access subscribers, 438,000 fewer than the previous quarter. Within ads, there were lower paid-search and display advertising on AOL sites and reduced sales of ads on third-party sites. The company’s Google page search deal also saw revenues fall 24% over the year.

According to a comScore report, AOL had 102 million average monthly domestic unique visitors during the quarter and 44 billion domestic page views. 

Meanwhile, to focus on its content business, Warner is following a three-point approach to increase returns. First, they are leveraging scale of operations and brands to ensure that they deliver high-quality content consistently. For instance they have “institutionalize[d] success in a hit driven business” for Warner Brothers, which has delivered two of the four highest-grossing films in 2009, making it the one at the box office.

Second, the company is working on improving the efficiency of its operations through the sharing of resources. They have already announced plans to cut 280 jobs at Time magazine at a cost savings of nearly $100 million. At AOL too, further job cuts have been announced. To make its magazines more useful to readers, the company is working to improving their quality. For instance, for Fortune magazine, the company is reducing the frequency of publication, but investing in raising the quality of each issue by focusing on reporting more on the largest and most important companies.

Finally, Time Warner is driving the development of business models to capitalize on changes in consumer usage and technology trends. TV Everywhere  is one such initiative, where Time Warner is in talks with “several third parties to develop open authentication systems that could be used by any distributor and by any program.” To make the user experience seamless, they are working toward a single sign-on for consumers, to enable them to move between multiple unaffiliated Web sites without reregistering at each one.

Time Warner should be looking forward to the end of the year, when AOL will start operating as a separate business altogether, and from the next fiscal the company can focus on being a pure content player. With that in mind, Time Warner could also look at acquisitions of sites such as Seeking Alpha for its business and finance portfolio, SI.com for the Sports section and InStyle.com for the lifestyle sections of its magazine divisions.

The stock is trading at $31.95 with a market capitalization of $37 billion. It is trading very near to the 52-week high of $33.45 achieved early this year .

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