Disney tales: TV and movies are terrible businesses. Theme parks are awesome.

November 8, 2013

It's the happiest place on earth . . .  for Disney shareholders that is. (Gene Duncan/AP)

The Walt Disney Co. is an iconic media and entertainment brand. It owns some of the world's best-known and beloved characters, film franchises, television channels and theme parks. And it reported earnings Thursday that give a surprising (or perhaps not-so-surprising) window into the forces buffeting all media industries.

Here are the results by Disney division for the fiscal year that ended Sept. 28


The first of these divisions, Media Networks, includes assets like ESPN, ABC television and Disney cable channels. And it is barely growing — operating income was up only 3 percent. Revenue grew a bit more than that, but it came at a cost. ESPN, for example, faced higher programming and production costs because of the rates it must pay to license college sports, the NFL and professional baseball and basketball. The money for those mega-billion dollar sports deals you hear about has to come from somewhere, and that somewhere is Disney's cable networks division.

The same is true in broadcast television. We may be in a golden age of quality television, but that isn't without a cost. "Primetime programming costs reflected an increase in the average cost per hour as a result of a shift in hours from lower-cost reality and primetime news and to higher-cost original scripted programming," Disney said in its earnings release.

The studio entertainment business (that is, movies) is tough as well. It actually lost money, with negative $722 million in operating income. Blame "The Lone Ranger," Disney's mega-flop over the summer. (It was the second straight year the company had major write-downs on a big-ticket film investment; in 2012 it was "John Carter"). Fortunately for Disney, it had more success this year with the likes of "Brave," "Iron Man 3" and "Wreck-It Ralph."

Here's the common thread facing Disney's pure media businesses, the forces causing low operating income in the TV division and a loss in movies. In producing content, even a company as big and powerful as Disney ends up being something of a middleman. The content creators — whether the NFL or the producers of "Scandal" or Robert Downey Jr., the star of "Iron Man" — are in position to extract a big chunk of the value they create. There are lots of networks that would love to broadcast professional football, and so ESPN ends up paying more than its owners would surely prefer to secure those rights.

Disney's interactive division, meanwhile, is fast-growing, with a 26 percent in revenue, but still loses money overall (an $87 million operating loss), and is growing off a minuscule base. It generated only 2.4 percent of Disney's total revenue last year. Traditional media vehicles like television and movies may not be great businesses, but they have a scale that digital properties have not yet come close to matching.

But there is one division at Disney that is in a sweet spot. It is growing at a steady clip. It is highly profitable and becoming more so. And it at a large enough scale that those profits are big enough to matter.

That would be the company's Parks and Resorts division, namely Disney theme parks. The numbers are impressive: A 17 percent rise in operating income, to $2.2 billion.

With theme parks, the economics that make traditional media businesses so hard are not so relevant.

Disney is the company that puts together the labors of thousands of people to create a good experience for tourists, who pay lots of money to visit the parks: Disney builds the parks, designs the rides and employs the ticket-takers and security guards and janitors who make it all work. Nobody else can create a Disney theme park, so all the value that is created accrues to the company. Disney owns characters like Mickey Mouse and Snow White; the poor workers wearing the costumes at theme parks earn an hourly wage, not the huge payouts that movie stars can claim.

Disney's theme park business  is more like the NFL than it is like ESPN. It's putting all the pieces together to create a product that's more valuable than the sum of its parts. No wonder it is the business that is driving earnings growth for the whole company.

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Sarah Kliff | November 8, 2013