• by Wayne Friedman , August 10, 2006

Although Disney posted healthy fiscal third-quarter earnings growth--a 39 percent net-income improvement--its media networks provided no help. The culprit? Blame the soft ad market.

Disney felt the effects of weaker-than-expected ad growth for its broadcasting and cable network businesses. And the news isn't better for the near-term. Looking forward, Walt Disney Co.'s CEO Robert Iger said fourth-quarter TV ad sales are flat so far, while ad sales at Disney's radio group were down "mid-single digits."

For its media networks operations, Disney's operating income sank 28 percent to $181 million--with revenues only 8 percent higher to $1.6 billon, versus comparable time periods a year ago. These numbers were slightly worse than analysts expected. Jessica Reif Cohen, media analyst at Merrill Lynch, believed operating income would decline by only 9 percent and that revenue would grow 10 percent.

It wasn't only lower ad sales--analysts pointed fingers at ABC, which spent more money than usual on pilots. ABC commissioned 15 pilots and gained 10 shows for the upcoming season, more than any of the big four networks.

Disney has also been hurt as a result of the sagging Disney Mobile business. In particular, its new Mobile ESPN business has been slow to take off. Revenue from Disney's cable networks--primarily ESPN--came in lower than expected, says Cohen. However, ESPN did improve profit margins.

Overall, Disney's cable networks witnessed a 12 percent gain in revenue to $2.2 billion, and operating income climbed 15 percent to $969 million. But much of this gain was due to a change in accounting procedures concerning programming revenues at ESPN.

Disney's big financial results--which gave it 12 percent growth to $8.6 billion in revenue, and 39 percent growth in net income to $1.13 billion--came mostly from box-office revenue of theatrical releases "Cars" and DVD sales of "The Chronicles of Narnia." The $100 million movie revenue from "Cars" and the sale of 18 million DVDs of "Narnia" helped push the studio division revenues up 17 percent to $1.71 billion.

Disney's big summer hit "Pirates of the Caribbean: Dead Man's Chest" is expected to be a major theatrical player when business is completed, estimated to gross nearly $800 million in worldwide box-office sales. Still, higher-than-average marketing costs will dampen overall financial results, according to Iger. One analyst estimated that Disney spent about $100 million in marketing the film.