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Disney Sees Profit Drop 26%

Increased pilot costs and higher programming license fees contributed to a 34% plunge in operating income at Disney's broadcasting unit for the fiscal third quarter. The segment includes the ABC network and the station group brought in $204 million during the period.

"Lower advertising revenues at the ABC Television Network were primarily due to decreases in news, daytime and primetime," Disney said in a statement. ABC Studios meanwhile saw higher international sales of shows including Grey's Anatomy and Criminal Minds.

Cable, which comprises services such as ESPN and ABC Family also saw a fall, with operating income declining 8% to $1.1 billion. Total operating income for the TV segment was down 13% overall to $1.3 billion. Broadcasting revenue was down 4% to $1.4 billion while cable revenue was down 1% to $2.5 billion.

Disney said the cable declines were attributable to lower ad revenue at ESPN, which is out broadening its advertising base to include packaged goods firms with research suggesting men make 40% of purchasing decisions in modern households. Separately ESPN saw the benefit of subscriber growth on affiliate revenue.

Overall Disney's net income dropped 26% to $954 million; revenue was down 7% to $8.6 billion.

President and CEO Robert Iger said in a statement, "While a tough global economy impacted our performance in the quarter, we remain encouraged by the relative strength of our business."

Commenting on Disney's position with regard to the Time Warner fronted TV Everywhere initiative which aims to authenticate or identify pay-TV subscribers before serving them up free web video, Iger said Disney continued to be skeptical of its efficacy. "We worry it could create issues for consumers, we don't know if it works. We're open-minded about delivering our product more broadly...when its distribution is very consumer friendly. Our product is extremely valuable to distributors and consumers and if we're offering it in another location then I believe that's more valuable." Iger made reference to commentators who had criticized Disney for some online initiatives who were now willing to give away their programming for free.

In answer to an analysts question, Iger added: "Hulu has far exceeded our expectations as far as an aggregation play."

Disney Chief Financial Officer Thomas Staggs said that while the company was seeing signs of stabilization in the advertising market, "it's a little early for us to call signs of a recovery, or to make any predictions about the pace of that."

"The local ad market remains soft, resulting in a 26% decline at our TV stations in Q3, which is consistent with the trends we saw last quarter," he said, adding, "Ad sales at the ABC Network were down by mid-single-digit percentage points compared to prior year, driven in part by lower ratings."

Staggs added that the company was comfortable with the rates that ABC was getting in the upfront but would sell less inventory in the upfront. "Given the strength of our programming and the fact that some major advertisers remain on the sidelines in this up-front, we expect to be well-positioned for the scatter market."

When Sanford C. Bernstein analyst Michael Nathanson was asked about a $20 million decline in equity income from cable joint ventures which include A&E Networks and Lifetime, Staggs responded that there had been some one time items in the previous year. "Some of what you saw in the other businesses, a difficult ad environment, does show up in those numbers, so we've got that going on too, but there's a little bit of noise in the system that probably is why it looks odd to you."