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How cord-cutting could change Disney's game plan with ESPN

Despite beating profit expectations in the second quarter, Disney's shares fell 6 percent to $113.99 after the earnings were announced. The decline of traditional TV could change how Disney runs ESPN.

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A part of the signage at the main gate of The Walt Disney Co. is pictured in Burbank in this California, May 7, 2012. Despite beating profit expectations in the second quarter, Disney's shares fell 6 percent to $113.99 after the earnings were announced.

Fred Prouser/Reuters/File

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Cord-cutting loomed over Disney's quarterly earnings, as a loss of ESPN subscribers caused Disney to taper its TV profit outlook.

Despite beating profit expectations in the April-June quarter, shares fell 6 percent to $113.99 after the earnings were announced.

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The company said a "modest" decrease in ESPN subscribers would trim a few percentage points off a forecast for profit growth from domestic subscriber fees from 2013 to 2016. Fewer households have been getting traditional pay TV packages, and some are getting smaller channel packages, the company said.

CEO Bob Iger said Disney isn't expecting dramatic declines in ESPN over the next five years or so. But on a conference call with analysts, he said that if the traditional pay TV business continues to erode, Disney would consider alternatives for ESPN, "like going direct to consumers."

Such musings were once considered an almost sacrilegious affront to cable and satellite TV partners that generate the bulk of revenue and profit for media companies. Because of its huge live viewing audience, ESPN underpins much of the existing pay TV ecosystem.

However, online offerings like Sling TV include ESPN for $20 a month. That's far cheaper than traditional TV packages that can run into the hundreds of dollars.

Time Warner's HBO and CBS Corp.'s Showtime are already sold directly to consumers. Although they are still made available through traditional distributors like DirecTV and Comcast, the consumer offerings allow the channels to reach people who don't subscribe to big pay TV packages.

Disney's earnings for the fiscal third quarter topped analyst expectations, helped largely by its movie studio and the blockbuster hit "Avengers: Age of Ultron."

But analysts said the underperformance of its pay TV business — which is anchored by ESPN — raised concerns about the shift in consumer behavior to online video services.

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"Until now, we've seen all the growth at Netflix, Amazon and others has not really cannibalized more traditional ways to view content," said Robin Diedrich, an analyst with Edward Jones. "But I think the worry is that's starting to turn a bit."

Net income grew 11 percent in the April-June quarter to $2.48 billion, or $1.45 per share, topping the $1.39 expected by 10 analysts polled by Zacks Investment Research.

Revenue climbed 5 percent to $13.1 billion, a hair short of the $13.2 billion expected by six analysts surveyed by Zacks.

The Walt Disney Co. said weakness in the euro hurt revenue at Disneyland Paris. Although parks revenue grew, the unit's revenue came in below forecasts. The dollar's strength also contributed to a weaker profit outlook going forward, the company said.

Studio revenue gains of 13 percent topped all divisions, helped by "Avengers," which grossed $1.4 billion in theaters worldwide since its April release.

That success looked to continue, as the company prepares to releases the highly anticipated "Star Wars: Episode VII - The Force Awakens" in December. The kickoff to a whole new slew of "Star Wars" movies will be led by a flood of new products it intends to unleash at retailers worldwide on Sept. 4, which it is dubbing "Force Friday."

Every Disney segment grew except for its interactive division. There, revenue dropped and the unit broke even, reversing a profit from a year ago, as the "Disney Infinity" game lost momentum. The game is expected to get a surge of fresh content for this holiday season.

Parts of this story were generated by Automated Insights (http://automatedinsights.com/ap ) using data from Zacks Investment Research. Access a Zacks stock report on DIS at http://www.zacks.com/ap/DIS


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