Profit Flat at Disney, as ESPN and Parks Smooth Setbacks in Film

The film, released on July 3, cost about $400 million to make and market but has taken in only $175.6 million worldwide, roughly half of which goes to theater owners. While other studios have also had flops this summer, “The Lone Ranger” is by far the biggest: Disney on Tuesday said losses from the film would total $160 million to $190 million, depending on how well it does overseas.

For the fiscal third quarter that ended on June 29, prerelease marketing expenses for “The Lone Ranger” contributed to a 36 percent decline in operating income at Walt Disney Studios. That decline offset growth from Disney’s cable TV and theme park units, and Disney reported an overall profit of $1.85 billion — essentially flat from the same period a year ago.

That profit translated to $1.01 a share. In the year-ago quarter, net income was $1.83 billion or $1.01 a share. Revenue climbed 4 percent, to $11.58 billion.

Speaking to analysts in a conference call, Robert A. Iger, Disney’s chief executive and chairman, did not point fingers at “The Lone Ranger,” starring Johnny Depp, directed by Gore Verbinski and produced by Jerry Bruckheimer.

“We still believe that a tent-pole strategy is a good strategy,” Mr. Iger said, referring to big-budget movies. “You still have to make really strong films.”

The full write-down for “The Lone Ranger” will be taken in the current quarter, the fourth in Disney’s fiscal year.

As usual, the Disney division that includes ESPN drove the company’s financial performance; operating income at the Media Networks unit rose 8 percent, to $2.3 billion. ESPN benefited from contractual rate increases from cable providers and higher advertising sales, although programming costs also climbed. In particular, ESPN had to pay more for Major League Baseball rights.

Even though the Easter holiday fell in a different quarter this year, operating income at Disney’s theme parks increased 9 percent, to $689 million. The company said growth came from higher spending at Walt Disney World in Florida and Disneyland in California, both of which set attendance records.

In addition to trouble at its live-action Disney movie label, the entertainment giant faced trouble in the gaming and broadcast television divisions.

As expected, Disney’s video game and Web unit continued to struggle ahead of the release later this month of a major new gaming initiative called Infinity. Interactive operating losses widened to $58 million from $42 million.

Operating income at the ABC broadcast network and a string of local TV stations fell 21 percent, to $213 million, because of higher prime-time programming costs, lower sales of reruns and a decline in advertising revenue tied to a decline in ratings.

Mr. Iger said he is “bullish” on the new programs ABC plans to introduce in the fall, but added, “until the season unfolds, you can never quite tell.”

Media Decoder Blog: Disney Buying Lucasfilm for $4 Billion

Richard Lewis/European Pressphoto Agency George Lucas in 2005, flanked by stormtroopers from his “Star Wars” films.

8:22 p.m. | Updated LOS ANGELES — The Walt Disney Company, in a move that gives it a commanding position in the world of fantasy movies, said Tuesday it had agreed to acquire Lucasfilm from its founder, George Lucas, for $4.05 billion in stock and cash.

The sale provides a corporate home for a private company that grew from Mr. Lucas’s hugely successful “Star Wars” movie series, and became an enduring force in the creation of effects-driven science fiction entertainment for large and small screens. Mr. Lucas, who is 68 years old, had already announced he would step down from day-to-day operation of the company.

Combined with the purchase of Marvel Entertainment for $4 billion in 2009 and of Pixar Animation Studios for $7.4 billion in 2006, the acquisition solidifies Disney’s status as a leader in animation and superhero films. And it strengthens the legacy of Robert A. Iger, Disney’s chief executive, who has become known for his aggressive expansion of the company since taking charge in 2005.

Mr. Iger is set to step down as chief executive in March 2015, but will remain with Disney in a lesser role under an employment deal he reached with Disney last year.

Like the Marvel acquisition, the Lucasfilm purchase caught Hollywood and Wall Street by surprise. It was announced on Tuesday afternoon, while the New York Stock Exchange was closed because of Hurricane Sandy.

In a hastily convened conference call with investors late Tuesday, Mr. Iger said Disney planned to revive the Star Wars franchise and release a seventh feature film in the series in 2015, with new films coming every two or three years thereafter. Mr. Lucas will be a consultant on the film projects, Mr. Iger said.

Mr. Iger said Disney acquired a detailed treatment for the next three “Star Wars” films as part of the acquisition. He noted that the last film in the series, “Star Wars: Episode III — Revenge of the Sith,” was released in 2005, a period that he said has created “pent-up demand.”

Jay Rasulo, the company’s chief financial officer, said Disney’s financial calculations in agreeing to purchase Lucasfilm were driven almost entirely by the potential of the “Star Wars” series, which already has a place in the Disney theme parks. Lynne Hale, a spokeswoman for Mr. Lucas, said he was on a flight back to San Francisco from Los Angeles and could not immediately be reached. “It’s now time for me to pass ‘Star Wars’ on to a new generation of filmmakers,” Mr. Lucas said in a statement.

The companies said Disney would pay approximately half of the purchase price in cash, and would issue about 40 million shares of stock to cover the balance when the deal closes. Mr. Rasulo said Disney expects within two years to repurchase those shares. Lucasfilm, he said, should begin enhancing Disney’s earnings by 2015.

With the acquisition, Disney will acquire Lucasfilm’s live-action production business, along with its Industrial Light & Magic effects business, its Skywalker Sound audio operation and its consumer products unit, among other things. Ms. Hale noted that Mr. Lucas’s Skywalker Ranch and other physical properties in Marin County, Calif., were not part of the deal, and would remain with Mr. Lucas.

Kathleen Kennedy, a longtime associate of Steven Spielberg who recently agreed to become co-chairwoman of Lucasfilm, will now be its president, reporting to Alan F. Horn, the chairman of Disney’s movie studio.

Lucasfilm is based in San Francisco, and now, in combination with Pixar — which operates across the San Francisco Bay in Emeryville — it will give Disney, based in Burbank, a major presence in Northern California.

After the release of the first “Star Wars” film in 1977, Mr. Lucas’s Industrial Light & Magic took the lead in developing effects technologies that were used in a generation of science fiction and fantasy films. Eventually, other companies, including Weta Digital, a New Zealand company co-owned by the filmmaker Peter Jackson, rose to prominence in that field.

Asked about the future of Industrial Light & Magic, Mr. Iger said: “Our current thinking is we would let it remain as is.” In a later interview, Mr. Iger said Disney would be prudent in handling the Lucas operations, but was also mindful of the need to “reap the value” it sees there.

Along with “Star Wars” and its many iterations on movie screens, in television programming, in video games and elsewhere, Mr. Lucas has been a partner in the “Indiana Jones” series, and, occasionally, in an unrelated film, like “Willow,” though Disney executives said they were not relying on those films for future profit.

Mr. Rasulo told analysts that Lucasfilm’s consumer products licensing revenue, about $215 million this year, is roughly comparable to the amount of licensing revenue Marvel had when Disney bought it three years ago.

Currently, Mr. Rasulo added, Lucasfilm’s licensing revenue comes mostly from toys and heavily from North America. Disney, he said, is positioned to extend the licensing business to other products and to strengthen it internationally.

Asked by an analyst about Mr. Lucas’s reasons for selling at this point, Mr. Iger said, “I don’t want to put words in George’s mouth.” But he noted that Mr. Lucas has said he began planning his retirement four or five years ago.

Speaking later, Mr. Iger said talks were conducted personally between Mr. Lucas and himself, and began about a year and a half ago in Orlando, Fla., where the two spent time while reopening a “Star Wars” attraction at Disney World.

Of Mr. Lucas’s willingness to put his creative legacy in Disney’s hands, Mr. Iger said: “There was a lot of trust there.”

Disney, Struggling to Assert an Online Presence, Overhauls Disney.com

The new site, introduced this month and promoted as “cleaner, simpler, more elegant,” is one way Robert A. Iger, Disney’s chief executive, hopes to turn around the company’s gaming, mobile and Internet division after 15 consecutive quarters of losses — some $977 million in total.

Mr. Iger is optimistic about new products, which include an ambitious and unannounced gaming initiative code-named Toy Box. He has promised that Disney Interactive will turn a profit sometime next year. “It’s about time,” he told analysts in May, sounding a bit fed up himself.

But questions abound. Disney has now taken several stabs at creating a thriving Web site, and has vacillated on game strategy. Has the entertainment giant finally solved the riddle of new media? Or is it playing a no-win game on the whiplash-fast Web?

Furthermore, why has the deep-pocketed Disney taken this much time to figure it out?

“We’ve been waiting for years and years and years,” said Jessica Reif Cohen, a senior analyst at Bank of America Merrill Lynch. “For traditional media companies, this really does seem like a totally different skill set.”

Figuring out the Internet is critical for all media companies, but Disney’s future in particular depends on a winning strategy. The children it hopes to turn into lifelong consumers of its products are increasingly living online. Disney Channel used to be the company’s most important welcome mat. Now executives refer to Disney.com as the “front door.”

The interactive division’s losses are small for a company that last year recorded $4.8 billion in profit on $40.9 billion in revenue. Ms. Cohen noted that new media is “not a primary driver” of Disney shares, which have climbed 57 percent over the last year, to about $51.90. But at some point those losses threaten to besmirch an otherwise stellar record for Mr. Iger, who has said he will step down as chief executive in 2015.

“I don’t think he’s going to want any black marks,” Ms. Cohen said.

Almost every major media company has had a difficult tangle with the Web or gaming. Time Warner and AOL. News Corporation and MySpace. Viacom and the Rock Band game maker, Harmonix.

Disney is no different. In 2001, under Mr. Iger’s predecessor, the company took $878 million in charges to close its Go.com portal.

But recently, Disney has had more technology brainpower than most. Steve Jobs sat on its board from 2006 until his death last year. Current board members include John S. Chen, chief executive of the software developer Sybase, and Sheryl Sandberg, Facebook’s chief operating officer. Mr. Iger himself is a strong technology advocate, pushing for the company’s ABC network to become the first channel to offer its shows on iTunes, for instance.

That Disney has nonetheless struggled underscores how difficult it is for traditional media companies to compete in this arena. Challenges include the pool of available talent. If you are a prominent technology executive, or a creative young designer, you are more likely to join Google or found a start-up, not toil deep inside a media conglomerate.

Disney and its cohorts also resemble aircraft carriers trying to compete with speedboats. Smaller gaming companies can quickly change course as technology preferences change (although upstarts like Zynga have not succeeded at that lately). But the lumbering likes of Disney move slower.

Consider Epic Mickey, a 2010 video game that depicted a rough-and-tumble version of Mickey Mouse. Disney spent six years developing the idea, which required approval from a number of executives because it involved tweaking a sacred character. Disney managers then limited its release to the Nintendo Wii console, whose popularity had slumped by the time the game reached stores. Disney also missed that year’s Thanksgiving retail season.

Disney also bet heavily on console-based games — operating six development studios — but consumers abruptly moved to mobile gaming. Disney was not positioned to swiftly follow and had to buy its way in, spending what analysts considered a large sum, $563 million, for the social gaming company Playdom in 2010.

As for Disney.com, it must serve an array of products: 13 theme parks, games, children’s books, TV, movies, music, Broadway and online worlds like Club Penguin. (ESPN and ABC’s digital businesses, both considered innovative and successful, are handled by separate divisions.) Disney.com must cater to a broad audience, including toddlers interested in Winnie the Pooh and mothers booking theme park vacations.

Leading Disney Interactive’s latest quest for profitability are James Pitaro, a former Yahoo executive, and John Pleasants, Playdom’s former chief executive. Named co-presidents in 2010, they quickly cut costs through a series of layoffs and have shut down three of Disney’s console game studios. Going forward, their profitability strategy turns on multiple fronts.

Disney Online, which also includes subsidiaries like the parenting site Babble.com, attracts about 33 million monthly unique visitors, according to comScore. Mr. Pitaro’s vision for those sites centers on entertainment. “We can’t expect to grow Disney.com in reach and engagement if we’re just focused on marketing,” Mr. Pitaro said.

The redesigned Web site still provides advertising support for Disney products, but the sell is much softer and relies heavily on exclusive videos — backstage at Disney’s Broadway musical “Newsies,” for instance, or Re-Micks, a video series where classic Disney cartoons are remixed to current dance music. The site’s overhaul is only in its first stages. Plans call for adding a movie streaming service.

Mr. Pitaro has also reversed Disney’s go-it-alone Web strategy. He has sharply bolstered its presence on YouTube, spending up to $15 million to make original Web series. One of them, based on Outfit7’s Talking Friends apps, has generated over 102 million views in only a few months. Disney now operates more than 60 YouTube channels.

“We have to take our content to our guests wherever they are,” Mr. Pitaro said.

 Mr. Pitaro and Mr. Pleasants are working to build character franchises that can spread across Disney’s empire, a priority for Mr. Iger. There is promise in Swampy, an alligator who stars in Disney’s mobile game “Where’s My Water?” The hit game — 100 million downloads and counting — has spawned a modest toy line and been added to Typhoon Lagoon, a Walt Disney World water park. Disney Channel will run a Swampy short series next month.

Epic Mickey 2: The Power of Two arrives on Nov. 18 — before Thanksgiving and playable on every available game platform — while Club Penguin, a virtual world where children groom virtual arctic fowl, is set to fully expand onto mobile devices after a long delay. “It’s an important ingredient to profitability,” Mr. Pleasants said of Club Penguin.

Mr. Pleasants is also pouring money into a project Disney refers to as Toy Box, a console game with extensive mobile and online applications in which various Pixar and Disney characters will interact with one another for the first time. “I’m excited about what we’ve already done and where we’re going,” he said, adding that Disney has had three No. 1 apps in the last six months.

But every time Disney appears on the verge of making true strides in digital media, it seems to stumble. Last week, a major executive resigned: Lane Merrifield, the founder of Club Penguin, will join an education-focused start-up after clashing with Mr. Pleasants in operating philosophy and personality.

Mr. Pleasants said he is proud of the intensity he has brought to his division. When his contract expires in 2014, he said “it would be an honor to be asked to stay.”

“We have a long way to go,” he said, “but we have a plan and just need to execute it.”

This article has been revised to reflect the following correction:

Correction: October 21, 2012

An earlier version of this article misstated Lane Merrifield’s role at Disney. Mr. Merrifield, the founder of Club Penguin, was not one of the executives leading the Toy Box initiative at Disney.