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Executives

Lowell Singer - Senior Vice President, Investor Relations

Robert A. Iger - President and Chief Executive Officer

Thomas O. Staggs - Senior Executive Vice President and Chief Financial Officer

Analysts

Spencer Wang - Credit Suisse

Doug Mitchelson - Deutsche Bank

Michael Nathanson - Sanford C. Bernstein

Imran Khan - J.P. Morgan

Anthony DiClemente - Barclays Capital

Jessica Reif-Cohen - Merrill Lynch

Tuna Amobi - Standard & Poor’s

Benjamin Swinburne - Morgan Stanley

Jason Bazinet - Citigroup

David Bank - RBC Capital Markets

Michael Morris - UBS

Jason Helfstein - Oppenheimer

The Walt Disney Company (DIS) F2Q09 Earnings Call May 5, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Walt Disney second quarter 2009 earnings conference call. My name is Michelle and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. Lowell Singer, Senior Vice President of Investor Relations for Walt Disney Company. Please proceed.

Lowell Singer

Thanks, Michelle. Good afternoon, everyone, and welcome to the Walt Disney Company second quarter 2009 earnings call. Our press release was issued a few minutes ago. It is now available on our website at www.disney.com/investors. Today’s call is also being webcast and the webcast will also be available on our website. After the call, a replay and a transcript of today’s remarks will also be available on the website.

Joining me for today’s call in New York are Bob Iger, Disney’s President and Chief Executive Officer; and Tom Staggs, Senior Executive Vice President and Chief Financial Officer. Bob and Tom are going to lead off with some relatively brief remarks today and then we will leave plenty of time to answer your questions.

So with that, let me turn the call over to Bob.

Robert A. Iger

Thank you, Lowell and good afternoon. Our second quarter performance reflected the weak global economy as well as disappointing results at our movie studio. While we are now seeing some signs the economic downturn is stabilized, it is too early to make predictions about the timing and pace of the recovery.

On our last earnings call, I spoke about how the cyclical economic downturn and the secular changes facing certain of our businesses were causing us to take a hard look at what we do and how we do it. Since then, we’ve taken significant steps to pare costs and to organize our businesses to be better positioned in an environment where people are consuming a growing amount of content online even as they continue to enjoy traditional media.

What hasn’t changed, however, is our overall business strategy with its emphasis on creativity, technology, and international growth, as a means of driving shareholder returns. We remain committed to making great creative content and to making sure that content is delivered to consumers the world over in the best ways possible. This approach is exemplified by the recent announcement that we are joining Hulu as an equity partner and programming provider. Like ABC.com, Hulu is proving to be a great experience for the consumer and we believe that broader distribution of our content makes sense given the ongoing growth in online viewing.

Joining Hulu also allows us to expand the relevance and popularity of our brands and content. It helps combat piracy by offering a better alternative to consumers and we believe it will allow us to expand and diversify revenues over time without fundamentally undermining traditional business relationships, models, and windows.

As we look ahead, we see a blend of new and traditional media and business models utilizing both established and new distribution and marketing platforms. The movie theater isn’t going away, neither is broadcast television, but the same can also be said of new media. It isn’t going away and we expect it to grow in size and significance to people’s lives.

For that reason, we absolutely must be where our consumers are going. We believe that by providing consumers tangible value in new ways, we will ultimately be fairly compensated for it and thus create greater value for our company.

Turning back to the quarter, our media networks posted a notable performance, led by ESPN and the Disney Channel, which continued to build their brand strength through differentiated and engaging programming. The segment held up remarkably well given the challenging economic environment. ABC is in the process of consolidating its network and studio operations and we are pleased by the strong mix of programs which form the core of its primetime schedule.

We do, however, recognize the importance of adding successful new shows to ABC’s lineup. After posting strong results last year, studio performance was disappointing, something they’d be the first to admit. But we are enthusiastic about several upcoming films, including UP, which in a great validation of Pixar’s artistry, has been chosen as the first animated film to open the Cannes Film Festival. Princess and the Frog, an innovative take on the classic Disney Fairy Tale musical, and next year’s Toy Story 3, which brings back characters beloved by an entire generation.

On the live action front, we’ve got an exciting slate of movies coming up, including The Proposal, G-Force, A Christmas Carol, Prince of Persia, Sorcerer’s Apprentice, and Alice in Wonderland.

At our parks and resorts, we made a conscious decision to put in place promotions that would drive attendance. This strategy has had a predictable impact on margins but its also had the intended effect of bringing people to our parks, underscoring the tremendous affinity consumers have for the Disney brand.

Throughout, we have maintained our focus on quality, believing that we can derive long-term value by offering our guests an exceptional experience at affordable prices in this difficult economic environment. We expect these visits will keep guests coming back for more and telling others about the great time they had.

While the environment remains a challenging one, we are optimistic about Disney’s future. We remain intensely focused on creating the best in entertainment and managing our people, capital, and brands to maximize their potential. As the economy recovers, we believe we are well-positioned to prosper and to take continued advantage of the tremendous opportunities created by the growth of digital platforms and globalization. And with that, I will turn things over to Tom.

Thomas O. Staggs

Thanks, Bob and good afternoon. Before we take your questions, I would like to make a few comments on our performance last quarter and give you a sense of some of the trends we are seeing that could factor into our future results.

Studio entertainment was the largest driver of our year-over-year declines in Q2. Home video sales were off considerably, primarily because this year’s new releases did not match the strength of Enchanted, Game Plan, and No Country for Old Men in last year’s second quarter.

At the box office, some of our key theatrical releases, including Bedtime Stories, Race to Witch Mountain, and Confessions of a Shopaholic, performed below our expectations and well short of last year’s slate, further dampening results.

Our TV distribution contribution was lower, also due to the relative strength and timing of our products in the marketplace. I expect difficult comparisons for the studio again in Q3 due to less favorable release slates in home video and television distribution.

At our domestic parks, strong consumer response to our promotional offers helped deliver attendance in the quarter that was virtually on par with last year, despite the fact that Easter is in Q3 this year. We had higher complementary attendance this year, driven in part by our Free on your Birthday promotion.

In total, Walt Disney World attendance was down about 1%, while Disneyland was up roughly 2%. However, as Bob noted, our promotions also resulted in greater room and admissions discounting, which together with softer guest spending, impacted our margins in the quarter.

Overall, per capita guest spending at our domestic parks came in 6% lower than Q2 last year.

The buy four, get three free offer in Orlando helped to lift room occupancy to 89% versus 88% in the prior year, but also contributed to a 17% decrease in per room spending. In Anaheim, we did not have a resort promotion comparable to Walt Disney World and occupancy came in at 69%, down by 14 percentage points. Per room spending at Disneyland Resort decreased by 6%.

At our international parks, softness in guest spending and somewhat lower attendance at Disneyland Resort Paris drover lower operating income despite some improvement in results at both Tokyo and Hong Kong.

We were pleased with the pace of sales for Disney Vacation Club in Q2, however results were impacted by unfavorable securitization impacts, the sale of higher cost units in this quarter, and tough comparisons against the member term extensions for our old Key West property sold in the prior year.

Our parks management did a good job in offsetting a portion of our revenue declines by reducing costs. At the same time, we are careful to maintain the quality of our guest experience, so our cost reduction opportunities are somewhat limited, especially given the relatively modest declines in volume that we are experiencing.

Looking ahead, room reservations at our domestic resorts for the balance of the fiscal year are nearly on par with the prior year, with Q3 slightly ahead of last year due in part to our buy four, get three free offering at Walt Disney World, which runs through the middle of Q4.

At our consumer products segment, our ownership of Disney Stores North America drove an increase in the amount of revenue we recognized in the quarter but negatively impacted our profits and margins. The difficult retail environment has persisted, affecting our Disney Stores results worldwide, as well as our licensing business. Q2 earned licensing royalties were down by a little over 10% on a comparable basis versus the prior year.

As Bob indicated, our media network segment, led by our cable businesses, performed relatively well given the tough advertising market. At ESPN, increased affiliate revenue more than offset lower advertising revenue and higher programming costs. ESPN’s ad sales were down by a high single-digit percentage in the quarter, consistent with what we saw in Q1, due in part to continued softness in several ad categories, including consumer electronics, automotive, and financial services.

The quarter also benefited from higher affiliate revenue across our other cable networks and increased advertising revenue at ABC Family.

At broadcasting, continued weakness in the local ad market and lower political ad spending compared to the prior Q2, drove a 30% revenue decline at our TV stations. This decline is larger than what we reported in our first quarter this year, but if you exclude political ad spending from both quarters, the trend in ad sales at our TV stations was slightly better than what we saw in Q1.

Ad sales at the ABC network were down modestly versus the prior year. Programming and production costs at ABC were up versus last year’s Q2 when production was affected by the writers’ strike. These higher costs were partially offset by higher international sales of shows, including Ugly Betty, Desperate Housewives, and Criminal Minds.

We will also see increased programming costs in Q3, again due to the changes in the timing of production spending as a result of the strike.

Softness in the ad market continues this quarter, drive by the same categories as in the last couple of quarters. I would also note that we are seeing ad buyers making decisions and placing orders closer to the dates their ads run. We have seen a similar trend in the booking window at our resorts. So while we believe that the pace of decline is generally stabilized, we believe that ad buyers and consumers remain cautious.

Given the challenging operating environment, we are managing our costs closely, as evidenced by the charges we took during the quarter. These actions are having a significant impact on our costs. A number of them represent temporary measures in response to the downturn but many of them are structural and therefore more permanent changes to our cost base.

We will continue to take steps to become more efficient in coming quarters. But as Bob mentioned, the economic downturn does not change our fundamental strategy, so the decisions we are making now are focused on executing against that strategy and putting our company in position to thrive as the economy rebounds.

With that, I will turn it back to Lowell for Q&A.

Lowell Singer

Okay, thanks, Tom. Operator, we will be happy to take the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Spencer Wang of Credit Suisse. Please proceed.

Spencer Wang - Credit Suisse

Thanks and good afternoon. One question regarding costs, maybe in two parts though -- Bob, last quarter you talked about reducing the cost structure, particularly at the studio in light of the new environment. This quarter revenues were down about 20% but costs were basically flat call it year-on-year, so can you just talk a little bit about how we should expect the cost structure to change going forward?

And then for Tom, at theme parks last cycle, your margins peak to trough went down by about 800 basis points. Should we expect that similar kind of dynamic this cycle or will something be different? Thank you.

Robert A. Iger

The plan in the studio, Spencer, is to address costs virtually every level, starting with the number of films released where we had reduced a few years ago to down to the level that we are currently at and while we don’t have specific plans, it’s possible we’ll continue to look at reducing the total output of the studio.

We’re also looking obviously at the cost of production, although as we reduced our number of films, the percentage of tent pole movies as part of the slate has gone up, so the average cost per film has gone up slightly, but we are going to look at that carefully and of course, we are going to look at marketing, where I think we have some real opportunities in terms of reducing expenses.

And then lastly we’ll continue to look at our infrastructure. We’re just restructuring the company in Europe, an announcement that we made in the last few months, and we think we’ve got opportunities there, and we’ll look across the globe as the studio did a few years ago, at opportunities not just in the studio business but in all of our businesses to restructure with an eye toward not only creating more accountability but more efficiency.

Thomas O. Staggs

Spencer, with regard to the parks, I want to avoid giving you guidance on where margins will be, not to obfuscate but because frankly no two economic environments are the same and no two downturns are the same, likewise. I would say this -- if all things were equal, I believe the parks group is, first of all, as adept as they have ever been, and perhaps more so at managing their cost base. I also believe they have some greater amount of arrows in their quiver with that regard and a somewhat more diversified base of business.

So if all things were exactly equal, I think that we could come out better in terms of total margin decline than we did in the past. But again, I would hasten to add that we haven’t seen the whole picture yet and therefore it’s difficult to make a prediction on exactly where things will come out.

Spencer Wang - Credit Suisse

Great, thanks. That’s helpful.

Lowell Singer

Okay, Spencer, thanks. Operator, next question, please.

Operator

Your next question comes from the line of Doug Mitchelson of Deutsche Bank. Please proceed.

Doug Mitchelson - Deutsche Bank

Thanks very much. A question for both Bob and Tom -- it wasn’t that long ago investors thought Disney was capable of producing $2.50 a share in earnings, and now that investors have moved on from trying to figure out 2009 earnings downside due to the recession to try to figure out earnings power in a recovery, I am wondering if you believe the earnings power for Disney has been hampered by any structural changes brought about by the recession or any secular challenges, whether you think your businesses are still capable of rebounding to their prior profitability and grow from there. Any color by segment would be welcomed, so -- thanks.

Robert A. Iger

Well, we are not going to make predictions about how fast or how far we will rebound, or whether we will come close to or surpass the number that you mentioned. We have been pretty consistent about how we look at our businesses, both with a fair amount of optimism, believing that we have the brands and the asset mix, and that they are managed in an integrated fashion to deliver the kind of growth we think is demanded of us by shareholders.

While at the same time, we’re wary that there are secular changes going on in a number of our businesses, created by mostly digital technology and changes in consumer behavior, that if we don’t manage carefully will make it harder for us to grow the company at a pace that we would feel appropriate. And those that I’ve noted most recently, including in my comments today, have to do with the studio and how people are consuming media in general, digital media in particular, and the impact that has on the traditional platforms.

Doug Mitchelson - Deutsche Bank

Great. Thank you.

Lowell Singer

Thanks, Doug. Operator, next question, please.

Operator

Your next question comes from the line of Michael Nathanson of Sanford Bernstein. Please proceed.

Michael Nathanson - Sanford C. Bernstein

Thanks. I have one for Bob and one for Tom; Bob, on Hulu, you clearly would not do this if you didn’t think it was not cannibalistic to TV consumption, so I wonder -- what kind of research have you done to see if a move to web distribution is not a negative to overall consumption of your content? You mentioned piracy trends -- have you seen a downturn in trends in piracy as you move to the web?

Robert A. Iger

Well first of all on the piracy front, we found that as we move product to the web, at least that where piracy that we are aware of, because there’s still a lot of piracy that we are unaware of, that there’s been some stabilization. And we feel pretty confidently that if we don’t put our product out online in a well-timed and well-priced basis, it will be demanded by consumers and they will find -- many of them will find ways, and very quickly, and we think it’s really important that we are there.

We’ve looked at a lot of research as it relates to media consumption, traditional versus new platforms and frankly, Michael, it is not only inconclusive but some of the research that we’ve seen actually conflicts with other research that we’ve seen.

Our feeling is that, and some of this is instinct, by the way -- it’s not all based on research, is that media consumption online is growing and will continue to grow, and that if our product was not available on that platform, it wouldn’t necessarily retard media consumption growth. So we feel that we are better off for more than just the piracy reason -- we’re better off being in that space than not being in that space. We realize that monetizing at a rate that is as robust as the traditional platforms doesn’t exist yet but we believe, as my remarks indicated earlier, that eventually it will.

The other thing that is pretty interesting to us about Hulu and about the ABC.com experience, is that a lot of the consumption that we are seeing is incremental because it’s a different demographic, so the average age of the consumer of stream video on ABC.com is younger than the average age of the ABC television network. That, by the way, was true in our iTunes experience as well. And what we have seen so far of the Hulu demographic suggests that the Hulu demographic is generally younger than primetime network demographics.

So we don’t believe that it’s necessarily cannibalization and again, our feeling about new media platforms, but the Internet in particular, is that it’s only going go to grow in size from a consumption perspective and we just feel that it is really important for us to establish ourselves there as a brand or brands -- ESPN, Disney, ABC -- as sub-brands, the name of our shows, to engage consumers more with our products and our brands, to help fight piracy, and ultimately I think the monetization is going to come in a variety of ways. We’ll see advertiser supported product. We are developing subscription product. We are already in the electronic sell-through product. And so I think that that blend over time is likely to become pretty interesting for us as a company and for many other companies that are creating high quality content that is capable of occupying space online.

Thomas O. Staggs

Michael, I would just add that one interesting fact is that we find in our research that online, people that consume media online, as Bob alluded to, actually consume more media overall than folks that don’t and in fact, especially the folks that are early adopters, and the early adopters not only are consuming more media, they are consuming more traditional media and more of the online media, obviously.

And so I think that to Bob’s point, there are real market expanding opportunities here. So it’s important that we are there if our product is going to thrive, and it’s important that we take part in this potential expansion of the marketplace. And we are confident in the long run that there is real ability to create value this way.

Michael Nathanson - Sanford C. Bernstein

Tom, can I just ask you a financial question? I appreciate the answers. ABC network revenues this quarter was down modestly. Last quarter was down single digits, I think high-single-digits. So can you give us some insight into the quarter over quarter trend? What happened in the Christmas quarter versus the first quarter? How did the business get better?

Thomas O. Staggs

Well, Michael, there’s a number of currents going on here. So in the first quarter, we did reasonably well, as you noted. The revenues were relatively strong, even though we had ratings down somewhat. The price in the market held up well. In the second quarter, again we are only down modestly in terms of our revenues. We had pricing in the scatter market that was modestly ahead of the up-front, but again in the second quarter, I think it’s important to remember that we had a strike impacted quarter, and so that impacted the ratings year over year and the ratings comparisons and therefore the revenue comparisons. And so there’s a number of things going on there.

So as we try to elevate from that and see what’s going on to both my comments and Bob’s, we see some stabilization in the marketplace. The ad market is there. It’s perhaps not as robust -- certainly not as robust as it was a year ago at this time but at the same time, for the right shows, for the right lineup, for the right demographics, there’s an ad market there to be had.

Michael Nathanson - Sanford C. Bernstein

Okay, thanks.

Lowell Singer

Thanks, Michael. Operator, next question, please.

Operator

Your next question comes from the line of Imran Khan of J.P. Morgan. Please proceed.

Imran Khan - J.P. Morgan

Thank you for taking my questions. Two questions -- first, in terms of the park, you know, I think the stunt that you did, promotionally did that will go through this mid fourth quarter, so I was trying to get a better sense like how is the average room night trending intra quarter and how should we think about the margins of Q3 and Q4?

And second question is I believe that you benefited by the political spending on ABC on broadcasting during the second half of 2008. could you give us some sense how much was the political benefit? Because I think you talked about that without the political benefit, the business improved in the last quarter. Thank you.

Thomas O. Staggs

Let’s see -- so on the television station, I mentioned that the revenue was down about 30%. In the first quarter, revenues had been down around, as I recall, 28%, and it was only -- it was slightly better in the second quarter if we neutralized for political. So it improved the second quarter by a few percentage points and had a more modest effect on the first quarter.

With regard to intra-quarter trends in room rates -- well, it’s a little difficult to read, only because remember we’ve got at the beginning of the third quarter, we had the Easter holiday, we had less discounting in the Easter holiday but then the promotions that we’ve had in place will continue. We’ve got some new promotions going on at Disneyland in the third quarter this year versus what we had in the second quarter.

So I don’t expect dramatic changes in the trends in average room rate but the discounting that we had been partaking in continues. I mentioned that on the last conference call that Easter tends to shift -- last year was roughly $40 million in profit year over year. It’s probably in that ballpark again this year. So I think that’s the biggest difference quarter over quarter that we might see in terms of what’s going on.

But in terms of the discounting that we are doing at the hotels, with the exception of some new promotions at Disneyland, which is obviously the smallest part of the room population for domestic parks, we haven’t dramatically changed the trends and won’t until mid-way through the fourth quarter when the promotion there at Walt Disney World ends.

Imran Khan - J.P. Morgan

Thank you.

Lowell Singer

Thanks, Imran. Operator, next question, please.

Operator

Your next question comes from the line of Anthony DiClemente of Barclays Capital. Please proceed.

Anthony DiClemente - Barclays Capital

I was surprised at how well advertising at ESPN held up, just given what’s happened in the auto category. And I was just wondering if you could elaborate a little bit on advertising at ESPN and what auto represents perhaps as a percentage of the total advertising, or maybe what some of the other categories did in terms of the out-performance.

And maybe that’s for Tom, and then second question for Bob -- if you could just elaborate longer term on your international growth opportunities and talk a little bit about trends that you are seeing abroad, and then talk a little bit about your park strategy abroad. That would be great. Thank you.

Thomas O. Staggs

Anthony, as we’ve discussed in the past, we’re obviously pleased with the audience that ESPN delivers and I think that they’ve managed to turn a relatively good performance on the ad front, although given all that’s going on and give the fact that some of their most important categories have been the most impacted, the ones that I mentioned on the calls, auto to your point being chief among them.

We don’t break out the specific percentage of advertisers across that business. Auto is one of the biggest categories but isn’t as predominant as say it is at television stations. But we have seen Ed Airheart and his team out there and they have managed to fill in with some categories that helped to make up some of the deficit -- men’s grooming, insurance, those have come along well and have shown steady sign of improvement.

And so I think that they’ve got a good product, they are out there doing a good job in the market place, and as I mentioned, we think that we will continue to see softness in auto, in financial services, consumer electronics, but again we’ll make sure we are doing everything we can to fill in the rest of the marketplace and I think that that -- the demographic they deliver, that’s going to be appealing to advertisers.

We won’t make it all up but they will continue to do what they have been doing, we hope.

Robert A. Iger

A little more on that point -- this quarter, ESPN is finding the ad market for its NBA product to be quite strong and baseball has been strengthening nicely. The movie studios have been quite helpful and the quick service restaurant segment is also doing well.

And as to your other question on the international side, you asked overall and then specifically the parks, we have been working to expand our presence in Asia, as you know, one by expanding Hong Kong Disneyland, and there was a recent report that meetings with the Hong Kong government have been productive and we are optimistic that at some point soon, we’ll be able to reach an agreement that will enable us to expand that park, which has actually been doing quite well from an attendance perspective, particularly from both Southern China and other markets in China -- and so the goal, which was to use it as a means of attracting people from Mainland China, seems to be working nicely and we are going to continue to work to turn Hong Kong Disneyland into a major destination in that part of Asia, one that not only is good for its bottom line but also helps us to build the company’s portfolio in that region.

We also have been in discussions, as you know, with the Shanghai government and a few months back reached a framework agreement for a park in Shanghai. That is an ongoing process that right now is awaiting approval from the Central Government and we can’t really make any predictions, except that we believe the opportunity to build a Disneyland in Hong Kong is a great one for this company -- in Shanghai, rather -- and one that we would -- we are obviously working very hard to try to fulfill.

Each market across the world represents different opportunities for the company. We’ve been looking hard at emerging markets but we are also continuing to look at opportunities in the developed world, where not only are we looking to reduce expenses but we are actually looking to grow top line. And it really is across the board. We continued to develop local Disney branded films -- that’s still relatively small but we hope to grow that over the long-term. Our media networks are growing nicely. We now have 93 Disney channels around the world and we are working hard to look at opportunities for ESPN as well.

We’ve seen some interesting opportunities on the digital front by extending our reach for Disney.com, particularly in the markets where we don’t have media network presence, and there are many of them. And we are also now rolling out our virtual world business, led by Club Penguin, which is now available in multiple markets outside the United States and we are pleased with what we see.

So there’s a lot of activity. The size of our international business is still not where we believe it can be but we are building foundations in a lot of parts of the world to enable it ultimately to grow at a pace and to a level that we think is possible.

Anthony DiClemente - Barclays Capital

Thanks very much.

Lowell Singer

Thank you, Anthony. Operator, next question, please.

Operator

Your next question comes from the line of Jessica Reif-Cohen of Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

Thank you. Bob, I was wondering if we could go back to one of your earlier comments when [inaudible] -- [when you said] that you are seeing some indication the business is stabilizing, were you referring to the advertising only or are there other things you can cite across your businesses?

And then secondly, it would be great if you could comment on how strong you feel like the upcoming content cycle is at the Disney Channel. You’ve had such a great run, particularly in summer with High School Musical and Cheetah Girls -- how do you feel like you are positioned now for the next, for the upcoming year?

Robert A. Iger

Well, on the Disney Channel front, we feel good about their content pipeline, both for that channel and then for the new channel, Disney XD, which is aimed at boys. The Demi Lovato show, for instance, Sunny With a Chance, is off to a great start and we just launched the Jonas Brothers series this past weekend. That also got off to a solid start. We are pleased with their upcoming movie slate and we are in development or actually in early stage production for High School Musical 4.

The team that is in place at the Disney Channel that manages its content globally is an extremely talented team and the pipeline we think is pretty rich.

To your first question, Jessica, about what has stabilized, we were referring to businesses in general, not specifically to the advertising business, although we believe that is one that we could say we see stabilization or stability. I’d say on the park side, we haven’t seen a trend downward for a few months. The trends that we’ve seen this year were obviously reflected in our earnings, seem to be continuing and not worsening but we are not suggesting that we are seeing signs of improvement yet in that business.

Licensing would be maybe one business where we’ve seen some modest stability but I think the retail segment in general could be facing some more difficult times and we are not predicting necessarily a further downturn in licensing. That’s one, particularly on the international front, where I think it would be premature to say that we see stability right now.

But I would say advertising, travel and tourism for us -- video sales, although that’s title specific, or slate specific, and what other business did I just -- I guess those would be the three primary ones. Generally stable.

Jessica Reif-Cohen - Merrill Lynch

Okay, thanks. Would it be safe to say there will be no more park promotions then after this one is over?

Thomas O. Staggs

We’ll have to read the marketplace as we get there and take a look and make those decisions as we go.

Jessica Reif-Cohen - Merrill Lynch

Okay. Thank you.

Lowell Singer

Thanks, Jessica. Operator, next question, please.

Operator

Your next question comes from the line of Tuna Amobi of Standard & Poor’s.

Tuna Amobi - Standard & Poor’s

Great, thank you very much. I’ve got a couple of questions as well -- so on the parks, for example, I wanted to kind of confirm what you said on the last call that given the Easter falling outside of Q2, based on the trends that you saw for the Easter, are you still confident that Q2, Q3 combined is going to be up modestly compared to last year? That’s number one.

And separately on the film studio, so I think that it kind of seems ironic that the box office is having a record year and yet the -- your studio, which has been clearly one of the top performers up until of late, is not participating in that. So I wanted to get a sense of when you think -- what you need to do in the studio side to kind of balance out your top line growth. I know you did the Spielberg deal and you’ve taken out a lot of costs. What do you think needs to be done to kind of balance out the top line growth strategy in the film studio on the box office side?

Robert A. Iger

Well, I’ll take the second part of the question -- you know, it’s about choice of films and the execution of the films that have been chosen for production. And we’ve had a rough year in terms of the performance of the slate, so in that case, it’s not the marketplace -- it’s our slate. And I mentioned a number of films coming up that we feel really good about, UP in particular this summer; Princess and the Frog later on in the calendar year; Toy Story 3 next year; a number of live action titles, some that will appear in 2010, A Christmas Carol being one of them, Alice in Wonderland another one, Prince of Persia another.

But then we’ve got Tron and Pirates 4 and a number of other live action films that we feel, at least on this stage, quite good about. But looking back at the year, I said it in my remarks, it’s been disappointing for the studio and they would be the first to admit that.

Thomas O. Staggs

Tuna, back when we did our last earnings announcement, we talked about a Q2/Q3 combined to sort of get a sense of where things were going, and we mentioned it had been about on par with the prior year. You’ve seen now the attendance for the parks domestically came in very close to the prior year -- as I mentioned, down about 1% at Walt Disney World, up about 2% at Disneyland. As we look at -- I mentioned Q3 bookings now, which are an indicator. They are obviously not definitive but the bookings for Q3 are currently modestly above the prior year and it’s too early to say exactly where that will come out but it looks like the trends we talked about at that point in time are generally holding -- and again, that’s part of the reason we’ve talked about stabilization in our point of view as to what we are seeing in the marketplace.

Tuna Amobi - Standard & Poor’s

Okay, that’s very helpful. Just kind of -- if I can clarify one of Bob’s earlier comments, actually a separate clarification here on the media consumption research that you referenced -- I think trying to reconcile that to the comment that you made I think in Washington, D.C. last month about your -- it seemed like you were kind of opposed to this whole idea of online paying subscribers and yet you seemed to be trying to get your content to as many viewers as possible. Are you just opposed to the subscriber paid model and prefer the advertising kind of Hulu type deals, or can you kind of reconcile that comment?

Robert A. Iger

Well, I think you misunderstood me. I believe that our online revenue will come from a variety of forms, as I mentioned just a few minutes ago. I’m not against subscription at all; in fact, we are developing a subscription service ourselves for Disney branded content.

I think maybe what you might be referring to is my comments about authentication which is pretty complicated subject. We wouldn’t be necessarily opposed to authentication, particularly if it enabled people who are already paying subscribers to multi-channel services to watch the programs and those channels online, possibly even for an additional fee. That actually might generate new revenue for the business, not just content providers but for distributors.

Where I start to have problems is that if authentication is being developed as a means of blocking people who are not multi-channel subscribers from watching anything online, that tends -- that we believe is not only anti-consumer but anti-technology and we have some issues with that.

So you might have interpreted those comments which were made in Washington at the NCTA convention to mean something else.

Tuna Amobi - Standard & Poor’s

All right. That’s helpful. Thank you for the clarification.

Lowell Singer

Okay, Tuna, thank you. Operator, next question, please.

Operator

Your next question comes from the line of Benjamin Swinburne of Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Thanks. Good afternoon, guys. I actually wanted to dive a little deeper on the Hulu front, Bob, and ask you about your various TV assets. If you look at ABC, the Disney Channel, maybe ABC Family as three somewhat distinct business models, how do you think about putting that content on Hulu and also how do you think about using the iTunes or the pay to own, pay to rent model? It would seem like the more you put on Hulu, the less you are going to get on an electronic sell-through or electronic rental basis. Do you think you will window the content? Do you look at these three assets very differently when you look at these emerging platforms? Any color there? I realize it’s early days but I would love to hear your thoughts and then I have one quick follow-up.

Robert A. Iger

Okay, well, first of all, it’s sort of a different response to your question -- we look at the brands differently, to begin with, so ABC, ESPN, and Disney were all taking a slightly different approach -- and ABC Family -- to how we are moving content to new media platforms. Disney and ESPN, we’re working really hard to develop their dot.com sites as primary portals to access almost all things that fit under those brand umbrellas. And so they will get preferential treatment. ESPN is not part of the Hulu deal but the goal there is to offer not only video but information in all other forms of sort of sports consumption on ESPN.com, primarily, to build that brand out as a destination.

Disney.com, the same thing, although the Hulu deal does provide for some Disney Channel programming on Hulu, it’s windowed differently than the ABC programming, and it will be put online in a window that is -- the first window will be Disney.com.

On the ABC and the ABC Family front, we concluded, particularly with ABC, that while the ABC.com experience has been a really good one and has delivered a fair amount of consumption, we thought in order to really take advantage of that medium and that platform, we had to have ABC content in more places -- I’m talking about advertiser supported streams -- than just ABC.com. And over time, we became very impressed with what Hulu had accomplished in terms of its consumption, in terms of its user interface, in terms of the overall quality of the experience, and its ability long-term to monetize. And as I said a few minutes ago, we also thought we could potentially expand the audience because we believe that while there might be some overlap, it’s not completely overlapped.

On the EST or electronic sell-through front versus the stream, we believe that there are people who will want to buy a program through say the iTunes platform, download it onto a hard drive commercial free, and take it with them wherever they want to go. And there will be people who are online who don’t really need to put it on a hard drive, who just want to watch the show, don’t want to pay for it and don’t mind watching some limited commercial interruptions. So there are kind of different consumer experiences and we are looking to create a real blend in terms of how we monetize and how we reach consumers and what kind of product we make available. We basically believe that there’s still a lot of value, by the way, to cable and satellite providers at the same time, that what we are offering them is the great programming, part of really strong networks and brands -- ABC, ABC Family, Disney Channel, et cetera -- and they get that in the primary window. They get that first and we are not encroaching on that window in this deal. So we’ve been actually spending a couple of years completely redefining our network business, not just ABC but in general. So networks for us are primary windows that deliver a fair amount of revenue that help support the development and the production and the marketing, because that’s important too, of all this great content. We monetize it obviously in a couple of ways -- subscription and advertising, which is great for us and for the reseller of this content, the multi-channel providers. And the advantage they have is that their customers see it first before it’s available anywhere else. Except they wouldn’t be very happy if we did nothing online, I believe, and the pirates got a hold of it and they were paying nothing to anyone. But that’s a whole other story.

So again, we’re looking at this in different ways. When I talk about redefining our networks, our networks are really one distribution opportunity or one distribution platform. The businesses that we are in are largely IP creation or the creation of high quality content -- ESPN, ABC, ABC Family, Disney Channel -- and the networks are just a primary platform for distribution.

Benjamin Swinburne - Morgan Stanley

That’s very helpful. If I could just quickly follow-up separately on the broadcast segment -- I think revenue for the segment was down about 15% in the December quarter and it was down I think 2% this quarter. You talked about ABC network and the stations I think overall were fairly similar, probably together when you look at December versus March. So what drove the big sequential improvement? Was this a big syndication quarter and maybe if you could help quantify that for us, that would be helpful.

Thomas O. Staggs

The quarter over quarter comparisons for the first quarter in broadcasting were more difficult if you line up the ad sales, and that was really the primary driver. It wasn’t just ad market but that was the biggest driver there.

Benjamin Swinburne - Morgan Stanley

The year-over-year comps were tougher in the December quarter?

Thomas O. Staggs

Yes.

Benjamin Swinburne - Morgan Stanley

Okay, thanks.

Lowell Singer

Thank you, Ben. Operator, next question, please.

Operator

Your next question comes from the line of Jason Bazinet of Citigroup.

Jason Bazinet - Citigroup

One quick question -- I think in your opening remarks, you said it was too soon to talk about the timing or magnitude or recovery, and I just had one question regarding restructuring costs -- I think in the quarter it was about $102 million. Assuming that we just sort of bounce along the bottom like this, should we expect more restructuring costs or do you think most of the cost-cutting that you’ve done is sort of baked into the system at this juncture?

Thomas O. Staggs

Well, I would say that there is a possibility, not definitively, but there is a possibility that you will see more. Certainly both Bob and I alluded to the fact that we are trying to make -- take steps right now to make sure that we are right-sizing the organization to thrive as the recovery comes. What we are not going to do is cut a bunch of headcount that we just have to add back as soon as there is a recovery.

Having said that, we think there are more opportunities to become efficient. We are going to look for those opportunities and the extent that we find them and that they lead to restructuring charges, you would see those later in the year.

Jason Bazinet - Citigroup

Okay. Thank you very much.

Lowell Singer

Thanks, Jason. Operator, next question, please.

Operator

Your next question comes from the line of David Bank of RBC Capital Markets. Please proceed.

David Bank - RBC Capital Markets

Thank you. A couple of questions -- the first one is I’m curious, the thinking in going to the Hulu deal, you guys were -- you know, really took your time coming up with a strategy and a lot of times observed the marketplace and YouTube probably has an audience, depending on whether or not you are looking at streams or users, something like 15 times the size of Hulu. So you could sort of argue that your ability to monetize the content, and you will certainly drive more audience to Hulu, we know, but you could potentially have monetized the content more at YouTube and I’m guessing you probably could’ve gotten a pretty nice guarantee from Google. So I’m curious about how the thought process went there.

The second question is sometimes historically you’ve had a little bit of a lumpiness in terms of deferred revenue at ESPN and kind of recognizing that revenue -- is there anything that we should be looking out for in the quarter that just passed or in the next quarter? Thanks very much.

Robert A. Iger

We had a really healthy debate at the company about whether to make our content available to another aggregator. I should begin actually by saying in a way, this is new because we had already made a number of deals with third parties -- iTunes being one, that’s an aggregator, but others as well. And when it came to Hulu versus YouTube, and I don’t want to get into all the specifics, there were I guess there were things about both that were attractive to us. Obviously both have a fair amount of traffic, you’re right to point out that in YouTube’s case, substantially more than Hulu, although the traffic is all built on the consumption, distribution and consumption of short-form video, whereas Hulu’s was largely long form, although they have clips from shows like Saturday Night Live that also did quite well. And it wasn’t an easy call to make in terms of what direction to go but because we thought that both platforms were impressive.

On the other hand, what we had in Hulu was the opportunity to become an equity partner, which is something we think will derive value for the company over time, and to be part of a play that’s primarily a long form play that doesn’t have to sell itself as something new anymore. It’s already out there and already has sold itself, whereas YouTube had to be converted to a long-term play.

Again, both interesting opportunities for us and I think both opportunities that can grow and the possibility of our long for content ending up on the YouTube platform still exists, by the way. So it was a good discussion. As I said earlier, we were impressed with the progress that Hulu made from a consumer perspective, both consumption and user interface, and ultimately decided that we would go where we could own a piece of it and really participate at what could be real growth of an aggregator.

David Bank - RBC Capital Markets

Thanks.

Thomas O. Staggs

David, I think you asked about ESPN deferrals -- if you look, if we put on exactly the same number of hours of programming in the first three quarters of this year versus the first three quarters of last year, we would defer slightly more in revenue just through the natural growth in our affiliate stream. However, there are, as we get to the end of the third quarter, just the way the tests work versus the hours of live program that we put on, we are sort of close to some of the thresholds there. And so if, for example, the key threshold that we went by in the third quarter last year, we were 10, 15, 20 hours less in programming this year, you have the potential to take as much as $150 million of revenue from Q3 and push it to Q4. To the extent that becomes the case, we’ll be transparent for you about it so you can figure out what it is, but assuming that the hours of programming stack up the same way that they did last year, and I suspect that they still could, or likely would, the only difference in the deferral would be through the natural growth really of the --

David Bank - RBC Capital Markets

And in Q2 there was no odd comp or anything like that?

Thomas O. Staggs

No, the deferrals -- there was no great difference in the thresholds and therefore the revenue recognition.

David Bank - RBC Capital Markets

Terrific. Thank you, guys.

Lowell Singer

Thanks, David. Operator, next question, please.

Operator

Your next question comes from the line of Michael Morris of UBS. Please proceed.

Michael Morris - UBS

Thank you. To go back to an earlier question on broadcasting, the revenue was down 2% in the quarter. You mentioned the stations were down 30 and the network was down slightly. That would imply a pretty meaningful increase of production and distribution. You cited the international market distribution of a few shows. Can you expand on that a bit in terms of I guess -- anymore detail on which markets and give us some feel for the sustainability of that increase as we look forward?

And then second, at the parks, it looks like about $150 million in costs came out this quarter. How much of that is -- was fixed versus variable, given some of the per cap declines? Where are you in the cycle in terms of some of the cost-cutting measures that you have announced or put in place and how should we be thinking of that going forward, regardless of what happens on the top line? Thanks.

Thomas O. Staggs

Okay, so on the television side, yes, one of the key drivers on the revenue turned out to be international sales of shows. I mentioned some of the shows in the prepared remarks. Europe was a strong market for us. In terms of quarter-to-quarter sustainability, it really comes down to the availability of shows, et cetera, and that’s not really key in terms of where the trends are going. We’ve been able to keep the pipeline relatively full, so we’ve got strong shows to continue to sell over the next several years. Bob mentioned filling in new shows to put in that pipeline is obviously important for us to sort of continue to sustain that over time. But the key is having the shows there and to the extent that we have had and we did this quarter, the markets, especially in Europe, have been there for us to sell into and you know, our shows have ended up being particularly appealing in that regard.

With the cost base, I’m not going to try to give an exact percentage on what’s fixed and what’s variable, et cetera. We’ll make as much of the cost savings as we can be permanent, but some of it clearly has to do with adapting to the marketplace that we are in. We had very modest changes in park hours but again, they were very modest and that wasn’t a big impact overall, but that obviously would change depending on where we were in the cycle, et cetera.

A number of the actions that the parks have been taking they took in the second quarter, which means of course the savings from those haven’t fully factored in as yet, and they will continue to feather into the year as we go and as we take further steps in that regard, so we hope to see the impact from the cost savings increase as we move to subsequent quarters. But again, the degree and the duration of that impact will depend largely on sort of how much more we do and what type of steps we take.

Lowell Singer

Thanks, Mike. Michelle, we have time for one more question.

Operator

Your next question comes from the line of Jason Helfstein of Oppenheimer.

Jason Helfstein - Oppenheimer

Thanks -- one strategic question and one accounting question -- so obviously you’ve talked a lot about Hulu on the call and I think we’ve all thought a lot about it but thinking about film, are you considering a similar type of strategic decision with respect to film, particularly as you anticipate the Starz deal ending in 2012? And just any ideas on ultimately how to get better control over the distribution of film into new platforms?

And then on the accounting side, when you think about weaker DVD sales, how does that impact your ultimate accounting as you model revenues and other distribution channels, such as pay TV and free TV? Thanks.

Robert A. Iger

The pay TV deals, or the pay deals for us for our movies have been a very good source of revenue and deals that we will continue to pursue. At the same time, we realize that there are opportunities to monetize beyond those and we will continue to look at those as well. I mentioned that the possibility exists that we will have one day an online Disney branded subscription service that would be windowed in a way to make it compatible with any deals that we did in the pay window, and also enable us to build our brand and create an affinity with our customers. So we think that Disney’s brand is unique when it comes to films and we would like to take advantage of that unique quality and create an online destination for Disney branded movies, but we also fully intend to pursue the pay window because it obviously has real value from a monetary perspective.

Thomas O. Staggs

On your accounting question, to the extent that for a given film we concluded that the DVD sales would be lower proportionally versus the other windows for that film, that would move amortization for that particular film relatively out of the DVD window in favor of the other windows, because we of course match revenues.

I would say that generically speaking, the changes in those estimates have not been dramatic to date but we have to do each one on a title specific basis. So when we have a title, we do our best to estimate what it will generate in revenues across the various windows and then match our amortization to go along with that. To the extent that we see changes in the relative revenue generation potential of the various windows, we’ll adjust accordingly.

Jason Helfstein - Oppenheimer

Thank you.

Lowell Singer

Okay, thank you, Jason. Thanks again, everyone, for joining us today. Note that a reconciliation of non-GAAP measures there were referred to on this call to equivalent GAAP measures can be found on our investor relations website.

Let me also remind you that certain statements on this call may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance [at the time we make them] and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. This concludes today’s second quarter call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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