The Walt Disney Company (DIS) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Third Quarter 2011 Walt Disney Company Earnings Conference Call. My name is Deanna, and I'll be the operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Lowell Singer, Senior Vice President of Investor Relations. Please proceed.

Thanks, operator. Good afternoon, everyone, and welcome to the Walt Disney Company's Third Quarter 2011 Earnings Call. Our press release was issued 45 minutes ago. It is now available on our website at www.disney.com/investors. Today's call is being webcast, and the webcast will also be available on our website, as well a transcript of today's remarks. Joining me in Burbank for today's call are Bob Iger, Disney's President and Chief Executive Officer; and Jay Rasulo, Senior Executive Vice President and Chief Financial Officer. Bob will lead off, followed by Jay, and then we will be happy to take your questions. So with that, let me turn over to Bob and we'll get started.

Thank you, Lowell, and good afternoon. I'm pleased to report that we had a strong third quarter, driven by our Media Networks and Parks and Resorts businesses. Net income in the quarter was up 11% on a 7% revenue increase. EPS for the quarter adjusted for comparability grew 16% to $0.78. Given the economic news of the past week, I'm sure there's interest in what we are seeing. And during the past few days, we haven't seen any change in the pace of activity in our Parks and Resorts, advertising or consumer products businesses. Jay will follow-up with more detail on specific trends in his comments, and we'll of course continue to closely watch key trends in these areas. Over the past few months, we've had opportunities to meet with a number of investors and analysts. Since we obviously can't meet with everyone listening to this call, I want to take a different approach to my comments today and expand a bit on our strategy and discuss some of the opportunities we are most excited about. Let me start with ESPN. The growth in our Media Networks segment in Q3 was primarily driven by ESPN. ESPN remains incredibly well positioned today, given its ability to deliver comprehensive, high-quality coverage of major sports events, the value it provides to fans, advertisers and multichannel operators and its disciplined approach to programming acquisition. ESPN's long-term commitment to serving sports fans continues to pay off with growth in reach and engagement. Our research shows that each week, almost 107 million people watch, listen, read or log on to ESPN Branded Media. And the average person now spends 6 hours and 35 minutes with ESPN Branded Media each week. The value of sports also continues to be reflected in the advertising marketplace. In this year's upfront, ESPN enjoyed all-time highs in both pricing and total dollars committed, with tremendous strength in our upfront NFL and college football sales. ESPN also continues to provide great value to multichannel video operators. In Beta Research's 2010 cable operator study, ESPN retained its position as the network with the most perceived value for the 11th consecutive year. And ESPN2 placed second for the sixth straight year. So we're very pleased with ESPN's competitive position and the value we provide to fans and all of our partners. So it's certainly clear to us, and I hope clear to you, that with ESPN, the #1 sports brand, along with Disney, we own 2 of the most powerful brands in media. Let me also spend a moment on the sports rights acquisition marketplace. John Skipper, ESPN's Head of Content, often says, the next time we're the only bidder for a sports package will be the first time. And we never take competition lightly, and the fact is competition for television sports rights has always existed. But our focus has remained unchanged. We have been and we'll continue to be diligent in our bidding and willing to pay fair prices for rights that will benefit and create long-term value for ESPN and the company. We recently reached 2 new agreements that illustrate this approach. In May, we signed a 12-year deal for multi-platform rights for a wide array of Pac-12 conference sports, including football and basketball. This deal strengthened our position as the leader in college sports television. And last month, ESPN reached a 12-year deal to be the exclusive U.S. broadcaster of Wimbledon. Given our investment in technology, ESPN was able to offer Wimbledon the distribution platforms on which to air more than 900 live hours of tennis during the 2-week tournament. Matches will air on ESPN, ESPN2 and ESPN3, and this deal will enhance and expand our coverage of Wimbledon and add another blue-chip event to ESPN's great stable of popular and important sports programming. In our recent sports rights negotiations, we have obtained long-term deals, and in addition to the 2 deals I just mentioned, in the past few years we reached a 15-year deal with the SEC and a 12-year deal with the ACC. Long-term deals provide us with greater cost visibility and allow us to build a stronger -- a longer term relationship with fans. Also in our negotiations, we seek access to broad multi-platform rights, extending from television to online to our authenticated service. This multi-screen, multi-platform approach should also enable more growth, particularly as new platforms and new patterns of consumption emerge. During the past few months, we also pursued deals for the NHL and the Olympics, 2 attractive sports properties. In both cases, we made bids that made economic sense for ESPN, and we exhibited financial diligence and discipline and avoided burdening ESPN with new commitments that would have lowered ESPN's margins. Now turning to Broadcasting. We delivered earnings growth at our Broadcasting business this quarter, driven in part by affiliate revenue growth at ABC and our own TV stations. We are in the process of negotiating cash retransmission payments for our own television stations and license fees from our affiliated stations. Our own stations have already reached agreements with several large multi-channel distributors with more to come. And we believe our own TV stations are getting paid per sub cash retransmission rates that are comparable to what other station groups are earning. We have already completed license agreements with non-owned affiliates, covering more than 60% of our affiliate footprint. And to give you some perspective on what this means financially. We now expect annual revenue streams to total between $400 million and $500 million by fiscal 2015. At the Studio, we enjoyed strong creative success during the quarter. Pirates of the Caribbean: On Stranger Tides became the eighth film to earn more than $1 billion in global box office. Over the past few months, Marvel's Thor and Captain America: The First Avenger both opened to strong box office results. Thor has earned almost $450 million in global box office and Captain America is on track to deliver similar results. Both films, along with Iron Man and The Hulk, are key components of Marvel's Avengers franchise. And Marvel's approach, starting with great characters and stories, attracting great filmmakers and producing high-quality films, bodes well for our next film, The Avengers, which are aiming to turn into another great franchise for the company. Cars 2 opened on June 25, and it's on its way to earning well above $500 million in global box, and Cars remains one of the most important franchises of the company. I'm excited about our upcoming films, and tomorrow The Help from DreamWorks will open and we're very encouraged by the early response to this film. This Thanksgiving, The Muppets return to the big screen in a family comedy we believe will reinvigorate a once great franchise. In December, we will distribute War Horse, a Steven Spielberg directed epic from DreamWorks that is bound to get a lot of attention. And in March, we will release the live action film, John Carter from Andrew Stanton, whose previous films include Finding Nemo and WALL-E. In May, we will release The Avengers and finally, in June, Pixar's next original film, Brave, will hit theaters. Our Disney Channel business remains very strong as well. During the third quarter, Disney Channel's ratings were up 10%, while Disney XD's ratings were up 24%. And this past Friday, Disney Channel's original movie, Phineas and Ferb: Across the Second Dimension, which is the most recent installment in this franchise debuted to a phenomenal success, becoming cable TV's #1 movie of the year in total viewers and the #1 scripted telecast on all TV this year with kids. Disney Channel now distributes 100 channels around the world. And now let me discuss our Parks and Resorts business, specifically our capital investment strategy. We deploy capital in this business with a focus on expanding our markets, providing differentiated guest experiences and creating long-term growth. In order for a project to move forward, it must deliver attractive double-digit returns on invested capital and support our brand and our strategy. Fiscal 2011 and fiscal 2012 will be peak years for our Parks' capital spending, given the timing of a number of projects that were approved independent of each other over the past 5 years. And let me briefly update you on 5 of those projects. Next year, we will complete our redesign of California Adventure, with the opening of Cars Land and an entirely new entrance to the park. The expansion and redesign of California Adventure was a must, to not only increase length of stay and attract new visitors, but to correct the justified perception problem that the price-to-value relationship for this park was not what it needed to be. World of Color and the Little Mermaid: Ariel's Undersea Adventure, the 2 first attractions to open as part of this project, helped drive record Q3 attendance at the Disneyland Resort, and our investment in California Adventure is beginning to generate returns. This year, we launched the Disney Dream and next year, we will introduce its sistership, the Disney Fantasy. We have unique competitive position as the creator of and the leading brand in the family cruise market, and we're very encouraged by the Dream's performance thus far and expect this investment to drive mid-teen returns on invested capital. In Orlando, we are significantly expanding Fantasyland. This is the most popular land at the Magic Kingdom, which is our most popular park around the world. This project will double the size of Fantasyland and enhance the guest experience, particularly during peak periods. This is the first major enhancement we have made to Magic Kingdom since its 1971 opening. We expect this initiative will drive higher levels of guest satisfaction, encouraging guests to spend more time and more of their vacation dollars with us. In Hong Kong, we are in the midst of creating 3 new themed areas, including Toy Story Land. We expect this expansion to perpetuate the upward momentum we have been enjoying in Hong Kong Disneyland. And finally, as you know, we recently reached final agreement to build a park in Shanghai, and we believe the economic benefits to the Walt Disney Company of this park will be significant, given the growth we expect in the Chinese economy and leisure travel and entertainment in China. We are optimistic about the return Shanghai Disneyland can generate for the company, and we see it as one of our most exciting and important projects. Each of these 5 investments exceeded our stringent hurdle rate requirements and is expected to be accretive. We continue to believe that investment in parks projects like these is an excellent use of the company's capital. In closing, we are optimistic about our creative pipeline across our businesses and confident our current long-term strategy will create shareholder value. Great brands demonstrate their value through all economic environments. And thus, with Disney, ESPN, Pixar, Marvel and ABC, we remain well positioned for whatever economic conditions we face in the future. And with that, let me turn the call over to Jay.

Thanks, Bob, and good afternoon, everyone. I'll now take a few minutes to discuss our Q3 results in more detail and highlight a number of comparability items that will impact our Q4 results. Media Networks was the largest contributor to the year-over-year increase in operating income, driven primarily by ESPN. At Cable Networks, growth in operating income was due to increased affiliate revenue at ESPN and Disney Channel resulting from contractual rate increases, as well as higher equity income. During the quarter, ESPN was able to meet by a few hours the same programming commitments that it met in Q3 of last year. As a result, net affiliate revenue recognition related to program covenant timing in Q3 was comparable to the prior year. Thus, the $228 million in deferred revenue we mentioned during our last call was actually recognized in Q3. We estimate that the EPS impact of this timing shift is $0.06. Year-over-year ad revenue comparisons at ESPN were affected by the impact of the men's FIFA World Cup and Game 7 of the NBA Finals last year. We estimate that ESPN's ad revenue was up 9% if you exclude these items from the prior year. When these items are included in the prior year, ad revenue at ESPN was down 1% compared to last year. At Broadcasting, operating income growth was driven by lower programming costs and higher ad revenue at the ABC Television Network. At our own TV stations, ad revenue was down 8% as a result of lower political spending in the quarter and the sale of our Flint and Toledo stations. Excluding the effect of these items from the prior year, ad revenue was up 2%. Thus far in Q4, ABC Networks' scatter pricing is running more than 25% above upfront levels, with some deals priced well above that level. Ad sales at ESPN and ABC Family are pacing up versus prior year. TV station ad sales are pacing down mid-single-digits. I'll remind you that our stations generated approximately $55 million in revenue from political spending in the second half of last year, so station results in Q4 will face a difficult comparison. At the Parks and Resorts segment, operating income growth was driven primarily by increased guest spending at our domestic parks and higher passenger cruise days, partially offset by higher operating costs. Results also reflect lower royalties from Tokyo Disney Resort and a prior year benefit from a real estate transaction at Disneyland Paris. Also keep in mind that operating results this quarter include 2 weeks of the Easter holiday, while last year, one week. While our reported Q3 segment margins declined by 50 basis points, without the impact of the Easter shift, the Tokyo earthquake and the Disneyland Paris real estate transaction, we estimate that theme park margins would actually have increased by 40 basis points versus the prior year. Domestic park attendance was up 2%. After adjusting for the Easter holiday shift, attendance was up 1%. Per capita spending was up 8%, driven by higher admissions, merchandise and food and beverage spending. Average room spending at our domestic hotels was up, an impressive 14%. Occupancy at our hotels was about 1 percentage point below prior year levels at 81%. The increase in per room spending that we are seeing is consistent with the strategy we articulated to reduce discounting. As illustrated by our Q3 results, we remain willing to make a short-term tradeoff between modestly lower occupancy and significantly higher room pricing, as we believe that a return to normalized pricing levels will drive greater long-term profitability. So far this quarter, domestic hotel reservations are pacing down 2% versus prior year levels, while booked rates are up mid-single digits. Results at our international parks were impacted by lower royalties from Tokyo Disney Resort and a decrease at Disneyland Paris that was primarily due to the real estate transaction. We continue to see improvement at Hong Kong Disneyland Resort, driven by higher attendance and guest spending. Disney Cruise Line's performance this quarter reflected the successful launch of the Disney Dream, which contributed to operating income in its first full quarter of operation. At Studio Entertainment, operating income was down from last year as a result of the lower domestic theatrical performance of Cars 2 compared to Toy Story 3, and lower worldwide theatrical performance of Thor compared to Iron Man 2. While we were pleased with the global box office performance of Pirates 4 this quarter, its operating results were comparable to those of Alice in Wonderland in Q3 last year, as increased revenue was largely offset by higher marketing and distribution costs, which were incurred in the quarter. At Consumer Products, operating income was up during the quarter as a result of growth in earned revenue for Cars merchandise and higher revenue from our Marvel properties. On a comparable basis, Disney branded earned licensing revenue was up 10% year-over-year. At Interactive Media segment, lower operating results were driven by the acquisition of Playdom, including $21 million in purchase accounting adjustments. Results at our console games business improved during the quarter due to higher unit sales and lower marketing expense, partially offset by the higher cost of sales reflecting fees paid for the developer of LEGO Pirates of the Caribbean. As Bob commented, our strategic position and strength of our brands gives us reason to remain optimistic about the future. However, I want to identify some comparability issues that will impact our Q4 results. As I mentioned earlier, ESPN achieved many of its key programming commitments in Q3, so revenue recognition related to those commitments in Q4 will be comparable to the prior year. Therefore, the $228 million in deferred revenue recognized in Q3 will not be recognized in Q4. Additionally, at Media Networks, we expect to incur higher programming and production costs at ESPN due to contractual increases in rights cost for college football, NFL, Major League Baseball, along with costs associated with our new ACC contract and startup cost to the launch of the Longhorn Network. ABC faces a difficult comp in television syndication, given sales of shows in the prior year, including Ugly Betty and My Wife And Kids. At Studio, Cars 2 will continue to face a difficult global box office comparison versus last year's release of Toy Story 3. Additionally, the Q4 home video release of Thor faces a difficult comparison to last year's home video release of Iron Man 2. We estimate on a combined basis the higher cost of ESPN, lower syndication sales at ABC and challenging studio comps will impact our Q4 earnings by about $0.07 per share. And finally, we significantly increased our pace of share repurchase during the quarter by buying back 35.1 million shares for approximately $1.4 billion. Year-to-date, we've repurchased almost 89 million shares for $3.5 billion. We continue to view the repurchase of our stock as a very attractive use of our capital, and we'll continue to return capital to shareholders via dividends and share repurchase in a financially prudent manner as part of our overall cash deployment strategy. Now I'll turn the call over to Lowell for questions.

Thanks, Jay. Operator, we are ready for the first question.

[Operator Instructions] The first question will come from the line of Michael Nathanson, Nomura.

Let me have 2 for Jay. Jay, can you give an update, when you provided your ESPN pacing number on the last call, I think it was running mid-single digits. And it ended up, I believe, virtually flat. So what happened over the quarter besides it looks like a slowing of pacing. So what impacted that number?

Yes. The World Cup numbers, and we're after the -- in fact, impacted the second half of the quarter and we're after the pacing's data that we gave as of the call, Michael, which explains the difference.

Okay. And then let me ask you this on the Dream, it's now included in the revenues this quarter for the whole quarter. Is the Dream margin higher or lower than the average domestic margin? So is that affecting the year-over-year change in margin for you guys?

Yes, it's incrementally higher margin than the rest of the Cruise business.

He's asking for the whole business, though.

For the whole park business, yes.

Yes, both.

The next question will come from the line of Michael -- Spencer Wang, Credit Suisse. Spencer Wang - Crédit Suisse AG: Just a 2-part question on theme parks. To follow up on Michael's question, Jay, it looks like the underlying cost growth of the parks are still kind of in the low double-digit area, even when you're kind of normalized at the onetime stuff. So I was just hoping you could give us a little bit more color on what's driving that since I thought it was a fairly fixed cost business. Is that just the impact of pension and other things? Any more color? That would be helpful. And then just secondarily, maybe for Bob, if the economy does weaken domestically, how would you address that in the parks? Would you revisit the promotion strategy that you've implemented back a few years ago? Or would there be a different approach?

Let me start with your margin question. The reported margin numbers don't reflect obviously a lot of things that we have coming online for which we are experiencing launch costs and pre-revenue costs. And the list is: the Aulani resort, the things they're coming on in DCA, some spending behind our next-generation work in Florida, and believe it or not, some expenses against the Shanghai project, which of course we won't see revenue on for years and years. So if you actually -- I mentioned 40 basis points, if you actually add back those factors, it's about another 100 basis points in margin growth in the quarter. So I've said for a long time that yes, other things you mentioned like pension and so on are all part of the equation. But we don't see any reason why when these projects are coming in at their long-term revenue versus costs equation that we won't be able to get back to the kinds of margins we've seen historically.

And you also have to consider, Spencer, and Jay covered this a bit, but just to reiterate, our parks' footprint globally is simply bigger with more lands, more attractions, more resorts. There are going to be increased costs. I think it's right to look at margins versus costs because we simply are going to be running a bigger and bigger business. On the second part of your question, if the economy weakens, will we reconsider promotion strategy, yes. At some point, we might. We take a look at what impact a weakening economy has on us. As I mentioned at the beginning of my comments, so far, in the last few days, we haven't really seen that much of a change. Now we're currently selling basically a shoulder period mostly, which is the fall, where there is some discounting. Anyway, we'll take a look at holiday bookings as the year progresses. It's way too early to predict whether we'd be discounting or not. But my gut is based on the trends that we've seen this past year that it's not something I think we'll necessarily have to do quickly.

The next question will come from the line of Ben Swinburne, Morgan Stanley.

I wanted to just maybe dial in to the cable comment you made about increased costs. If you look at the first 9 months, your media net margins and certainly your cable margins are up nicely, as you've seen operating leverage in cable. Are we going to see margins decline in cable in the fourth quarter as part of the increase in programming and production costs? I understand it's going to be higher, but maybe just sort of putting in a little more context behind it would be helpful.

Yes. I'm not going to predict margins, Ben, for the quarter. But there are a couple of factors in place that we think are strategic that are contributing to those cost increases, namely building Disney HD as well as XD, as well as Disney Jr. And then some of the contractual cost increases that I mentioned that go along with the new football deals and so on -- I mean the increased football cost, as well as the Longhorn Network and so on and so forth. So I won't predict margins, but I will tell you that those, plus some additional new program in ABC Family will have an impact on the quarter, but we consider those very strategic investments in the building of these networks and believe they'll have returns.

Okay. And then just on the parks, you also mentioned I think book rates for -- I think you said pacing plus 2, is that a number that's relevant in the context of the 14% REVPAR growth that you just put up this quarter? I mean should we be looking at those 2, as sort of comparable? And if so, why the [indiscernible] The deceleration?

Yes. I said -- maybe I misstated it, but just to restate it, we said that bookings were pacing down 2% in terms of volume but up mid-single digits in terms of price. And remember when -- fourth quarter is our peak quarter. And our peak quarter a year ago probably did not see the kind of discounting that we saw in the third quarter. So when you look at growing your rates in peak periods is always a little more challenging.

Okay. And last question, as promised. Bob, on the film business, you were one of the earliest ones to out call the trends in home video. You made a lot of changes in the cost structure. Can you just update us today on where all that stands? You've brought distribution together at the studio. Is there more to come on the expense front in terms of overhead reduction at the film business, given the trends there? Or do you think you've rightsized it?

Well, I think we'll continue to watch trends. I don't think they've necessarily been heading in any more positive direction. I think the attention that we're paying right now, the cost is more in the production of films than necessarily in the structure of the studio. And it's our intention to take a very careful look at what films cost. And if we can't get them to a level that we're comfortable with, we think that we're better off actually reducing the size of our slate than making films that are bigger and increasingly more risky.

The next question will come from the line of Doug Mitchelson, Deutsche Bank.

Two for Bob. One is real quick. Bob is there any timeframe that you could give us on the mid-teens return on invested capital that you expect from the cruise ships. And the bigger question, just on the flow-through to the bottom line from retrans, the reverse retrans, ABC's unique in that among the big 4 broadcast networks. It doesn't have an NFL package and there are some concern that the NFL will get some of those retrans dollars when they come up for renewal, and ABC doesn't have that. Does ABC change its programming strategy at all knowing that you're going to have this robust retrans revenue coming in over the next few years?

The second part of the question first. You're right in your assessment of the flow-through because there isn't a pass along to any sports leagues through ABC, that we've weaned ABC of expensive and relatively risky sports properties. And therefore, it's our goal and aim to basically maintain that strategy and to take whatever increased revenues we get from retransmission consent or what I'll call affiliate fees to the bottom line. It's solidifying basically, and I guess, improving way to manage that business. On the first part, the double-digit returns on invested capital on the cruise ships, it's basically -- our experience with the 2 ships that were launched in the '90s have been double digit. And so far, in terms of the Dream, we believe that we'll be able to maintain that same double-digit returns or mid-teens returns for the new ship, and then hopefully for the Fantasy, which comes on board next year, over time.

Do you think that you would want to predict in any way? Over time, okay.

Yes. I don't think we want to predict when that business is going to stabilize, Doug. But we are very encouraged by the first full quarter of the Dream already being accretive to our margins. So we remain a relatively small, I would call it, boutique cruise line, and it shouldn't take forever for us to absorb that capacity.

The next question will come from the line of Anthony DiClemente, Barclays Capital.

One for Jay and one for Bob. First for Jay, with interest rates this low, I know you talked about pension cost on your last call, you talked about it becoming a tailwind over the next 5 years. But just given the expectation as of the last month or so, it's kind of hard to get too aggressive on pension plan returns, I would think. Can you just give us a little bit of color on that as you see it? Is it possible that you're going to have make adjustments to your assumptions, including your discount rate? And then a follow-up for Bob.

I guess like everyone else, we'll have to wait and see. But pension rates return have been pretty low for a while. We in fact, in the past quarter you'll see in our balance sheet and cash flow statement the reflection of a bit of a buy down of our pension liability because it was so incredibly cheap for us to borrow money that we took advantage of that borrowing to buy down that liability a bit. But I think it's something we'll carefully manage. Obviously the growth in medical and post-retirement medical costs is something that we are keenly aware of, have been dealing with now like a lot of companies for a number of years, but not something that we feel will either get out of control or will we be inclined to let it get out of control in terms of downdraft.

Okay. And Bob, you start off the call talking a lot about ESPN. And I just -- it strikes me that ESPN3 could very well possibly be an undermonetized aspect of ESPN and Disney. And I'm aware of the sensitivities to putting more stream programming onto ESPN3. You have the leagues there, your suppliers that I'm sure are cognizant of the value of it and then you've got your distributors who -- you don't want to undermine the relationship you have with your affiliates by offering this content direct to the consumer. But I'm pretty sure that consumer wants more sports streams to devices like iPads and like phones. And so as you look out, as the negotiations that you have with both sides of this, what really needs to happen for more sports -- or live sports to be streamed to mobile devices via ESPN3?

I think we have a pretty interesting opportunity here, and that is to in effect have our cake and eat it too, which is a means of saying that with a pretty aggressive approach to authentication, reflected already in deals that we've made that have been long term for ESPN, we can incentivize customers to either sign up with or stick with multichannel distributors. At the same time, we can offer the multichannel distributor packages with new elements to the ESPN package that will enable them to sell expanded packages to their customers, which has the affect of really 2 things: one, raising more revenue; and two, providing the customer with an even broader array of sports and sports-related material. I mentioned the Wimbledon deal. ESPN has created the technology to offer just about every match, I think maybe every match, that would be played at Wimbledon over a 2-week period of time, and may have the ability to offer that to distributors, which gives distributors an opportunity to offer a broader array of services to their customer. I guess it's a means of my saying that in this case the relationship that we have with the distributors is a very valuable one, and it's one that we aim to respect by both protecting what we currently have and determining or figuring out ways that we can expand on it.

The next question will come from the line of Jessica Reif-Cohen, Bank of America Merrill Lynch.

Couple of questions. First, did you guys recently bought out your partner in India. Can you give us an update on what you paid for it and kind of what you see as the prospects there?

Well we own roughly 50% of what is essentially India's largest film company. And as we look at that market, Jessica, we believe that there's some great opportunities for growth for this company as not only the market expands, particularly with new technology, but as it becomes even more hospitable basically to foreign investment. And so, what we've done is we've actually made an offer to buy out the public, and also buy out our partner, which is going through now basically a process in India, essentially a regulatory process, as well as the typical process that you'd go through if you are essentially tendering shares. Our view on this, by the way, is not only about the long-term prospects for India, but it's pretty consistent with what role M&A plays in our overall capital deployment. I know that Jay talked about this back in February when we had our investor meeting, but we decided to take an even closer look at it since that meeting. And we determined that between fiscal '06 and 2010, we deployed about $13 billion for acquisitions. And we now estimate that 90% of that capital was allocated toward acquisitions that are creating value for the company. What I mean by that is deals, which our rate of return exceed the cost of capital. And so we now estimate that the businesses that we acquired for $13 billion represent about $23 billion in enterprise value. So our M&A strategy has clearly worked. By the way, when we look at enterprise value, we're looking at the value to the company in many ways. Pixar, a great example of that and the huge impact it's had on the Disney brand, as a for instance. So we're going to continue to deploy capital in this direction. We like growth in international markets, I mentioned Shanghai earlier. India clearly is another example of a high-growth market that we think investing in at least in today's world is a smart move.

And then on just new forms of distribution for television, I guess television and film. You guys made a very short-term deal with Netflix. I don't think you've announced anything yet with Netflix international or Amazon or anyone else. Can you just give us an update on how you're thinking about kind of the new models of distribution and how accretive it could be in the coming years?

Well we're in discussions with Netflix and with a number of other entities in the space. And I think it's likely that we will make more deals in this space. Our overall approach of late has been to make deals that increase revenue, while at the same time, protect and respect basically the multichannel or the channel distribution value that we see today. And so, we're looking at deals that are largely library in nature, meaning very little if any content that would be in season, mostly prior season. But also, trying to build into at least some of these deals, some form of authentication, not necessarily in the ones that you described, but in ones that it will allow access to our programming faster or in a more aggressive window, if the customer is a multichannel subscriber. I think it's a means of growing the business. There's clearly a thirst for film and entertainment, in particular branded, high-quality entertainment. And what we're seeing I think stimulated in part by not only higher connectivity speeds, but significant development in mobile technology, particularly tablets. And we're looking at platforms that are emerging that are creating all kinds of new business opportunities for content providers.

And then just a really quick follow-up, you mentioned retrans could get -- or retrans and reverse comps could get to $400 million to 500 million by fiscal '15, can you give us the base currently so that we have a sense of how it ramps?

No.

And the next question will come from the line of Vasily Karasyov, Susquehanna.

To follow-up on the M&A question, there were press reports that you were involved in the auction of Hit Entertainment in the U.K. And without asking you to comment on specific transaction, can you tell us how you view your character portfolio at this point? Do you feel like it's complete after you bought Pixar and Marvel? Or do you still think there is room for additional characters?

We have, as far as I can tell, anyway, the most valuable array of characters in the world. When you consider Marvel and Pixar and Disney, to name a few, and Muppets, by the way, it's interesting we continue to create value or mine value from those that we have. I mentioned The Avengers. I mentioned Muppets. I mentioned Phineas and Ferb on the Disney Channel. I mean there's a constant, basically, either refreshment of characters that we've got or invention of new ones here. So we don't have what I'd call a strategic hole, but we've looked expansively at opportunities across the world to buy either new characters or businesses that are capable of creating great characters and great stories for those characters. Marvel's a great example of that. And we'll continue to do that. But because there isn't a great strategic hole to fill, we've got so many already, it will be judicious in what we'd be willing to pay for them.

The next question comes from the line of John Janedis, UBS.

Given the macro weakness in Europe, have you guys seen a change in reservation trends from international guests at the parks? And maybe on a related note, I think you pushed through ticket price increases in June, is there any evidence that you're seeing an impact on attendance or length of stay?

On the International front, we've actually seen an uptick in our international business, particularly to Florida. And we're seeing it actually right now during this quarter. Jay, you want to handle the other front?

I wouldn't read too much, John, into the timing of the price increase. There's a lot of moving parts there. We generally increase in the course of the summer. Last couple of years, it's been a little later in the summer, but I wouldn't read a whole lot into that. What I will say is that whether you look at in-park spending or a per room spending, we are seeing the kind of trends that we strategically set ourselves up to see, which is to reduce broad-based discounting, use promotions selectively to fill the trough weeks that occur in every quarter of every year, whether it's a high water year or a low water year. And the net result of that is that across the board, our revenue per guest is up at our theme parks, and we continue to see that moving into Q4.

We also think that investment like the kind that we talked about earlier, does enable more price elasticity. So when you look at the kind of investment that we're making in California Adventure, it's not just a fix, what as I said, was perceived to be and rightfully so a miss creatively or a whole, it's to enable more price elasticity. We're adding not only capacity, but we're adding significant amount of fairly attractive experiences or attractions, which gives us the ability to price a little bit more aggressively, sometimes even in tough markets.

The next question will come from the line of Alan Gould of Evercore Partners.

Jay, what kind of visibility do you have on affiliate fee revenue from the cable going out 5 years? How much of that is visible right now?

Well as you know, we've done a number of deals that have been announced out there. We've got over the next 3 to 4 years some very big deals coming up. So I guess I would call the visibility partial. The deals that we've already locked in obviously and what their growth rates are, and the unknowns of deals that we don't have. So I don't know how to fully answer your question, but that's what the insight I can give you.

Can you give us a sense of how much is rolling off per year?

No, I don't want to get into the details of the timing there. But they're big deals and they're hard to keep secret when they're in play. You'll know about it when it's happening.

The next question will come from the line of David Bank, RBC Capital.

So my question is if you follow what movies with some of your competitors are doing with their programming in Hulu, and I would expect suspect you guys might be looking to do too, it would be to -- narrow the windows for content availability without authentication. For some of the content while potentially locking it in for a relatively long time. Question is do you need -- across what percentage of MSO and other distribution platforms have you kind of locked in authentication mechanisms for ABC? Do you essentially have authentication programs in place for the majority of distribution?

The answer is we don't. The only authentication deals we've done today are for ESPN. We fully expect and plan to do authentication deals for our other networks as well, but we haven't cut any to date. I will say, one thing you mentioned in your question, David, I don't think we'll make long-term deals for the content, because I think the world is changing too much. But you are right in your assessment that we'll basically push the window back or make access to the programming more difficult or later, except if customers are authenticated as a subscriber. And I think you'll see over the next few years a lot of deals done that enable this. We now have to hope that not only is the technology improves that enables authentication, but that the whole user experience gets better. This is a for instance. There have been over 2.5 million downloads of the Watch ESPN app. And a lot of people downloaded it, but they were subscribers to services that hadn't cut authentication deals with us yet. But even where there were subscribers to services that had cut authentication deals, the user experience still could be better. It needs improve. So I think this is kind of a developing situation. I think it's very exciting because of what it provides us, what it provides to the distributor and what it provides to the consumer, but you're still at the beginning of the beginning on this.

And the last question will come from the line of David Miller, Caris & Company. David Miller - Caris & Company: Bob, a question for you and a follow-up for Jay, if I may. On the retrans comments that you made in your prepared remarks, how are you managing negotiations with your non-owned affiliates? Are you just basically telling these guys, hey, we want $0.25 per sub per month that you go out and get whatever spread you want from the cable MSO? Or are you saying to them, look, we want half of what you get from the cable MSO because we're providing all the programming? Some context around that would be great. And then also, Jay, I think it was 90 days ago, it may have been during the conference circuit that you mentioned that the pattern that you're seeing with regard to bookings at the hotels, particularly in Orlando was sort of structured around the value segment filling up first and then the luxury segment filling up first, just sort of both ends of the continuum filling up first and then the middle would kind of fill in later. Are you seeing any change at all at the margin with regard to the pattern of that particularly over the last 4 weeks with all of what's happening in the capital market?

David, I'm not prepared to give you much detail on the nature of the deals that we struck with our affiliates. I can say that there are different facets to them that create some leeway in terms of how the deals are cut with the distributors. But I just don't want to get into detail about those. But so far, ABC's made a tremendous amount of progress. I think it's reflective of the fact that these stations that we don't own recognize the fact that the world indeed has changed. And while they all are encouraged by the retransmission set [ph] Fees coming and becoming more and more real, they also realize that a lot of the value created comes from the programming that the network provides them. And that's why... David Miller - Caris & Company: What are some of the deals that have been cut?

You got it right, but I just don't want to give you the details basically.

David, in answer to your other question, there hasn't been an appreciable change in the way that rooms have booked up from what you described and what I described. I will say from -- but I will give you this insight, in Q3 from a rate perspective, whereas rates were up across the board, they were up significantly more in the value and moderate segment than they were in the higher-end segments, as you might expect when you're coming off an economic downturn. That people at the end of the economic spectrum are going to be the ones that could not come and that they kind of rushed to it when they can. In terms of the booking window, we've lengthened about a week over the last 5 or 6 months from 13 weeks to 14 weeks on an average booking. You can read into that what you will -- I'm not sure there's a giant statistical difference between the 2, to be honest with you.

David, thanks a lot, and thanks again, everyone, for joining us today. Note that a reconciliation of non-GAAP measures that 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 call. Have a great day, everyone.

Thank you again, ladies and gentlemen. This does conclude the presentation. You may now disconnect, and have a great day.