The Disney Channel: more than just a pretty face

LOS ANGELES Fri Feb 10, 2012 1:08pm EST

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LOS ANGELES Feb 10 (Reuters) - The Disney Channel -- home to bubbly fare from "Hannah Montana" to "High School Musical" -- has emerged as a potent global engine for Walt Disney Co after decades of quiet expansion. And it couldn't come at a better time for the Mouse House.

As cash cow ESPN grapples with ever-richer sports rights and a once-reliable theme park business remains susceptible to a tottering economy, Disney's international presence -- now in over 375 million homes in 167 countries -- is driving sales growth and gaining ground internationally on Time Warner Inc's Cartoon Network.

Overseas, the Disney Channel has always been about brand-building, schooling foreign viewers on everything from Donald Duck to the hijinks of the Wizards of Waverly Place. But this week, company executives cited the foreign channels -- along with ESPN -- as driving growth at a cable unit that accounts for 40 percent of Disney's operating earnings.

Take Italy, where 8-year-olds bop to "A Tutto Ritmo," a dance show known in the United States as "Shake It Up." Or Turkey, where afternoon television for the kindergarten crowd means "Jake ve Varolmayan Ulkenin Korsanlari" -- "Jake and the Neverland Pirates" to their American counterparts.

This year, international versions of the Disney Channel, including sister channels Disney XD and Disney Jr., will generate revenue of more than $1 billion, estimates Barclays Capital analyst Anthony DiClemente.

"There's been a land grab for channel space overseas because that's where the growth is, and no one is growing as fast as they are," said Tony Vinciquerra, former chairman of News Corp's Fox Networks. "Disney caught up because countries that are only now bringing on satellite TV are hungry to get programs for kids."

Disney Channel's overseas success would vindicate decades of investment in international operations. The company is now doubling down: In November it paid $300 million for a 49 percent stake in Russia's Seven TV, which it will reprogram as a Disney Channel that will reach more than 40 million homes.

In February, it spent $375 million to complete its acquisition of UTV Software Communications, which produces local programming for India that includes Disney Channel India.

As recently as 2007, Disney's international channels were seen by just 54 million viewers in 20 countries, while Discovery Communications had its Discovery, Animal Planet and other channels in 170 markets.

Today, Discovery's foreign channels generate $1.3 billion, or 33 percent of the company's revenues.

A GLOBAL RACE

Beyond sales growth, international content can be highly profitable.

The Disney Channel's overseas diet of "Phineas and Ferb"" and "The Suite Life of Zack & Cody" generates operating margins of 50 percent or more, says Vinciquerra, because the programs are largely dubbed versions of the channel's U.S. fare.  Fox's international channels generate earnings of around $500 million, he says, "and Disney will go beyond that."

While rivals have focused mainly on pay channels delivered via satellite and cable, more than half of Disney's overseas channels are free to customers with rabbit ears. That gives them greater reach -- and thus more power as brand-builders that can help other Disney businesses -- and greater ad-revenue potential.

"That shows what a strong brand like Disney can do for you," said Jeff Gaspin, former NBC Television Entertainment chairman. "Advertisers will pay a nice premium in all those countries to reach kids and their parents."

Disney's foreign expansion has pushed it past Nickelodeon, which beams its kiddie shows into more than 110 countries, according to a filing by Viacom, Nick's parent company. And the Disney Channel is closing in on the Cartoon Network, which operates networks that reach 170 countries, according to spokesman Jeff Matteson.

In the United States, the Disney Channel and Nickelodeon run neck-and-neck in the race for viewers. Over the past year, Nickelodeon averaged 1.1 million daily viewers between the ages of 2 and 11, compared 978,000 for the Disney Channel, according to Nielsen data provided by Horizon Media. For ages 6-11, Disney led with 657,000 daily viewers versus 609,000 for Nickelodeon. Cartoon Network trails in both measurements.

Disney CEO Robert Iger made expanding the Disney Channel's overseas presence a priority after taking over in 2005. Since then, Disney Media Networks co-chair Anne Sweeney, who oversaw Nickelodeon's international expansion in the 1990s, has increased the number of Disney channels overseas fivefold.

Greener pastures are still out there. Disney has been blocked from the massive TV market in China. Instead, it airs several hour-long program blocks starring Mickey, Donald and other cartoons on state-owned China Central Television Network.

That may change one day. Last April, Disney broke ground on a planned $3.7 billion theme park in Shanghai with partners that included the state-owned Shanghai Radio, Film and Television Development Co Ltd.

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