Disney’s Confidence in Its TV Business May Be Misplaced

disney business fundamentals
Illustrtion: Cheyne gateley

The Walt Disney Co.’s annual 10-K report, released Nov. 23, does little to back up management’s confidence in a turnaround in 2017.

The report indicates that almost all of Disney’s major cable networks were down by 2 million or more subscribers compared with last year. Even worse, A&E, ESPN, and ESPN2 are down by 8 million, 9 million, and 10 million, respectively, over the last three years.

None of this is surprising. Pay TV subscriptions peaked in 2013, and many subscribers are trading down to smaller packages that exclude prominent channels. Emerging online-channel bundles like AT&T’s DirecTV Now seem likely to continue to eat into the traditional pay-TV subscriber totals.

sources: Company Reporting, jackdaw research Analysis

This has been having an impact on Disney’s annualized cable revenue. This past quarter’s numbers aren’t as dramatically bad as they seem because of a quirk in the company’s fiscal calendar, but the overall trend is still one of slowing growth.

Add to this the rising cost of content, especially in sports, and these problems become even more acute. Cable networks provide 70% of Disney’s TV revenue and 87% of its TV profit, so the ESPN and broad- er cable-networks business can significantly affect the company’s entire TV business.

Yet while Disney executives now appear to acknowledge many of the challenges they have played down in the past, they sound strangely optimistic. Pressed by analysts on the November earnings call, management cited the rise of skinnier online bundles as a potential savior for ESPN. These new offerings, they contend, will lead to a resurgence in subscribers from segments of the market the company hasn’t been able to reach — notably, millennials.

sources: Company Reporting, jackdaw research Analysis

But many consumers seek out these slimmer bundles in an attempt to rid themselves of expensive channels they don’t watch — which, not infrequently, include ESPN.

Over time, Disney sees going direct-to-consumer with its sports offerings as a potential driver of growth; its investment in Major League Baseball’s BAM Tech operation is intended to further this goal. However, Disney has dabbled in the direct-sales space only overseas and has pushed back against suggestions it would launch ESPN as an online service in the U.S. anytime soon.

While Disney execs continue to paint a rosy picture for the future, all the major trends seem to be working against the company, especially its ESPN channels. Given the firm’s track record of cord-cutting denial, we’ll have to take its optimistic claims with a grain of salt until some evidence for them emerges.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.

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  1. RG says:

    This article is not referencing any new data, yet it states ESPN needs a “savior”. That implies the author sees ESPN ultimately failing. ESPN still makes billions of dollars in profits. More than the other sports networks combined. Forecasting shows even with continued declines in subscribers ESPN will continue to make billions of dollars in profits.

    The author also fails to note that 21stC has FOX Sports 1 and 2; NBC U has the NBC Sports Channel and CBS has the CBS Sports Channel. That leaves out joint ventures in regional channels each of the media companies co-owns and manages. BTW… 21stC, NBC U and CBS admit their networks are losing money when traditional GAAP is used. But, publicly they reference their results as a sports bundle (network, cable, regional).

    So how is it ESPN needs a “savior” when it’s making billions and will continue to make billions? Yes, less billions, but still billions.

    How is it 21stC, NBC U and CBS are fine in both the short-term and long-term?

    This reporter took a quarter-to-quarter view, but failed to give serious consideration to long-term options. What if…

    DIS took a charge against the sports contracts to make them break-even. For example, they pay the NFL almost $2B per year. Why? Because FOX Sports and NBC Sports submitted aggressive bids for the rights.

    ESPN took key games OTT

    DIS launches a version of Disney Life in the USA with all their channels available and still maintains cable availability

    DIS makes a deal with Hearst to lower their 80% share in ESPN, but retains majority

    DIS removes all content from cable and goes OTT

    All these are long-term options that any reporter needs to include in a credible piece. The reporter tries to end the piece with DIS as a stock is doomed. But, he conveniently failed to mention DIS closed out their 2016 fiscal year reporting record profits, amongst the decline of subscribers in ESPN.

  2. Bas says:

    Pipe and Content consolidation started by Comcast acquiring NBCUniversal and now evolved with AT&T acquiring Time Warner. Fox which is controlled by the Murdoch family is now acquiring Sky, CBS-Viacom recombined or not will both get picked up, Lionsgate-Starz will also get picked up, Disney will spin-off ESPN, then look for a merger partner. Content is King, Pipe is also King in today’s world. Great Article.

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