Disney’s Confidence in Its TV Business May Be Misplaced

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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