The biggest problem Disney has had to face in recent years has been the decline in subscribers to its flagship network, ESPN. After peaking at around 100 million at the end of fiscal 2010, the figure dropped to 92 million by 2015. The declines showed up in Disney’s most recent quarterly earnings report as revenue in Disney’s Media Network segment in Q1 2017 fell by 2% year over year while operating income decreased by 4%. These poor numbers are attributed to lower advertising revenue in the Cable Networks sub segment where ESPN resides. This makes sense as companies will not pay as much to advertise on a network that has fewer subscribers.
The company has been able to perform fairly well in spite of this challenge due to strong performance in other segments. The Star Wars franchise and other box office hits have helped the Studio Entertainment segment carry Disney. However, the weakness of ESPN over the past half-decade or so represents a much bigger problem that all the major cable networks are having to deal with: the mass conversion from traditional cable TV to streaming services. This trend commonly referred to as “cord cutting” has seen many Americans drop their legacy cable provider in favor of new devices such as Roku or Apple TV and content providers such as Netflix, Hulu and Amazon Prime. Consumers are no longer willing to pay for an entire package of channels; they want to be able to choose exactly what services and networks they wish to view. Millennials are at the forefront of this trend but a sizeable number of Americans 35 and older are also choosing to drop their cable packages. We have reached a point where 25% of Americans do not subscribe to cable TV anymore.
On top of this troubling trend for cable TV networks, Disney has also seen increasingly higher production costs due to a new contract with the NBA and rate increases owed to the NFL. So what strategy should Disney as looks to salvage its flagship network? One thing is certain: there will always be an extremely high demand for sports broadcasting and ESPN is clearly positioned as the dominant outlet for all sports media and coverage. One positive headwind for ESPN has been the growth of light cable packages which has counteracted the prevalence of cord cutting. Disney has also been exploring new platforms for ESPN and is aiming to make the network more readily available on streaming options. Only time will tell whether ESPN and all of the other large cable networks will be able to find new monetization methods as streaming becomes the dominant method of TV consumption.