Disney continues to see weakness in Media Network’s segment

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.

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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.

Cord Cutting Statistics

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.

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14 thoughts on “Disney continues to see weakness in Media Network’s segment

  1. Would Disney be able to convert ESPN to a streaming network? Customers typically want to see games in real time, as they occur, so it seems like there would be a relatively small portion of viewers that would want to deviate from a standard service.

    • ESPN already does offer streaming of every game airing on its family of networks on its “WatchESPN” site and mobile app. It also streams games on WatchESPN that are not airing available on live television. However, you need to login with your cable provider credentials in order to be able to access WatchESPN so cord cutters will not have access and thus this does not help ESPN attract people without cable. I think there might be other ways to access WatchESPN like if you have a Roku for example. I do know if you accessing the internet via a military or university network than you do not need cable provider credentials to use WatchESPN.

      • The only problem with the “WatchESPN” site is that it blacks out a lot of local games, i.e. the ones I want to watch. This has sort of forced me to continue my cable subscription, as I imagine it has many others. However, if WatchESPN allowed me to watch ALL sporting events originally broadcasted on their networks, then I would be willing to pay more of a premium for its service.

        • But that would be the case if you were just using cable. The local game is being shown on your local channel and nationally televised games are on a network channel. This protects the rights of those who bought the game and there is really no way for this to change.

          Having said all this, I fee like ESPN should be as well placed as anyone to adapt to the “cord cutting” trend. They have over 10 different channels, each of which pertains to their own “niche.” There is a channel for old games, one for the SEC, and even one solely for the sports teams of the University of Texas. As people cut back from large cable packages to narrow in on what they want to watch, ESPN seems to be in a pretty good spot as they already space out a lot of different sport content.

  2. How important is ESPN to Disney overall? As opposed to licensing income from movie characters? movie earnings [which involve very arcane and opaque accounting]?

    If movie revenues see big ups and downs, then ESPN helps smooth profits (an empirical question, 10 minutes with their annual report should provide a tentative answer). But that then becomes a finance question, and only makes sense if stock prices are unduly affected by changes in quarterly earnings. Otherwise it’s cheaper/better for investors (which means pension funds) to hold stock in ESPN and stock in Disney than for Disney to own Disney and ESPN.

    • From Seeking Alpha this morning: Amid a downturn at ESPN, Walt Disney (NYSE:DIS) will lay off a “small percentage” of workers at the sports network, including on-air anchors, reporters, and radio/podcast hosts. The move is less about cost control, CNBC reports, and more about reshaping ESPN for a digital future. But Sports Illustrated’s Richard Deitsch said the company plans to save tens of millions in staff salary, suggesting big names are on their way out.

  3. I remember in China three summers ago when a Chinese businessman told me that ESPN was Disney’s biggest moneymaker. Definitely did not expect that, and it is interesting to see how that comment has affected the overall company. I guess the general public assumes that Disney films and parks are their main sources of revenue, but Wall street seems to realize the declining numbers from ESPN, which is reflected by its stagnating price movements for the last few years. It will be interesting to see what happens down the road for Disney, as they are still a household name, nonetheless.

  4. On the topic of ESPN, youth sport participation has been on a steady decline for a while. This potentially could led to an overall decline in interest for sports, which would also hurt ESPN viewership. Since Disney also owns the Disney Channel and ABC, I think the viewership of these two channels should be analyzed as well. Additionally, how much are other networks hurting? The topic seems to be about Disney and ESPN, yet with less cable subscribers as a whole in the industry, is this just the new normal?

  5. I think Disney’s all or nothing policy in regards to access to ESPN’s channels might not be the most effective way to gain the most viewership. Many people are willing to watch the larger sports games like March Madness and the World Series, but do not want to pay the outrageous fees for an all inclusive package that would include access to sports channels that only show bowling and women’s basketball. Has there been any research to see if a more effective business strategy would be for viewers to only pay for the sporting events that they want to watch?

    • I can imagine the reason for the all or nothing approach is probably that overall it brings in higher revenue. I believe the thinking is that consumers that haven’t converted to streaming channels will pay a high price in order to be able to watch their favorite major events like you mentioned, even if it means paying for unwatched channels. If Disney started offering cut price deals on the specific sports channels, these consumer surpluses will be higher as they are paying a lower price to watch the exact same channels they would have watched anyway – to the detriment of Disney.

  6. One potential remedy for ESPN’s woes could be the inclusion of more high-traffic live professional sports such as European soccer and NHL hockey. Over the last couple years ESPN has been attempting to draw viewership by running trendy “talk” shows or others similar to its flagship Sportscenter program, while totally missing out on what people are willing to subscribe to cable to watch, actual live sports. While NBC/NBCSports currently have the rights to the British Premier League and the NHL, ESPN could potentially be well off looking into broadcasting the Bundesliga or Serie A.

  7. If you go to ESPN (whether their website, app, or one of the cable channels) you will get all of the stats and analyses you could ever ask for. There are plenty of sports nuts out there that drool for this stuff and people who know a lot of people like that would probably think that these fanatics could keep ESPN doing business for Disney forever. The trouble is that the real money is in live broadcasts of sporting events and as the post explains, this is increasingly becoming an online affair. ESPN needs to compete with such services as the NCAA March Madness app, which live streams every single game of the NCAA men’s basketball tournament for free. These broadcasts are like music, no one wants to pay for them anymore (sorry WatchESPN). Disney, with all of its film and general character revenue, will probably make out fine regardless, however ESPN will need to come up with a streaming system that is cheaper and more inclusive if it is to remain as prominent as it is today.

  8. I think another issue with ESPN’s declining market is the growth of programs such as Fox Sports and CBS who have poached some of ESPN’s top dogs. Fox Sports and other programs then compete with ESPN for rights to certain sporting events and this competition likely drives down ESPN’s overall market share.

  9. We have an interesting bundling story here: pay-per-view is an unbundled product, ESPN is a bundled product. So if streaming pushes towards the former, then ESPN will suffer independent of whether underlying demand is falling, fuel to the fire.

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