For much of the last three years, shares of The Walt Disney Company (DIS 0.93%) have been range-bound, primarily on investor fears involving the future of its flagship ESPN sports network. From a peak of 100 million subscribers in 2011, those numbers have dwindled to less than 88 million today. Based on recent news, that decline might continue.
The Wall Street Journal is reporting that several popular cable channels are banding together to create a new streaming service geared specifically toward those not interested in sports programming. Discovery Communications, Inc. (DISC.A) (DISCK), Viacom, Inc. (NASDAQ: VIA) (VIAB), AMC Networks Inc. (AMCX -2.24%), Scripps Networks Interactive, Inc. (SNI), and A+E Networks (a joint venture between Disney and Hearst Communications) will be part of the undertaking.
The service, reportedly called Philo, is expected to be available in the coming weeks with a subscription costing less than $20 per month. While the exact lineup has not been announced, it will likely feature programming from Discovery Channel, Animal Planet, TLC, HGTV, Food Network, MTV, Comedy Central, and Nickelodeon, among others.
With cord-cutting on the rise, and a growing number of options available to consumers that want to skip sports, many have left the sports network for dead -- but that's a big mistake.
Are ESPN's days numbered? Image source: ESPN.
A new paradigm
The proliferation of online streaming video has been a game changer, putting increasing pressure on the cable industry. Cord-cutting is accelerating, according to research firm eMarketer, which claims 22.2 million subscribers have ditched cable in 2017, 33% more than in 2016, and much higher than the 15.4 million it previously predicted. The company estimates that by 2021 cable subscribers will drop to 181.7 million, having fallen 10% over the previous five years.
Additionally, fewer younger viewers are signing up for pay-TV in the first place. Cord-nevers, as they are called, are expected to grow from 32.5 million last year to 41 million by 2021. In 2016, an estimated 23% of U.S. households had canceled their cable subscription or never signed up for one to start with.
Fewer people are paying for cable, opting instead for streaming options from providers like Philo or Netflix, Inc. and getting their sports elsewhere, if at all.
These trends were likely the catalyst for Disney's decision to launch its own streaming options. The company already has a 33% stake in BAMTech, the video streaming platform founded by Major League Baseball, with plans to increase that stake to 75%. It plans to use the technology to launch an ESPN streaming service in early 2018. According to Disney, customers who are cable subscribers will be able to access the ESPN television networks using the same app.
With cord-cutting on the rise and more options out there for people that don't want to pay for access to sports programming, there are plenty of trends working against ESPN, but the numbers make it clear there's plenty of life left in the network and its parent, Disney.
Fun with math (Or how much of that is from ESPN?)
Disney doesn't specifically disclose how much revenue it generates from ESPN, but a review of publicly available information can get us close.
In the fiscal third quarter of 2017, Disney reported total revenue of $14.24 billion. Of that amount, $5.87 billion or 41% came from the media networks segment, but there is more to the division than just ESPN.
Cable networks accounted for the majority of media networks revenue, at $4.09 billion, representing 70% of the media segment, but only 29% of the company's total revenue. Disney has numerous cable channels, including The Disney Channel, Disney XD, and Freeform (formerly ABC Family) as part of the media segment, so only a portion of that $4 billion is a result of ESPN.
There is another way to approximate ESPN's actual contribution. According to Business Insider, $9.06 of each monthly cable bill pays for ESPN's top four networks -- ESPN, ESPN2, ESPNU, and SEC Network. Using the most recent Nielsen estimates of 87.2 million subscribers for the network, this would amount to a quarterly contribution of $2.37 billion, or 16.6% of Disney's quarterly revenue.
Hearst Communications owns a 20% stake in ESPN, so accounting for that, ESPN provides $1.9 billion each quarter to Disney's revenue, or roughly 13.3% of Disney's total revenue.
There are numerous limitations to these estimates. Not every cable bundle will contain all four of ESPN's top networks and the reported subscriber's approximations don't yet include those with so-called skinny bundles -- lower priced options like SlingTV, Vue, or DirecTV Now.
By these calculations, however, ESPN likely produced somewhere in the neighborhood of $1.5 to $2 billion of Disney's $14 billion in quarterly revenue.
ESPN is making the transition to a digital age. Image source: ESPN.
Death is not imminent
Though the sports network may gradually be losing subscribers, Disney has still been able to increase revenue from its cable segment. For the fiscal year ended October 2016, Disney's cable networks produced revenue of $16.6 billion, an increase of 29% over the $12.9 billion generated in the fiscal year ended October 2011 -- even though ESPN lost nearly 13% of subscribers since its peak in 2011. Disney has been able to make up for waning subscribers by increasing affiliate fees. This speaks to the pricing power Disney has, even in the face of subscriber losses.
When a newspaper incorrectly printed Mark Twain's obituary, he is quoted as saying, "the reports of my death are greatly exaggerated." I believe the same can be said of ESPN. In 2016, it was still the highest rated cable channel for men and adults between the ages of 18 and 54. Though challenges remain, ESPN is still the most dominant sports network in the world, and it isn't going away any time soon.
