Image source: Walt Disney.

ESPN has been bleeding subscribers for years now. After peaking at around 100 million at the end of fiscal 2010, Walt Disney (DIS 1.09%) reported that subscribers fell to 92 million by 2015. Reports from Nielsen indicate the network continued to lose subs through 2016, but Disney has yet to release an official number.

While ESPN has been able to weather the subscriber losses with increased advertising and affiliate rates, the subscriber losses finally caught up to Disney's cable networks division last quarter. Revenue for the segment -- led by ESPN's family of networks -- fell 7% year-over-year, and operating income fell 13%. ESPN was the main culprit as its ad revenue declined 13% year-over-year.

Three big reasons for the revenue decline

During Disney's earnings call, CEO Bob Iger gave three main reasons for the shrinking ad revenue at ESPN.

A significant decline in daily fantasy advertising had a meaningful impact on the segment. Daily fantasy sports sites have come under fire over the past year, with some states banning them outright. Negative media coverage has led to lower interest in these sites as well, resulting in lower advertising budgets. Daily fantasy ad spending accounted for approximately 59% of total U.S. TV ad revenue growth during Disney's fourth quarter last year, according to Bernstein Research. The loss of these massive advertising budgets had an outsized impact on ESPN.

The Olympics also took place during Disney's fourth quarter, which diverted ad dollars away from ESPN. Comcast's NBCUniversal said it booked $1.23 billion in ad revenue for the Rio Olympics, up 20% from 2012.

The biggest factor, however, may be that Disney's fourth quarter was one week shorter this year than last. That naturally produces a 7% decline in ad inventory -- in line with the decline in revenue for the entire segment.

On the earnings call, management told investors they can expect continued declines in ad revenue due to the timing of college football bowl games this quarter. ESPN will air only three New Year's bowl games in the first quarter this year, compared with six last year.

Lower subscriber count

The loss of a week in the fourth quarter also negatively affected the affiliate fees collected by ESPN. But continued subscriber losses also factored into the decline, Disney admitted in its earnings release. Those factors were offset somewhat by contractual rate increases.

Nielsen reported that ESPN lost 621,000 subscribers in the month of October. While ESPN disputed the number, Nielsen reaffirmed its estimate. The Nielsen report follows several other estimates of continued subscriber losses from ESPN. Disney will release its subscriber counts for all of its networks in its annual report.

CEO Bob Iger argued during the call, "We believe that, to some extent, the causes of those [subscriber] losses have abated; notably, the migration to smaller packages." He added the growth of digital distributors like Sling TV and Hulu offer an opportunity for ESPN to reach more millennials and reduce the number of cord-cutters and cord-nevers.

A growing concern

While Disney's cable networks revenue declined 7% year-over-year, operating income fell at approximately twice that pace, mostly driven by programming costs. ESPN has some of the costliest content of any network, and these expenses are only going to continue growing.

Disney expects its overall cable programming expense will rise at least 8% next year, largely because of a new contract between ESPN and the NBA. That number could climb even higher if ESPN works out a deal with the Big Ten NCAA conference for additional content.

With its subscriber count declining and its content costs rising, ESPN could have a negative impact on Disney's overall growth going forward. While Iger is confident the worst is behind it, it has yet to show an ability to stem the losses. Investors should keep an eye out on Disney's reported subscribers when it releases its annual report and pay attention to estimates from ratings agencies for any improvement in the subscriber trend.