The Walt Disney Company's (NYSE:DIS) stock has recently hit a speed bump. Versus the S&P 500's 34% three-year return, shares of The House of Mouse have increased only 18%. The impetus for Disney's lagging stock performance are struggles in the company's media networks division, most notably its ESPN family of networks. In fiscal year 2017, Disney's media networks represented approximately half the company's total operating income.
As the chart shows, year-over-year operating income not only continues to fall, but the rate of decline is also increasing. In 2014, Disney reported a 7.4% increase from the division, falling only 1 percentage point to 6.4% the following year. Fiscal year 2017 produced a massive 11% year-over-year drop, signicantly worse than 2015's 0.5% decline. Last year, ESPN's weakness was particularly worrisome for the Walt Disney Company as it resulted in a year-over-year decrease in total operating income. Unsurprisingly, in 2017 the Walt Disney Company reported lower revenue, net income, and earnings per share than it did in the prior year.
For Disney to reverse its fate, the company will have to effectively monetize its ESPN brand. Recent news is encouraging for Walt Disney investors.
Women watch sports, too
You can't fault Disney for positioning its advertising to male audiences as sports have typically been seen as a male-heavy demographic. However, that's not necessarily the case. For example, the NFL has a fan base that's 45% female, according to NFL vice-president of marketing strategy and fan development Johanna Faries. This figure is supported by analytics firm Athletic Business, which notes 53 million women watched the 2015 Super Bowl, 46% of the total audience of 114 million.
Disney is now seeking to take full advantage of this demographic. An article in The Wall Street Journal reported that ESPN is now using this data to convince brands to reach women by running female-friendly ads on its channels during major events. In this year's college football national championship game, Northwestern Mutual ran a female-targeted advertisement and Warner Bros. ran a spot for Paddington 2, a family-friendly movie.
Will this lead Disney back to growth?
Sports are considered the holy grail for advertisers. First, sporting events often command larger audiences -- in the first half of 2017, sporting events or pregame commentary accounted for 23 of the 30 most-watched programs. On nonelection/transfer-of-power years, this figure is generally higher. Second, with a 95% live-viewership rate (the percentage of people who watch the content live) versus 66% or less for scripted television, advertisers are more confident their ads will be viewed rather than skipped over.
Broadening potential advertisers is a wise strategy that should increase spot rates, but it's unlikely to offset the network's biggest problem: declining subscribers. Leagues understand their unique proposition to advertisers and sports rights are astronomical -- recent contract extensions for the NBA and NFL cost ESPN nearly 200% and 73% more, respectively, than the prior deals -- and ESPN is no longer able to pass along the costs to cable subscribers without substantive sub-losses. ESPN's huge $7.54 monthly fee has led to a loss of more than 13 million subscribers in the last six years.
For now, ESPN will most likely continue to post disappointing results from its media networks division and continue to lay off on-air talent at ESPN. However, declines in operating income will eventually ameliorate, and the company's host of other businesses, specifically its growing studio entertainment business, should help the stock offset media network weakness.