Please ensure Javascript is enabled for purposes of website accessibility

Is Disney's Secret Weapon About to Backfire?

By Rick Munarriz - Apr 30, 2020 at 10:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ESPN seemed to be sitting pretty this year -- collecting affiliate fees without the burden of sports programming costs -- but that party may be coming to an end.

ESPN has gone from being a workhorse to an albatross at Disney (DIS 2.33%), but there is -- or at least was -- a chance that the world's leading sports programming network could deliver strong operating earnings growth when the media giant needed it the most. ESPN could've been the secret weapon that helps Disney offset the weakness at its currently shuttered theme parks and its studio entertainment arm with no open movie theaters to distribute its films. 

The bullish case for ESPN is that, with sports leagues around the world canceled and folks still paying full price for the cable network, Disney would be scoring juicy margins for its sports programming empire. ESPN doesn't have to pay for games that aren't played, and the network has relied on documentaries, talk shows, and replaying classic games as ways to fill the void. However, now cable and satellite television providers are starting to ask for a rebate from ESPN. At least one attorney general is asking that the pay-TV companies pass along those potential savings to consumers. It's quite possible that the ESPN tailwind of the past six weeks could be a headwind in the very near future. 

The set of the Mike & Mike show on ESPN.

The set of the Mike & Mike show on ESPN. Image source: ESPN.

Playing to win

There's a consumer appetite for live sports. That became evident this past weekend, when ratings for the NFL draft -- when pro football teams select their new players among eligible upperclassmen -- clocked in 37% ahead of last year's viewership. Even the less glamorous second and third nights of the draft outdrew the initial World Series and NBA Finals games from last year. 

The big audience turnout for the draft should prove comforting for Disney and its majority-owned ESPN. We may be streaming Tiger King and the third season of Ozark, but there's still some serious percolating demand for live sports in some shape or form. 

Folks pay more for the ESPN family of sites than any other cable network. If your pay-TV bundle includes ESPN and its siblings, you're probably paying more than $9 a month for the sports programming. Investors used to relish ESPN's dominance, but with cord cutters kicking cable and satellite television services to the curb, and bidding wars for sports rights driving content costs higher, it's the iconic sports network getting squeezed. 

Savvy investors picking up on the ramifications of what the suspension of the NBA season on March 11 would mean in terms of relaxing Disney's costs -- and the ripple effect into other leagues that would eventually halt or delay their seasons -- figured that ESPN would be a baseball diamond in the rough. ESPN would continue to collect the chunky affiliate fees, but any potential dip in advertising revenue or online streaming subscriptions would be more than offset by the surge in operating profit. 

We'll get a clearer picture on how the last couple of weeks of March played out for ESPN when Disney reports its fiscal second-quarter results next week, but now we're learning that cable giants want some of their money back. A growing number of service providers don't want to pay ESPN's affiliate fees for April, arguing that the media network giant isn't delivering on their live sports programming obligations.

It gets worse. New York Attorney General Letitia James is asking the seven major cable and satellite television providers in her state to provide financial relief for its customers. If it turns out that consumers don't have to pay for ESPN, you can be sure that the pay-TV companies won't be paying either. In short, ESPN should provide a tailwind for margins in next week's quarterly report, but it will probably be a headwind again for the new quarter. 

Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
$109.11 (2.33%) $2.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.