The National Basketball Association paused its season in March after a player from the Utah Jazz (Rudy Gobert) tested positive for the coronavirus. A few months and lots of expensive planning later, the league was able to restart in modified fashion and is nearing the point of crowning a champion.
Getting to this point hasn't been easy. In trying to ensure the safety of players and staff, the NBA created a virus-free, bubble-like atmosphere at Disney (NYSE:DIS) facilities in Orlando, Florida.
Many, including myself, thought that with the surging demand for in-home entertainment, and the long absence of major sports during the pandemic, there would be strong pent-up demand for televised NBA games. But the TV ratings suggest that isn't the case for the NBA Finals so far.
How bad is it?
The first three games of the NBA Finals attracted an estimated 7.4 million, 6.6 million, and 5.9 million television viewers, respectively. Each of the three games set successive record low ratings. The previous record for the least-watched NBA Finals game was set back in 2003 when the then-New Jersey Nets (now Brooklyn Nets) played the San Antonio Spurs. That game brought in 8.1 million viewers.
Admittedly, after a long hiatus where there were no major sports to watch, sports fans now actually have an abundance of options to choose from. The increased competition for eyeballs could be one explanation for the record lows. Another could be that watching the games with no fans in the stadium is a lot less exciting.
Regardless, LeBron James' Los Angeles Lakers are up three games to one against Jimmy Butler's Miami Heat going into Friday night's Game 5, and if the trend continues, this may become the worst-rated NBA Finals for a long time to come.
Why this is bad for Disney investors
Disney's media segment in fiscal 2019 generated $7.5 billion in operating profits for the company -- the highest among any of its business segments. That profit creation ability has taken on increasing importance as the coronavirus pandemic is wreaking havoc on its other businesses. In the first nine months of fiscal 2020, the media segment accounts for 95% of the company's total operating profits.
Disney's ABC network has the broadcasting rights for the NBA Finals and so benefits by generating ad revenue from the games. More eyeballs equal more dollars. What's more, the network depends on people to stick around after the game and watch the program that follows as well as using the program to showcase other content available on the network and on other Disney-owned networks. Estimates show 2.2 million people stayed and watched the program (the sitcom Blackish) that followed the NBA Finals on Sunday.
The NBA Finals in 2019 brought in an estimated $288 million in revenue alone for Disney's media segment. With record-low viewership, and company's like Coca-Cola significantly reducing overall marketing budgets, that figure is likely to be much lower for 2020. And with many of Disney's operations either at lower capacity or closed temporarily, the letdown from the NBA Finals is coming at an inopportune time for this consumer discretionary stock.