There's no denying that the verbal sparring between activist investor Nelson Peltz and Walt Disney (DIS -0.01%) CEO Bob Iger has been fun to watch. The proxy fight will probably lead to structural changes -- even more than it already has -- even if we can't yet predict what those changes might be.
Whichever of these two men ends up winning this well-publicized argument, however, the 2024 priority should be the same. That's Disney's TV business, consisting of ABC, The Disney Channel, National Geographic, ESPN, A&E, and a handful of other channels. This division remains the company's single biggest source of revenue and operating income. If Walt Disney is going to thrive, it needs to do so on this front more than any other.
And there's the rub. Disney's television revenue has been stagnant since 2019, while its operating profits have been deteriorating since 2021. Something's got to change, and soon.
Not even ESPN is helping Disney's TV business
Yes, Walt Disney's theme park and resort business is massive. And technically speaking, depending on the year in question, the company's combined domestic and international parks and experiences arm can be Disney's top breadwinner, as measured by revenue and/or operating income.
In a normal environment, unlike the one we've been in for nearly a couple of years now, Disney's cable television business is its champion. It accounted for more than half of last fiscal year's operating income of $12.9 billion. That's still roughly in line with the theme parks and experiences' contribution to the bottom line.
But there's a legitimate concern to consider here. Its domestic parks and experiences business, which is much bigger than its international theme parks business, is finally running into a revenue and profit headwind. At the same time, Disney's cable TV revenue and operating income are also hitting a wall. They've been hitting a wall, in fact, since 2020.
Date source: Walt Disney. Chart by author. Figures are in millions of dollars.
These numbers include results from Disney's lauded sports channel, ESPN, which hasn't had the best of years despite the post-pandemic recovery of the sports industry. ESPN's operating income only grew slightly last quarter. Before that, it was falling. Ditto for revenue.
Data source: Walt Disney. Chart by author. All figures are in millions.
While this sports-centric brand remains the premier name in cable TV's sports programming, its tepid growth is still a companywide problem, as it alone makes up about half of Disney's TV business. If it's not thriving, Walt Disney's entire TV arm isn't thriving either.
Industrywide headwinds are blowing
Much of this weakness is attributable to plain old cord-cutting. Data from Leichtman Research Group indicates the nation's major cable television companies shed another 465,000 net paying customers last quarter alone. That brings the three-quarter/year-to-date tally of domestic cable cancellations up to more than 4 million, extending a downtrend that first got going in 2015. The nationwide count has fallen from a little over 100 million cable-customer households then to just a little over 70 million now.
That said, it would be naive to ignore the toll that alternative advertising venues are also increasingly taking on cable's pricing power as an advertising medium. Market research outfit Omdia believes free-to-watch, ad-supported streaming platforms will collect $6.3 billion worth of worldwide ad revenue this year alone, with 80% of that figure being driven just within the United States. Ad-supported and subsidized streaming platforms, meanwhile, should handle $39 billion worth of advertising business, according to estimates from Digital TV Research. Roughly one-third of that business will also be done in the same U.S. market that Walt Disney's cable arm serves.
Those figures are getting too big for any cable TV player to ignore. That's particularly true given that television ad rates fell again for the current fall season of television shows.
But the writers' strike? It may not have been as much of a problem as first suggested. TV ad spending has actually been in a shallow decline in the United Stets for several years now. Indeed, WARC Data reports 2019's pre-pandemic television ad-spending of $61 billion was the least spent on TV advertising in the United States since 2011. These figures were also expected to continue sliding at least for the next several years even before the strike materialized.
Connect the dots. This business hasn't been wildly marketable in a long, long time.
Disney stock is tough to own until cable TV is fixed
Bob Iger is seemingly well aware of the company's cable television woes. In July, he commented that the company's cable TV arm "may not be core" to its overall business, adding that he and other executives would soon be taking an "expansive" look at Walt Disney's television arm. He's since reined in sweeping assumptions that the comment meant a sale of a least some of its TV assets was on the table. Just last month, he plainly stated these assets are "not for sale."
Still, all of it acknowledges he knows something must change for this important profit center.
In the meantime, Iger and his team continue working on Walt Disney's next best growth bet. That's streaming. Although the combination of Disney+, Hulu, and ESPN+ aren't yet profitable, they are generating almost as much revenue as the company's cable TV arm. That's something to build on, including an eventual pairing of Hulu and Disney+. Presumably, ESPN+ will be folded in the standalone streaming version of ESPN once it launches.
There is no easy ESPN transition in the cards, though. The sports-centric network is one of the top reasons consumers continue paying steep prices for cable television. Once it becomes available outside cable bundles, many consumers will probably sacrifice their access to The Disney Channel, A&E, and Disney's other less-watched channels; these people can gain access to ABC's programming through other means as well, like an aerial antenna.
That shift will put tremendous pressure on the other half of Disney's cable TV operation. There's also no assurance that all cord-cutters are truly interested in paying a premium for access to a streaming version of ESPN.
Meanwhile, although Walt Disney intends to dial back its total spending on content, less new programming could bring its already-slowing streaming subscriber growth to a screeching halt before this arm ever works its way out of the red.
Data source: Walt Disney. Chart by author. Figures are in millions. Note that last quarter's growth surge stemmed from heavy promotions of the international version of Disney+
It's a tricky set of problems, to be sure. It's not clear how the company will be able to solve one without making another one worse. What is clear is that fixing its cable TV business needs to be prioritized. It's carrying half of the company's current profit weight, funding many of Disney's other, smaller growth initiatives.
More to the point, Disney stock could continue struggling until this fix is in place.
