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What's Wrong With The Walt Disney Company Today?

By Anders Bylund - Jul 15, 2014 at 2:00PM

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Disney is one of the Dow's weakest performers on Tuesday. What's wrong in the House of Mouse?

The Dow Jones Industrial Average ( ^DJI 0.00% ) is having a dull day, hanging within a few points of breakeven as of 1:30 p.m. EDT. Walt Disney ( DIS 0.29% ) isn't helping: The Dow's only media titan is down 0.9%, making it one of the worst performers on the Dow today. Disney's drop is taking about five points off the Dow's total value.

So what's wrong in the House of Mouse today?

According to The Wall Street Journal and its anonymous insider sources, basketball broadcasting rights are about to become much more expensive.

The National Basketball Association is negotiating new contracts with Disney's ABC and ESPN, as well as Time Warner 's ( TWX ) Turner Broadcasting networks. The current eight-year deals are set to expire in 2016, so it's about time to lock up the broadcasting rights for the next decade or so.

The networks currently pay between $400 million and $500 million per year for their NBA licenses, and the league reportedly stands to double the size of these checks.

It's not just a simple price hike. Turner reportedly wants a piece of the big-ticket NBA finals action, which currently runs exclusively on Disney's ABC network. The finals averaged 15.5 million viewers per game this year. It's a drop in the ocean of the Super Bowl's 111 million viewers, but it beats World Series ratings and is far ahead of hockey's Stanley Cup viewership.

There are untold millions of advertising dollars at stake here, particularly because the new NBA deals should fix the rights for another eight years or more. This championship wrinkle could turn into a bidding war and may stretch the negotiations well into 2015.

That's the thorn in Disney's side today, as the NBA might raise its ESPN and ABC fees by something like $4 billion over the next eight years. Of course, Time Warner also suffers, and its shares are falling 0.5% today.

But don't expect Disney and Warner to simply absorb these rising costs. If the NBA deals work out as the Journal is suggesting, you'll see cable and satellite networks footing at least some of the bill in the form of higher carriage fees for Turner, ESPN, and ABC. As such, cable providers like Time Warner Cable (NYSE: TWC) and Comcast ( CMCSA -5.29% ) will likely pass their increased costs on to consumers in the form of higher monthly bills, demonstrating the domino effects of rising content costs.

This cascading cost structure works because many viewers simply cannot live without their NBA action. There's no alternative to today's cable and satellite packages, assuming you're looking for your hometown heroes' games.

The NBA League Pass comes with an online streaming component, but it only covers out-of-market games and excludes the nationally televised games you'd find on your local ABC or Turner affiliate. So there's that option, but League Pass Broadband gets terrible reviews and comes with severe restrictions. Almost makes you wonder if the NBA prefers the old cable distributions model over this newfangled broadband idea.

As the media landscape moves further into the digital era, you have to wonder if rising content costs will push more viewers into the cord-cutting trend. Maybe that's the fear that keeps the NBA from offering a decent online option.

Will that plot twist hold Disney and Warner back from escalating into a full-on price war? Is the NBA setting a costly precedent for the other major sports leagues? How much of these costs will the American consumer absorb before demanding a la carte access to one sport but not another? How long will the current system of pre-packaged cable channel bundles survive once the sports content steps aside?

So many questions, very few answers. It'll take years to sort out this chain reaction of uncertain outcomes. That uncertainty is making Disney one of the Dow's worst performers today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$35,227.03 (0.00%) $0.00
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$150.81 (0.29%) $0.44
Time Warner Inc. Stock Quote
Time Warner Inc.
TWX
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$49.58 (-5.29%) $-2.77

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

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