On Thursday, January 8, 2015, Former FBI director Robert Mueller released its findings on the NFL's handling of the Ray Rice domestic violence incident. The report brought both positives and negatives for the NFL and commissioner Roger Goodell. Although the four-month investigation found the NFL did not see the now-viral video prior to its initial two-game punishment of Mr. Rice, Mr. Mueller and his team found the NFL's investigation should have been more thorough in light of the evidence initially uncovered.
For Commissioner Goodell, this is, sadly, par for the course. Mr. Goodell's reign has been characterized by diametric opposites -- excellent NFL monetization and financial performance, but an inability to handle a crisis. Any crisis, for that matter. Whether it be this unfortunate event, the continuation of the NFL's inadequate concussion policies that led to a lawsuit, or the handling of the lockouts with players and officials that led to the replacement referee fiasco, Mr. Goodell's NFL could best be described by an NCAA designation: Lack of Institutional Control.
This is a big risk to Disney
For the Walt Disney Company's (NYSE:DIS) shareholders, this is a major risk to their investment. Many associate the Disney brand with movies, theme parks, and Mickey Mouse-themed merchandise; but at its heart, Disney is a media company led by its ESPN network. As a matter of fact, as of Disney's latest annual report, its media networks division provided 43% of the company's revenue and 56% of its operating income.
While Disney's media networks division includes other stations, like ABC, the crown jewel of this division is ESPN. Last year, Wunderlich Securities assigned ESPN, as a stand-alone entity, a value of $50 billion, when Disney was valued at $137 billion. Considering Disney owns 80% of the channel, at that time, ESPN was 30% of Disney's total value. For perspective, ABC was assigned a value of "only" $3.2 billion.
NFL is important to ESPN, and both sides know it
As a sports-centered network, ESPN is both a partner and dependent on the popularity of America's love affair with sporting events. And there's no sport more popular than the NFL. Although viewership was flat on a year-over-year basis, the NFL averaged an audience of 17.6 million viewers per game in 2014.
ESPN directly benefits from these viewers by its Monday Night Football partnership, but perhaps benefits more indirectly through its reporting on NFL scores, highlights, and players on its wildly popular SportsCenter show, NFL Live, and a host of other programming.
As such, ESPN needs the NFL to be successful in order to enrich its shareholders. And both the NFL and ESPN know this. Consider Playmakers, the ESPN drama of a fictional professional football team: Although the show was a huge hit, ESPN abruptly cancelled it at the behest of the NFL due to concerns the show painted football players in a negative light.
While this show was cancelled in 2004, before the Ray Rice incident, the Aaron Hernandez murder trial, and the Adrian Peterson child-abuse case made Playmakers' story lines G-rated in comparison, the cancellation of a top-rated show in order to keep a content partner happy shows the NFL has the upper hand in negotiations. And that's due to the NFL's content being so highly demanded.
Simply put: Any risk to the NFL is a direct risk to Disney
As a company that derives so much value from this content, Disney is open to risks if that content is mismanaged or loses popularity altogether. Unlike a normal network that can drop shows and replace them quickly, ESPN cannot create new sports in the event the NFL's popularity wanes through fan fatigue, or gross mismanagement of the brand. Sure, it's possible many of those fans shift viewing habits to other major sports leagues -- MLB, NHL, or the NBA -- but timing would suffer, as would the direct investment ESPN pays for NFL programming.
While it's prudent to note the NFL is still immensely popular, there are signs popularity could wane in the future. Last year, a shocking survey found 61% of millennials identified the NFL as a "sleazy" organization, more than the 48% of all respondents who felt the same way. In addition, a 2012 ESPN Outside the Lines survey found many parents are less likely to allow their kids to play youth football amid those concussion concerns.
Eventually, concerns about player safety, off-field behavior, and the NFL's failure to address both will have to be fixed for the NFL to continue to thrive. In the end, Disney's investors are putting their faith in Roger Goodell to solve these complicated issues. In the wake of Mr. Goodell's initial Ray Rice conference, former NFL player and ESPN analyst Mark Schlereth said, "The majority of players that play in this league right now and former players do not trust the commissioner of this league." With Goodell's track record, Disney shareholders ultimately need to ask themselves if they feel the same way.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.