For many looking to "cut the cord," or do away with large cable-TV packages, there's a huge barrier to pulling the plug: live sporting events. For the nexus of all things sporting related, The Walt Disney Company's (NYSE:DIS) ESPN, Americans' love of all things sporting-related has benefited the company tremendously since former CEO Michael Eisner purchased the network -- perhaps fortuitously, as Disney bought Capital Cities Communications for then crown-jewel ABC.
And although Eisner is long gone from Disney, and regardless of initial intent, ESPN has been the engine for Disney's growth over the past decade -- so much so that last year, analyst firm Wunderlich Securities found the value of the network was $50.8 billion, or roughly 40% of Disney's total value at the time of valuation. Although the company doesn't release ESPN's figures separately, its Media Networks division was responsible for 43% of total revenue and 56% of segment operating income.
ESPN is an important part of Disney's financial success and should be watched. But lately there have been signs of a rockier road ahead. As reported by The Wall Street Journal, ESPN has lost 7.2% of its subscriber audience since 2011, as many non-sporting fans look to cut ESPN's monthly charge of $6.61 from their cable bills or cut the cord entirely, according to SNL Kagan. However, in a CNBC interview, CEO Bob Iger seemed to point toward offering ESPN as a standalone unit, joining many networks in direct-to-consumer distribution. While that sounds great on the surface, consumers will probably be disappointed in his comments.
Will the service even be worth the cost?
While Iger did say the company is looking into offering a direct-to-consumer solution for ESPN, he was firm that that day won't come until the next decade -- so that's a major blow to those hoping for a solution soon. And for those who are OK with the wait and are eventually looking to cut the cord and buy a streaming offering from Disney, it's possible the deal won't be as good as one might hope -- many analysts think the service would cost about $30 per month as an over-the-top offering for Disney to achieve the same profit as its $6.61 bundled offering.
More recently, ESPN has been hemorrhaging on-air talent, as the company is looking to cut costs. In the past few months, the company has let go of Grantland founder Bill Simmons, acerbic personality Keith Olbermann, and Colin Cowherd . And while these commenters were well known to rub colleagues and the leagues they cover in the wrong way, getting rid of them has the added benefit of saving the company money on production costs.
But the problem is not with on-air talent costs that are in the millions. It's the billions in broadcasting rights they have to pay to the leagues they cover. For example, the newest inked deals between the NFL, MLB, and NBA resulted in price increases of 73%, 100%, and 169% above the previous long-term deals. Those content costs are locked in, but the amount of people paying for them has been decreasing. The company will be forced to raise prices on the remaining subscribers or monetize that content in another way to keep ESPN's growth engine intact.
Right now, Disney's stock is firing on all cylinders, but long-term investors should watch Disney's Media Networks division closely going forward.
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.