Disney Stocks Continue To Be Affected By ESPN

Disney’s stock share has been taking a hit because of uncertainty within the media industry over a change in habits from viewers and it’s Disney’s sport arm, ESPN, that is becoming one of victims of “cord-cutting”, with people cancelling cable or satellite due to an increase in online content.

Fortune reported over the summer, “The big fear is that the network’s lucrative stranglehold on sports is disintegrating, pulled apart by a combination of cord cutting, streaming via digital services and competitive pressures from all sides.”

ESPN receives an estimated $6.60 per subscriber each month, which brings in more than $7 billion a year before any additional revenue is thrown in, which accounts for more than half of Disney’s annual profit.  With subscribers dropping each year (down 7% from 2013).

There is also concern that ESPN isn’t adapting quick enough to changes in how entertainment is consumed and while big hits like Frozen and Star Wars are bringing in huge sums of money for the company, analysts are worried that even if Disney turn ESPN into a streaming service like Netflix, it won’t bring in the same amount of profit as the current system.

In a secularly fragmenting media environment, ESPN is the most exposed. This is because ESPN’s business model depends on the cross subsidy of the pay TV bundle. Consequently, given ESPN’s fixed cost structure and variable revenue model, subscriber losses are likely to have a disproportionate impact on the business model. In our opinion, ESPN accounts for a disproportionate share of Disney’s cash flow and the gap between OCF (7%) and EBIT growth (17%) over the last 2 years likely already points to this pressure from subscriber losses. This issue could be compounded by potential step ups in cost recognition.

What do you think of ESPN?