Despite Disney CEO Bob Iger yesterday coming to the defense of ESPN, shares of the company's stock were trading at $105.50 each at presstime, down 4.6% from the close of business yesterday, when shares fell 9%, wiping $18B "off the company's market value," according to Richwine & Rigby of REUTERS. Yesterday's dip came a day after the company "lowered the profit outlook for its cable networks." Disney CEO Bob Iger also noted that ESPN "saw 'modest' subscriber losses." FBR Capital Markets analyst Barton Crockett said, "If Disney can get dinged, maybe nobody's safe" (REUTERS, 8/5). The WALL STREET JOURNAL's Flint & Ramachandran write any concerns about the future health of ESPN "are sure to spook investors" (WALL STREET JOURNAL, 8/6). In N.Y., Claire Atkinson writes when ESPN "sneezes, the rest of the media industry gets a cold" (N.Y. POST, 8/6).
GROUND IS SHIFTING: RE/CODE's Peter Kafka wrote in the "old days -- basically, up until a month ago -- most people in the video world assumed ESPN was untouchable." But investors today "seem to be looking at any media company that makes most of its money ... selling TV shows and TV advertising and saying Screw it! You’re all in trouble" (RECODE.net, 8/5). In N.Y., Steel & Barnes write not only has subscriber and distribution revenue "come under pressure as viewers choose not to pay for traditional cable and satellite service, but so, too, has ad revenue in the face of huge declines in TV ratings." BTIG Research media analyst Richard Greenfield said, "You have both legs of the media stool being kicked. The consumer is shifting" (N.Y. TIMES, 8/6). Gabelli Funds Portfolio Manager Chris Marangi said, "ESPN is viewed as undroppable by the distributors and that's probably true. The problem is people can still leave the traditional ecosystem, which is happening and maybe happening at an accelerating rate, and the sports networks, including ESPN, are very levered to that because their affiliate fees are so high" ("Fast Money Halftime Report," CNBC, 8/5).
SUBSCRIBER BEWARE: The WALL STREET JOURNAL's Miriam Gottfried in the publication's "Heard On The Street" feature writes Iger "gave an impassioned defense" of ESPN, but the company's action of lowering its expectations for domestic cable affiliate revenue "spoke louder than those words." Iger said that Disney "isn’t ready to take the 'radical' step toward an Internet offering." But Gottfried notes Disney "may feel pressure to pivot more quickly." Investment firm Jefferies estimated that ESPN’s overall revenue is "about 75% of Disney’s reported cable-networks revenue," and assuming all non-affiliate revenue "is advertising and assigning a 3% growth rate, results in annual revenue growth of 5% at ESPN for the next five years." Research firm MoffettNathanson noted rights fees at ESPN "rose by 13%" last year and 19% in '15. Nonsports programming costs "have grown at a somewhat slower pace." But MoffettNathanson estimates that the pace of growth in ESPN’s programming and production costs "should level off to 5% a year" from '16-20. Assuming that ESPN "amounts to about 25% of Disney’s operating income" this year and "adjusting for Disney’s 80% ownership of the network, ESPN will earn" about $4.5B in operating income on $11.9B of revenue in '15. Gottfried notes that 38% operating margin "would be significantly below the roughly 45% historical margin this model implies for ESPN." But it "shows ESPN margins moving back to 42%" by '20. There are "compelling reasons to believe declines will accelerate as the cost of the cable bundle rises and the availability of high-quality online alternatives increases" (WALL STREET JOURNAL, 8/6).
