ESPN, ABC Continue to Be a Drag on Disney Earnings Growth

Cynthia Littleton
Variety

Bob Iger’s tenure as CEO of Disney has been nothing less than stellar for investors. But there is an area of concern for Wall Street: the television division.

Disney has not significantly expanded its presence in TV under Iger’s watch, as it has in film with the key acquisitions of Pixar, Marvel, and Lucasfilm. The TV units have had a rough year, from accelerating subscriber losses at ESPN to ratings declines at ABC. Plus, the transformation of ABC Family into Freeform has been an uphill climb, with the cable network struggling to clearly define its mission.

Disney’s trials in TV reflect broader industry upheaval; at ESPN, cord-cutting and cord-shaving eating into the affiliate revenue base. Cable affiliate revenue has been the bedrock of earnings for media conglomerates, and Disney is no exception. By some estimates, ESPN accounts for as much as 30% of Disney’s operating income, and the sports powerhouse has shed 10 million subscribers in the past five years.

ESPN is, in some ways, suffering from its own success. Because of its marquee sports programming, it is by far the highest-priced cable channel for MVPDs to carry, commanding a monthly fee of more than $7 per subscriber. Disney over the years has been relentless in pushing MVPDs for steady fee increases because of ESPN’s status as a must-have channel for sports fans. Now that high cost serves as an incentive to MVPDs to leave ESPN out of smaller bundles offered for lower prices than the traditional MVPD basic package.

Meanwhile, the long-term bills for ESPN’s sports rights have skyrocketed in the past few years, due in part to renewed competition from Fox Sports and NBC Sports. That has set up a perfect storm of rising costs, softening ratings, and falling affiliate revenue.

During Disney’s fiscal fourth-quarter earnings call on Nov. 10, executives warned that 2017 earnings growth would be more “modest” than in the past few years, in part because of the shakeout in TV. Specifically, CFO Christine McCarthy pointed to a $600 million increase in ESPN’s NBA rights fees next year as a big factor in the projected 8% increase in programming costs for its cable division in fiscal 2017.

It has also been a hard year for ESPN on the advertising front. NBC’s summer Olympics telecast drew dollars away from other sports outlets, and the unexpected legal clampdown on fantasy sports leagues DraftKings and FanDuel took a toll.

Outside of ESPN, networks haven’t been an investment priority for Iger, says Michael Nathanson, longtime Disney watcher and senior analyst with Moffett-
Nathanson Research. The Disney Channels Worldwide business has international scale, and Disney is a 50-50 owner, with Hearst Corp, of A+E Networks, home of A&E, History, and Lifetime. But Disney has not been a buyer of cable networks, or significantly expanded ABC, in recent years.

“Bob’s focus has been on branded assets with recurring revenue streams that deliver franchises that can be moved through different parts of the company,” Nathanson says. “ABC doesn’t really fit well with the other parts of Disney.”

ABC has been in a two-seasons-long ratings slump, mired in third place behind CBS and NBC. Viewership for the 2016-17 season to date is down 13% compared with last season in the adults 18-49 demographic (1.9 rating) and off 9% in total viewers (7.2 million), according to Nielsen.

The Alphabet, like the other broadcast networks, has been buffeted by the migration of viewing to time-shifted platforms and away from the live linear telecasts that bring in the bulk of ad revenue. Because of that shift, network profits are increasingly dependent on the ability to launch shows that can be sold to streaming services and international outlets.

ABC has fielded a promising new drama this fall in “Designated Survivor,” which it co-owns with Entertainment One. ABC Studios is behind the much-praised family comedy “Black-ish,” now in its third year. But beyond those shows, ABC’s pipeline of salable series is thin (although there is a host of new shows on deck for midseason).

Disney/ABC TV Group president Ben Sherwood (who oversees all TV but ESPN) has been on a mission to reinvent ABC and other aspects of Disney’s TV business since he took over the division as Iger’s lieutenant nearly two years ago. By the looks of Disney’s 2017 financial forecast, Sherwood has his work cut out for him.

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