NFL Fuels Disney’s ESPN Engine
Disney (NYSE:DIS) competes with other media conglomerates like News Corp (NASDAQ:NWS), Time Warner (NYSE:TWX), CBS (NYSE:CBS) and Viacom (NYSE:VIA) in a variety of businesses. These businesses include cable networks, broadcasting networks, movie studio and consumer products.
We estimate that media networks, which includes both cable and broadcasting networks, is the most valuable segment for Disney, contributing about 63% of the company’s value. Within this segment, ESPN leads the way contributing close to 30% of Disney’s stock value, or roughly 47% of its total media networks value.
Our price estimate for Disney stands at $39.72, implying 6% upside to market price.
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What makes ESPN so valuable? A large portion of ESPN’s value comes from the National Football League (NFL).
NFL is ESPN’s Driving Force
Media companies pay tremendous amounts for broadcasting rights to the NFL, which is consistently one of the most watched programs in the US. ESPN’s agreement with the NFL spans 8 years (from 2006 to 2012) and amounts to $8.8 billion. Assuming even distribution over the contract term, this translates to annual payments of about $1.1 billion. Other broadcasters like Fox, CBS, and NBC pay between $600 million and $700 million annually under their agreements with the NFL. [1] These deals are particularly valuable to broadcasters due to stringent on-field advertising restrictions in the NFL, as well as the league’s widespread popularity in large consumer markets.
We estimate that operating costs for ESPN (excluding SG&A) will amount to about $2.3 billion for the 2010 fiscal year, the majority of which is attributable to programming and production costs. [2] To illustrate the NFL’s value to ESPN (Disney’s largest individual product line), we note that NFL licensing payments amounts to almost half of ESPN’s total operating costs (ex-SG&A) for fiscal 2010. If we were to make a blanket assumption that ESPN’s revenue breakdown is in line with its operating costs breakdown, it could imply that the NFL is accountable for almost half of ESPN’s profit (or roughly 14% of our price estimate for Disney’s stock).
To put this idea in perspective, ESPN features a wide variety of sports on its platform from football and baseball to NASCAR and college sports. Even within football broadcasts and publications, a large portion of ESPN’s content comes from college-level athletics.
50% of SG&A costs is a lot to allocate towards one content supplier, but the revenue hit could be much greater if ESPN were to discontinue its NFL licensing agreements. Many subscribers might even lose interest in the network.
You can see the complete $39.72 Trefis price estimate for Disney’s stock here.
Notes:- NFL Media Rights, SportsBusiness Daily, Sep 6 2007 [↩]
- Based on our allocation of cable network operating expenses according to estimated revenue contribution from ESPN [↩]