Although Disney’s ABC TV network will generate about as much revenue ($5 billion) as Disney’s ESPN and ESPN2 combined in 2010, ESPN constitutes more than 30% of Disney’s value compared to only 5% for ABC. The difference is attributable to ABC’s margins which are a fraction of those of ESPN.
ABC’s margins are lower than ESPN’s for three important reasons:
(i) ABC is more dependent than ESPN on the volatile TV ad market
Cable networks like ESPN derive revenues from a combination of advertising and fees collected from cable / satellite companies (Comcast, DirecTV). Broadcast networks like ABC are solely dependent on advertising meaning that their revenues and margins are more impacted by TV ad pricing and the state of broader advertising market.
(ii) ABC has high content production costs
Cable channels like ESPN spend money to acquire content rights (sports games, TV shows, film) for re-distribution. Broadcast networks (ABC, NBC, CBS, Fox) spend more on new content creation and carry the burden of developing new hit shows which leads to higher content costs.
(iii) ABC shares revenues with its affiliates
Broadcast networks like ABC depend on broadcast stations (WCVB-TV, WSB-TV, etc.) to deliver their content. There are more than 200 stations that broadcast the ABC channel and only 10 of them are owned by Disney / ABC.
How much of Disney’s value would be attributable to ABC if it had margins comparable to ESPN?
A. 10%
B. 20%
C. 30%
D. 40%
Make a selection above and increase the ABC margin forecast to the ESPN levels to see the answer.
