ESPN is without a doubt a giant among the cable networks in the U.S. and the leader in sports programming. Its popularity can be gauged from the fact that despite its subscription fee being the highest in the industry, it reaches roughly 95% of the U.S. pay-TV households. Although this is also resultant from the fact that most programming packages include ESPN bundled within them and usually subscribers do not have much choice. Nevertheless this can not negate the fact that the channel has strong demand and is very popular amongst sports enthusiasts due to its superior programming.
What role does it play in Disney’s (NYSE:DIS) future? To understand this, we need to understand ESPN’s contribution to Disney and the sensitivity of the stock to the changes in ESPN’s profitability.
We estimate that ESPN contributes close to 45% to Disney’s value, which is huge.
This estimate is based on the expectation that ESPN will more or less sustain its penetration within the U.S. pay-TV households, with only minor declines, and continue to grow its already high subscription fee. Clearly, Disney could suffer if ESPN was to face a greater competition, affecting its profitability. What could possibility lead to such a situation?
Rival media companies such as CBS (NYSE:CBS), NBCUniversal and News Corp (NASDAQ:NWS) are trying to improve their sports programming and challenge ESPN. NBCUniversal bagged rights for 2012 summer Olympics even though it is likely to lead to losses. Furthermore pay-TV providers such as Time Warner Cable (NYSE:TWC) are looking at options of dropping ESPN out of lower-priced programming tiers to cater to value-conscious subscribers. There is general unrest in the pay-TV industry over rising programming costs, bulk of which, can be attributed to sport channels such as ESPN.
The above mentioned factors could slowdown subscription pricing growth, lead to decline in household penetration for ESPN and affect margins. Furthermore these declines will be accompanied by decline in viewership and ad pricing, thus affecting ad revenues as well. Overall there is a potential for 10% downside to Disney’s stock if above scenario turns out to be true.
Our price estimate for Disney stands at $51.50, implying a premium of more than 5% to the market price.