Disney (NYSE:DIS) is a consumer-focused company and therefore building a brand that can touch consumers’ lives becomes really important. Disney boasts of several such brands including Disney, ESPN, Marvel, Pixar and ABC. While ESPN and Disney brands have contributed a great deal to the company’s growth and profits, ABC hasn’t been able to keep up and has slid in recent years.
The company owns a few networks and production studios under the ABC brand including ABC Family, ABC Network, ABC Studios and ABC Media Productions. We estimate that these together constitute just about 12% to 13% of Disney’s value in comparison to 45% by ESPN. Why is this contribution so low? It’s because of the weakness in ratings and the larger-than-life performance of ESPN.
Can ABC do better? We think so, but it will need to widen its appeal and focus more on well-scripted programs.
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ABC Network Could Do Better
If we look at the performance of ABC’s businesses (ignoring ABC Family’s revenues for the purpose of simplifying comparisons), we find that revenues haven’t grown much in recent years. In fact, revenues stood at $5.73 billion in 2011 compared to $5.79 billion in 2007.  Some of this can be attributed to 3.8% revenue decline during the recessionary period of 2008. However, the recovery has not been stellar and 2011 saw a slight decline again. Furthermore, revenue growth for 2012 is going to be more or less flat. So what’s really happening here?
The secular trend of broadcasting networks losing viewers to cable and alternative platforms is at play. We estimate that ABC Network’s average viewership has declined from 3.7 million in 2007 to 3.1 million in 2011. We expect a further decline in 2012 as management has reported weak ratings for the past two consecutive quarters.  This is not something that ABC cannot repair as demonstrated by CBS (NYSE:CBS) and Comcast’s (NASDAQ:CMCSA) NBC. CBS has been doing well where other broadcasting networks have suffered. Additionally, despite weak performance in previous seasons, NBC has got off to a fantastic start in the new TV season that began in September 2012.
Disney has made some acquisitions in recent years primarily catering to its movie business. However, the company could potentially leverage these acquired franchises or take inspiration from them and introduce well-scripted programs on ABC Network. The network seems to be doing well among women aged between 18 and 34, but it could expand its appeal to other demographics by introducing relevant programs. 
TV Production & Distribution Has Been Growing
The other component of ABC’s business is production and distribution of the content it develops under the banners of ABC Studios and ABC Media Productions. TV production & distribution revenue has increased from about $1.7 billion in 2007 to $2.3 billion in 2011 as per our estimates.
We expect this growth to continue as Disney increases the amount of programming and the extent of distribution. There is a high demand for quality programming among pay-TV networks as well as streaming companies such as Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Hulu, etc. ABC can leverage this, assuming it produces quality content, and grow its revenues. Increased distribution and licensing will aid margins as well. There is a significant potential to be unlocked in emerging markets where demand for pay-TV is increasing and, thus, the appetite to consume video content is on the rise.
Our price estimate for Disney stands $54.60, implying a premium of more than 10% to the market price.Notes:
- Disney’s SEC Filings [↩]
- Disney’s Q3 and Q4 fiscal 2012 earnings transcripts [↩]
- ABC Ranks as Daytime’s Number 1 Network for 9th Consecutive Week in Women 18-34, Delivering the Programming Block’s Best Numbers in Well Over 2 Years, TV by the numbers, Nov 15 2012 [↩]