As Disney (NYSE:DIS) reports its Q1 fiscal 2013 earnings on February 5, the focus will be on the impact of rating pressures on media networks against the growth in licensing and affiliate fee. Close to 60% of Disney’s value comes from cable networks and another 10% from its broadcasting network.
Disney has thrived on ESPN’s success, but can it continue to do that? The sports programming giant is facing pressure on its ratings, but so far has managed to offset it with higher ad pricing. Overall, we feel that given Disney’s brand strength, successful franchises and market presence, that its growth will find support from higher affiliate fees, licensing and syndication. Additionally, we expect the parks & resorts business to do well on the back of improving economy and the holiday season that could have driven attendance at theme parks.
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Cable Networks – Affiliate & Licensing Fee Growth With Ratings Pressure
Close to 60% of Disney’s value can be attributed to its cable networks business. This business is primarily dominated by ESPN, followed by Disney Channel and others. Accounting for the first quarter of fiscal 2013, we estimate that ESPN will bring close to $11 billion in revenues for Disney in 2012. These include revenues from primary ESPN channel as well as its other sister channels such as ESPN2, ESPNU, ESPNEWS, ESPN Classic and ESPN Deportes. A large chunk of these revenues, more than $10 billion, will come from ESPN and ESPN2 alone. If we delve deeper, we find that close to $9 billion will come from just ESPN. The channel has close to 100 million subscribers in the U.S., which speaks of the huge demand as well as bundling strategies that pay-TV service providers adopt.
While ESPN continues to benefit from increase in subscriber fee, it has been facing some ratings pressure. Disney’s advertising revenues have remained more or less flat in 2012, as higher ad pricing was mitigated by ratings decline. The decline in ESPN’s ratings can be attributed to Summer Olympics, which was broadcasted on NBC and garnered high viewership. This was one-off success for NBC, and therefore, we now expect some rebound in ESPN’s ratings in Q1 fiscal 2013.
Some of the trends indicate that the ratings pressure on cable networks may continue. The shift to DVR viewing, change in Nielsen’s rating measurement and change in viewing habits have affected live primetime viewership. As entertainment options increase, viewers are likely to spread their leisure time across different devices and services, and that might continue to put pressure on ratings. Disney has done well with ESPN and Disney Channel, and can mitigate ratings pressure with growth in fee per subscriber, increased licensing of content, syndication to international markets and more investment in programming, which will result in a virtuous cycle.
In addition to this, the company may see higher sports programming costs as it mentioned in the last quarter, leading to pressure on profits.
Broadcasting – Ratings Issue May Continue
We estimate that ABC broadcasting contributes close to 10% to Disney’s value. 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. The ratings have remained weak in 2012 as well, and we expect this trend to continue in the first quarter of fiscal 2013. However, 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 age group relevant programs.
As far as Disney’s parks & resorts business is concerned, we expect improvement driven by increased consumer confidence and improvement in the economy. The holiday season could have contributed to increased attendance in the parks. Even though this business constitutes a large chunk of Disney’s revenues, the value contribution is limited to 15% due to high capital expenditures. Nevertheless Disney continues to make investments in its parks and recently spent close to $300 million on Magic Kingdom Florida to reduce wait time for customers and increase sales.
Our price estimate for Disney stands at $54.60, roughly in line with the market price.