What Is Driving The Growth For Disney Channel?

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Disney‘s (NYSE:DIS) Disney Channel airs programs aimed at kids, and is the only non-commercial channel (advertisement free) on television with a penetration similar to that of ESPN. The network ended 2013 as TV’s most-watched network among kids 2-11 for the second consecutive year. Higher ratings were driven by shows such as Jessie and Austin & Ally. [1]

Disney Channel generates revenues through monthly subscription fee and it is one of the most expensive networks distributed on pay-TV. However, due to its content and the fact that the only advertisements it carries are those of its own shows, it is very popular among kids and families. We believe that the popularity of the network and its programming will drive the subscription fee in the coming years.

The network currently has 99 million subscribers in the U.S. and charges an estimated $0.96 monthly subscription fee, translating into revenues of over $1 billion. The estimated EBITDA margin of 47% for Disney Channel translates into EBITDA of over $500 million, representing 8% of overall cable networks EBITDA for 2013. However, the contribution will be much higher if we account for its international operations. Disney Channel reaches to more than 170 million subscribers internationally. [2]

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How Is Disney Channel Trending?

The penetration of Disney Channel in the U.S. TV households has increased slightly from 95.1% in 2007 to 96.1% in 2013, translating into subscriber growth from 94 million to 99 million between 2007 and 2013. The average monthly subscriber fee has also increased from $0.83 in 2007 to an estimated $0.96 in 2013. This is much higher than its rival Nickelodeon network, which charges an estimated fee of $0.52 per month. However, Nickelodeon network supports advertisements and generated around $700 million of advertising income in 2013, representing 53% of the network’s overall revenues.

We estimate Disney Channel’s penetration will remain around current levels throughout our forecast period. We forecast U.S. pay-TV households to grow from 114 million currently to 120 million by 2020. TV penetration in U.S. households is very high, with around 98% of all U.S. households owning TV sets, hence we do not expect the penetration level to change much. This translates to an annual increase of around 1% in U.S. TV households, in line with the U.S. population growth. Disney Channel’s penetration level of 96% will translate to 105 million subscribers by 2020.

We expect subscription fee to continue to grow in the coming years and reach around $1.14 in 2020 driven by the network’s popularity among kids. Moreover, pay-TV companies sign multi-year agreements with content owners with pre-defined price increments each year. 105 million subscribers and $1.14 monthly subscription fee will translate into annual subscription revenues of close to $1.5 billion towards the end of our forecast period.

What Is Driving Growth For The Network?

Disney Channel ratings have been trending well for quite some time now. The network remained at top among kids 2-11 and tweens 9-14 during the first quarter. The ratings were driven by shows such as Jessie, Dog With A Blog, Liv and Maddie and I Didn’t Do It. The network also benefited from the 2014 Radio Disney Music Awards and premiere of its original movie Cloud 9, which was the No. 1 cable TV telecast of Q1 2014 in 2-11 demographic. ((Ratings Highlights For 1Q 2014 – Final National Ratings, Disney Channel Press Release, Apr 1, 2014))

The upcoming slate looks solid for the network with Gravity Falls returning for a second season on August 1. [3] Disney Junior’s “Pirate and Princess Summer” annual programming event is about to begin later this week with new episodes of Emmy nominated Sofia the First and Jake and the Never Land Pirates. [4] Disney is also developing a new animated series for Disney Junior based on the movie – The Lion King, and it is expected to premiere in late 2015. [5] The network’s popular show Jessie is also renewed for fourth season to be premiered in January 2015. [6] Given the popularity of these shows, it appears that the Disney Channel will continue to hold on the top ratings position in its key demographics for the foreseeable future.

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Notes:
  1. Disney Channel on a ratings roll, New York Post, Jan 8, 2014 []
  2. Disney’s SEC Filings []
  3. SECOND SEASON OF “GRAVITY FALLS” PREMIERES FRIDAY, AUGUST 1 ON DISNEY CHANNEL AND MONDAY, AUGUST 4 ON DISNEY XD, Disney Channel Press Release []
  4. DISNEY JUNIOR’S “PIRATE AND PRINCESS SUMMER” MULTI-PLATFORM PROGRAMMING EVENT RETURNS WITH NEW EPISODES OF “SOFIA THE FIRST” AND “JAKE AND THE NEVER LAND PIRATES, Disney Junior Press Release []
  5. DISNEY BEGINS PRODUCTION ON “THE LION GUARD,” AN ANIMATED DISNEY JUNIOR TV MOVIE AND SERIES INSPIRED BY “THE LION KING, Disney Channel Press Release []
  6. Disney Channel Renews “Jessie” for Season 4, Nick And More, May 20, 2014 []