Disney: Better Ad Pricing And Marketplace To Boost ABC’s Revenues In The Near Term

Disney’s (NYSE:DIS) ABC broadcasting network has a significant reliance on advertising income, despite of the fact that it is the only major network that does not carry NFL programming. It should be noted that sports programming accounts for more than one-third of advertising income for the major broadcasting networks. Of late, advertisers have been spending more on online and social platforms, thereby reducing television’s share in overall spending. While this has impacted media companies in the past few quarters, broadcasting networks have rather done well with high growth in the scatter market ad pricing. ^[1] We expect ABC to post steady growth in advertising in the near term, driven by upcoming events that will impact the overall ad marketplace and garner higher ad pricing for ABC. Ad spending usually follows uneven trends, driven by factors such as sports and political events. Hence, this will turn in favor of broadcasting networks in the near term due to the Presidential election and the 2016 Olympics.  This latter event will primarily benefit NBC, as it has has telecast rights for the Olympics through 2032. Regarding the former, 2016 election ad spending on television is expected to grow 16% to $4.4 billion, as compared to the 2012 elections, according to a research by Kantar Media. ^[2] And most of the election ad spending on television goes to broadcasting networks and ABC will surely benefit from its proportional share. The figure below highlights the changes in ABC’s revenue and EBITDA over the next three years, according to our estimates.

The media industry at large is going through a tough time given the rapid growth of digital video platforms, such as Netflix and Hulu  (among others). As more viewers has shifted to these newer platforms, viewership on traditional television has declined, which in turn, has impacted the advertising revenues of media companies. Of late, the impact of this has been more visible on cable networks than broadcasting networks, primarily due their wide coverage and sports programming, where there are no signs of demand fading away. ABC generated a little over $1 billion in ad revenues from sports programming in the 2014-15 television season. Broadcasting networks (the big 4 networks) have seen stellar growth of 35% in their advertising income from sports coverage in the last 5 years. For the 2014-15 television season, the big four networks generated close to $8.5 billion in sports ad sales, representing 37% of the overall ad revenues. ^[3] This factor will likely bode well for the broadcasting networks in the coming years and we expect a slight uptick in broadcasting’s share of television ad revenues in the next 3 years.

Looking at the non-sports programming, ABC has performed well in the past television season, beating NBC by 16% and CBS by 17% in 18-49 ratings. ABC was the only major network to grow its 18-49 ratings with hits such as, How to Get Away With Murder, Black-ish, Fresh Off the Boat and Secrets and Lies in the 2014-15-television season. ^[4] ABC will likely continue this trajectory in the near term and this will aid its advertising revenues. While the network has seen some declines in the current television season ratings, it continues to perform better in the non-sports programming. Also, broadcasting networks have seen significant growth in retransmission and reverse comp in the recent years with CBS expected to cross $2 billion in annual revenues by 2020. We expect ABC to grow at a slightly slower pace and reach that mark by 2022 from an estimated $0.8 billion in 2015.

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1. Broadcast TV Advertising Spending Jumped 13% to End 2015, Ad Week, Jan 25, 2016 [↩]
2. TV Remains King in Political Ad Spending, The Wall Street Journal, Aug 30, 2015 [↩]
3. Sports Now Accounts for 37% of Broadcast TV Ad Spending, Advertising Age Sep 10, 2015 [↩]
4. Ratings: NBC, CBS Win Season Titles; ABC Comes On Strong, Variety, May 19, 2015 [↩]