Cord Cutting Has Disney’s ESPN On The Chopping Block

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Disney‘s (NYSE:DIS) ESPN is one of the most valuable cable networks, given is much-watch sports programming.  In our estimation, it represents 26% of its parent’s market capitalization, or $46.5 billion.  However, it is facing meaningful subscriber decline due to the emergence of alternative viewing platforms,  Increasingly, viewing seek online streaming to view programming, which in the worst case scenario leads to so-called “cord-cutting” (i.e., service termination). We expect the number of subscribers for ESPN to continue to fall at an average rate of 2.5% each year over the near term. There is a possibility that increasing fees and subscriber loss could result in losses in future, though we note that Disney has already moved to seek remedies to this trend, as follows.

What Happened To ESPN?

ESPN has lost more than 11 million subscribers over the past six years. At $6.45 per subscriber, its average subscription fee is the highest among all the channels owned by Disney, with TNT being the next highest at just $1.65 per subscriber. ESPN charges for its sports appeal as live sports continues to be the most watched programming content on TV. All was going well for ESPN until cord-cutting became meaningful.

Cord-cutters refer to Pay TV subscribers who end their traditional cable networks subscription for alternate viewing platforms, especially online viewing. ESPN is dependent on its subscribers driving more than 60% of its revenues from subscription fees in 2015.

Future Of ESPN

We estimate ESPN to lose more than 12 million subscribers by the end of 2020 thereby reaching 80 million subscribers as compared to 100 million subscribers ten years ago.

Why do we think so?

  1. Cord cutting is accelerating with an increasing number of U.S. pay TV subscribers shifting from traditional television each year to alternate viewing platforms. We expect pay- TV subscriber annual declines to reach 1.6% by 2020, up from from -0.2% in 2014.
  2. We expect ESPN fee per subscriber to continue to rise by 6% each year as to offset the impact of subscriber decline. However, the rise of a la carte services by online TV providers such as Hulu and  Amazon is influencing consumer behavior and has made the expensive bundling of ESPN more attractive. Pay-TV subscribers tend to watch less than 20% of the channels they subscribe to. We expect availability of flexible alternatives to encourage people to cancel their bundled pay-TV subscriptions.

The expected loss of subscribers will impact advertising revenue negatively. ESPN currently spends approximately $6 billion annually on live sports programming rights. In the longer term, as the number of subscribers fall, ESPN would suffer more as the burden per subscriber would increase. Additionally, higher subscriber fees could influence more customers to drop subscriptions

Here Is What Disney Is Doing To Fix It

The abovementioned scenario is assumes Disney does not change its strategy for ESPN. However, this scenario seems unlikely as Disney has already made an investment in MLB’s BAMTech which, will help the company launch ESPN digital streaming service online. We think more deals with OTT  (i.e., Over-The-Top) service providers will arise, which could help solve the problem.

Source:

[1] Cord-Cutting Is Accelerating, The Wall Street Journal, Dec 10,2015

[2]Is ESPN A Giant Bubble About To Burst?, Out Kick The Coverage, July 12, 2015

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Notes:

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1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively.

For precise figures, please refer to our complete analysis for Disney

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