What To Make Of ESPN’s Latest Round Of Layoffs

Disney‘s (NYSE:DIS) ESPN is reportedly laying off another 150 employees, as pay-TV pressures continue to weigh on the network. This is just the latest round of layoffs for the sports entertainment giant, as it laid off roughly 100 employees earlier this year, in addition to a cut of around 300 jobs in late 2015. The network is in the process of reorganizing its workforce ahead of a planned shift into new areas such as its direct-to-customer multi-sport subscription video streaming service ESPN+, which is expected to launch in 2018.

ESPN has been grappling with subscriber losses due to the emergence of alternative viewing platforms, and has lost more than 10 million subscribers over the last four years. ESPN is dependent on its subscription fees, from which it derives more than 60% of its revenues. In fact, it charges the highest affiliate fees of any channel, which are paid by cable operators and consequently passed on to customers. Over the years, its fees have been consistently increasing due to increasing programming costs. We expect ESPN’s fee per subscriber to continue to increase going forward, and reach about $9.2 in 2022 from an estimated $7.35 in 2017.

ESPN Remains Highly Important To Disney

Per our estimates, ESPN contributes about 27% of Disney’s value. The network has spent a significant sum of $45 billion as a part of its long-term sports programming rights commitment. ESPN has been scooping up broadcasting rights for major sporting events in the hopes that it will help boost its subscriber base. For the same reason, Disney increased its stake in BAMTech, a video streaming company originally created by Major League Baseball, from 33% to 75%, to help create the ESPN+ service. 

ESPN’s Weak Fiscal 2017 Performance

ESPN has remained a concern for Disney in fiscal 2017 as well. The company’s financials were substantially impacted by the higher programming expenses at ESPN – primarily due to the first year of the new NBA contract – which more than offset growth in its affiliate fee revenues. Further, ESPN’s advertising revenue was down in low single-digits in the recently reported fiscal fourth quarter, as higher rates were more than offset by a decline in impressions. To add to that, ESPN’s cash ad sales paced down, and prime-time viewership remained flat while the network saw a decline of 3% in total-day viewership in the September quarter. Disney has been witnessing a slowdown in its Media Networks segment lately, of which ESPN forms an integral part. However, the company expects ESPN to absorb most of the NBA rights costs in fiscal 2018, which could help the Media Networks segment grow, albeit at a slower pace.

Our $114 price estimate for Disney’ stock is about 10% ahead of the current market price.

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