Rising Sports Programming Costs Hits the Customer’s Pocket Book

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Walt Disney

One of the concerns for pay-TV service providers such as Time Warner cable (NYSE:TWC), Comcast (NASDAQ:CMCSA), Dish Network (NASDAQ:DISH) and others is that the programming costs are rising, especially when it comes to sports channels. Disney’s (NYSE:DIS) ESPN is the primary culprit and has registered fee growth that has significantly outpaced the growth for other networks. [1]

So where is the industry heading with this? Who gains and who loses?

Disney Will Stay Put, But Should Be Careful

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We estimate that ESPN constitutes almost 30% to Disney’s stock, thereby being the most significant driver of Disney’s valuation. Any price hike significantly impacts Disney’s cash flows since ESPN is present in almost every household.

With NFL demanding significant increases in the money that ESPN pays, ESPN is likely to pass on this fee to cable operators without taking any hit to its own margins. ESPN has been consistently increasing the fee it charges to cable operators and is likely to continue to do so for foreseeable future. As long as it can justify high programming fee, it will continue to benefit.

Nevertheless if service providers are forced to resort to dropping of sports programming from some of the low-end packages, ESPN could lose subscribers.

Cable Companies At Risk, Alternate Platform could Win

It is likely that cable companies will pass on these increased sports programming costs to the consumers. However this poses risk. If TV bills continue to increase, it will turn into an incentive for some of these pay-TV subscribers to drop their subscriptions and instead rely on antenna and alternative platforms such as Netflix (NASDAQ:NFLX) and Hulu. So far the these companies have more or less played role of a complementary service to traditional pay-TV. However, if TV bills continue to increase, it could transform these companies into direct competitors. Therefore, cable companies need to reduce such risk by allowing some of its consumers to have a choice whether or not sports programming such as ESPN should be included in their package.

Customer Loses

Ultimately the price rise percolates down and gets passed on to the customers who have to bear the burden of increased sports programming fee.

The question is, how many of these really care about having ESPN? Is ESPN’s high penetration a result of consumer demand or an agreement between Disney and pay-TV service providers to extract higher profits?

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Notes:
  1. Cable-TV Honchos Cry Foul Over Soaring Cost of ESPN, The Wall Street Journal, Dec 6 2011 []