You would be forgiven for thinking the sky is falling at the Walt Disney Company. In the six months since CEO Bob Iger sent media stocks tumbling after he spoke of “modest” subscriber declines at ESPN, we’ve seen story after story predicting a doomsday scenario for the house that Mickey built.
Not only is ESPN the most profitable network on cable but it's also seen as a barometer for the health of the entire pay-TV industry. If live sports can’t survive the age of cord-cutting, what can?
Fortunately for Disney, the Mouse House isn’t burning down yet. The Burbank, California, media giant is expected to show robust profit growth Tuesday when it reports earnings for the final quarter of 2015, although much of the credit goes not to ESPN but the stellar box-office performance of “Star Wars: The Force Awakens.” The sci-fi epic, released less than two months ago by Disney-owned Lucasfilm, is already the third highest-grossing movie of all time behind “Avatar” and “Titanic.”
Analysts polled on Thomson Reuters expect Disney to report earnings per share of $1.45 on $2.37 billion in profit, compared to $1.27 on $2.18 billion for the same period last year. Revenue is expected to rise 10.3 percent to $14.77 billion, compared to $13.39 billion last year.
Disney will report financial results on Tuesday after the markets close. A conference call with Iger is scheduled for 5 p.m. EST.
Overall, it’s been a good three months, but concerns about Disney’s live-sports cash cow still have investors on edge, and rightfully so. As was widely reported last year, ESPN lost about 7 million subscribers since 2013, a consequence of more consumers either cutting the cable cord or opting for skinnier bundles. The trend has sparked increased speculation that Disney might be on the verge of launching a direct-to-consumer product for ESPN.
In fact, Iger is frequently grilled about that possibility, which would allow cord-cutters to subscribe to ESPN without being part of a bundle. Iger has said Disney is ready to unleash such a product should the marketplace demand it, but he’s always stopped short of speculating when an over-the-top ESPN might become a reality.
Still, the chatter has investors concerned about what could be the beginning of the end for ESPN as we know it. The network commands by far the highest affiliate fees on cable — about $6 to $8 per subscriber, depending on the estimate — and is still cited by unhappy cable customers as one of the main reasons why they haven’t cut the cord. In other words, ESPN keeps viewers locked into the bundle, thereby preserving the pay-TV status quo. But if consumers could get ESPN without cable, Disney could lose its bargaining leverage in charging cable companies for those exorbitant affiliate fees.
Michael Nathanson, an analyst at MoffettNathanson, called the whole discussion a “manufactured debate.” Given that ESPN is still highly profitable, he wrote in a research note last month, bringing it direct to consumer simply doesn’t make sense, at least not for the time being.
“There is no debate,” Nathanson wrote. “All our work on reach suggests there is no economic motivation today for an a la carte ESPN service.”
ESPN and its sister networks represent about 27.5 percent of Disney’s total stock value, according to an analysis from Trefis, and Disney’s Media Networks division, of which ESPN is a part, is the company’s largest unit. Marci Ryvicker, an analyst at Wells Fargo Securities, expects the unit to post $6.2 billion for the quarter, an increase of 6.2 percent. In January, Wells Fargo lowered estimates due to lower-than-expected ratings for some college bowl games that were broadcast on ESPN.
On the plus side, Disney’s Studio Entertainment division is expected to have a record quarter, but then with “Star Wars” taking over the galaxy, how could it not? Ryvicker expects the unit to post first-quarter revenue of $2.3 billion, a 23 percent increase over last year. “Obviously, Disney had an exceptional studio quarter,” she wrote in a January research note.
“Star Wars” is also expected to boost Disney’s Consumer Products division, offsetting disappointing sales from “Ant-Man” and “Tomorrowland” merchandise. And of course, the temperature on “Frozen” — whose merchandise was a boon for Disney throughout 2014 and 2015 — was bound to cool off eventually. Ryvicker expects the Consumer Products unit to post first-quarter revenue of $1.5 billion, an increase of 8 percent over last year.
“We still believe Disney is a premium brand with potential upside from ‘Star Wars,’” Ryvicker wrote, “but given some deceleration in cable combined with a somewhat rich valuation, we like the stock just a bit less at these levels.”