Disney?

Investment Analysis Clubs Saul’s Investing Discussions
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There’s so many good deals now, it’s hard to know what’s the “best” one. Because of certain trading restrictions, I cannot comment on one stock that has been mentioned a lot on the boards today, but I was very happy to add to it today at great prices.

But, if one were looking to diversify from small caps and looking for a well-diversified entertainment conglomerate, one could do a lot worse than the House of the Mouse.

Bullish thesis: Star Wars. Pixar. Frozen. Marvel. Parks. Movies. Television. Merchandise. Amazing pricing power. Amazing brand recognition. We could go on.

But today Disney’s price reached a certain threshold that a lot of us look at. Behold:


Revenue (billions)		Q1		Q2		Q3		Q4
2013				11.341		10.554		11.578		11.568
2014				12.309		11.649		12.466		12.389
2015				13.391		12.461		13.101		13.512	

EPS (non-GAAP)		        Q1		  Q2		  Q3		  Q4
2013				0.79		0.79		1.03		0.77
2014				1.04		1.11		1.28		0.89
2015				1.27		1.23		1.45		1.20

Cash Flow (billions)		Q1	      Q2		Q3		Q4
2013				0.559		1.586		2.723		1.748
2014				0.554		1.826		2.047		2.042
2015				0.857		2.011		1.652		2.124

Current (2015 Q4 Earnings):

Revenue Growth (billions)
2014 Q4 TTM Revenue = 48.813
2015 Q4 TTM Revenue = 52.465
Year Over Year Revenue Growth = 7.48%, previous quarter’s Rev Growth = 7.0%

Non-GAAP EPS Growth
2014 Q4 TTM Earnings = 4.32
2015 Q4 TTM Earnings = 5.15
Year Over Year EPS Growth = 19.2% previous Q EPS Growth = 15.2%

P/E = (Check Current Price) 100.36/5.15 = 19.49

1YPEG = 19.49/19.2 = 1.01

Okay, it almost passed that threshold. Notice revenue growth and EPS growth are increasing too. Also, as an added bonus, Fuskie is a very thorough ticker guide and he even covers Disney’s public board on the Fool which makes it easy to keep track of all the latest happenings with Disney.

In my house Disney rules. I have a two year old son who loves light sabers and Lightning McQueen, two daughters who still sing Frozen songs, and a nine year old son who is strong with the Force.

Anyway, just thought I would mention this.

Matt
MasterCard (MA) Ticker Guide
Long DIS

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…and for the other side of the story:

Disney has a money problem even Star Wars can’t fix
https://www.washingtonpost.com/news/the-switch/wp/2015/12/28…

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Goofyhoofy,

It is this fear that I believe makes Disney such a great deal now. Disney’s television revenues and earnings continue to rise, despite the cord cutters. For the fiscal year just ended, Disney’s media networks revenues were up 10%. Even with their increased costs, media networks earnings were up 6% year over year.

And Disney already is taking the necessary steps to enter the streaming industry if cable continues to implode:

• Beginning this year, Disney enters a lucrative three year deal with Netflix.

• Disney owns a large position in Hulu.

• In the UK, Disney has launched a streaming service called DisneyLife.

• Their ESPN app can already broadcast all sporting events airing on its networks live.

• And Disney is playing a prominent role in disruptive streaming bundles like Sling TV.

IMHO, Disney is well-positioned for a world where cable plays a diminished role. Content creators can always change the avenue they use to get their content to the masses.

Of course, any company that receives a significant portion of their revenue/earnings from an industry that might be about to go through disruptive changes, should be heavily studied and scrutinized before being invested in. I have been wrong before and could well be wrong again.

Matt
MasterCard (MA) Ticker Guide
Long DIS

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IMHO, Disney is well-positioned for a world where cable plays a diminished role. Content creators can always change the avenue they use to get their content to the masses.

All of what you say is true, except for this ironic statement.

ESPN accounts for well over half of Disney’s cable revenues altogether (I have seen estimates as high as 75%.)

I would just point out that Disney is not the “content creator.” That would be the NFL, NBA, NHL, etc. They create it, they own it, they decide who gets to see it, on what basis, when, and by what distribution mechanism. In a world where cable “plays a diminished role”, it’s not clear to me what ESPN will bring to the party at all. The leagues have been happy to have ESPN write them a check and take the messy business of negotiating with (sometimes truculent) cable MSO’s across the country for carriage rights and fees, but when “streaming” hits a critical mass, they will likely take that in-house and simply offer a subscription package on a credit card basis to you and me - the same way they now sell tickets to the general public.

Most leagues already produce, or at least co-produce the broadcasts. They hire most of the announcers themselves or are heavily involved in the selection process. They all have their own, free-standing 24 hour channels, production trucks, and broadcast executives. Every team and every league now sells advertising, sometimes as much as 100% of the available time, so this is not an area of expertise which frightens them either.

I will say that ESPN has done very well for itself and for Disney, but I am looking 5 to 10 years down the road, and should cord cutting continue (and it will, and ESPN will be a primary cause thanks to the high rights they demand from your monthly cable bill whether you watch or not) ESPN and Disney will be hurt more than most, simply because they are locked into high cost/fixed term contracts while other “content creators” are not. (Never mind the increasing competition from Fox, Comcast and other bidders.) More to the point, Disney has been a laggard in offering “slim bundles” because they have been able to use the coercive power of ESPN to achieve carriage of their other offerings and garner high carriage fees for those as well. They do not want to give that up, which locks them into a position contrary to where the industry is going.

Paradigms, like bubbles and avalanches collapse slowly and then all at once. I think the cord-cutting phenomenon is happening slowly and is poised to disrupt things tremendously, because the cable MSO’s have finally understood that the fat bundles and high costs are now costing them customers. That does not mean ESPN is a bad business, either for Disney or for the cable gods, but it does mean that some sort of restructuring is likely. I don’t know if that will be in a year, two years, or five years, but it seems inevitable at some point in the not very distant future.

I remember when broadcast television was the unbeatable, forever, high profit business. Newspapers, too. With the advent of the new technologies which allow “direct to consumer” video, I find ESPN standing astride a business model that is yesterday’s news, owning neither the hardwire distribution networks nor the raw programming product that customers so crave. That makes them a middleman, and middlemen always die. The Internet is killing more and more of them every day.

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when “streaming” hits a critical mass, they will likely take that in-house and simply offer a subscription package on a credit card basis to you and me - the same way they now sell tickets to the general public.

Last year I subscribed to major league baseball through mlb.com. Being overseas (and so not in any ‘black out’ area) I could see any game including post season. There was a problem with the streaming video during the playoffs, particularly for the LA-NYM series. I think there was a bandwidth choke point somewhere. I bought the package mid-season when the Mets brought up Conforto and the ‘rest of the season’ promo was really cheap (as am I).
Add to that the ability to stream highlights, watch on delayed basis and it is a quite compelling value. Now all I need is a large screen OLED smart TV and a combo lounge chair/excercycle, beverage cooler and one of those robots and I can hit the man cave in March and emerge in November.

KC

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Last year I subscribed to major league baseball through mlb.com. Being overseas (and so not in any ‘black out’ area) I could see any game including post season. There was a problem with the streaming video during the playoffs, particularly for the LA-NYM series. I think there was a bandwidth choke point somewhere. I bought the package mid-season when the Mets brought up Conforto and the ‘rest of the season’ promo was really cheap (as am I).
Add to that the ability to stream highlights, watch on delayed basis and it is a quite compelling value. Now all I need is a large screen OLED smart TV and a combo lounge chair/excercycle, beverage cooler and one of those robots and I can hit the man cave in March and emerge in November.

Streaming is going to be the future no doubt about that. This year the NFL did a trial, streaming one of it’s games exclusively on Yahoo. I was amazed at the streaming quality - it was identical to watching the games on a traditional network.

Sincerely,
Charlie

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Hey Goofyhoofy,

I would just point out that Disney is not the “content creator.” That would be the NFL, NBA, NHL, etc.

Yes, you are undoubtedly correct. I was referring to everything else they produce (e.g. movies, shows, etc.).

In a world where cable “plays a diminished role”, it’s not clear to me what ESPN will bring to the party at all.

I understand what you’re saying, but I respectfully disagree. Let’s use your worst case hypothetical scenario where cable continues to bleed subscribers for the next five to ten years and then rapidly implodes (which I don’t necessarily agree with but admit it is one of many possible future scenarios).

In this scenario, Disney is caught off guard (even though they still have a decade to get ready for this) and has to start a streaming model from scratch. Or, since they already own a huge hunk of Hulu, they move everything over there. Either way, they now have to move all of their content over to some sort of streaming medium.

The NFL, NBA, MLB, NCAA Football, etc. will do exactly as you say they will. As you correctly point out, they already own the mediums and equipment, so each league moves all their broadcasts to their own proprietary streaming medium. And let’s say, at this point in time, all of Disney’s contracts with the sports league expire at the same time.

Boom! Disney is left in the dust, ESPN’s streaming apps is a shell of its former self without game coverage, and the sports leagues are rolling in cash. At this particular point in time, Disney’s stock crashes. But does the story end here? I do not believe it does.

So now the NFL, to use just one example, is living high on the hog. Every football fan must subscribe to their streaming service. Let’s say they charge $15/month when fans sign up for a year-long contract. And let’s say there’s a kajillion football fans in America. The first year under this cable doomsday scenario then, a kajillion football fans subscribe to the NFL’s streaming service.

At the next NFL owners’ meeting, the owners are all laughing like oil barons while lighting cigars with $100 bills. The phone rings. It’s Bob Iger. He wants the NFL to sell him rights to stream one game a week on Monday nights. The owners think: Well, nobody is going to quit the NFL’s subscription-based service if there is just one less game a week. So the oil barons and former tech CEOs agree to Iger’s terms because they make more money selling game rights away, than keeping all the broadcast rights to themselves. Plus this is a way to keep casual fans exposed to the game who might not subscribe to a NFL-only streaming service. Now, all of a sudden, ESPN’s app is streaming the same number of games per week as they are broadcasting now: 1.

Now Disney calls the SEC. He wants to be able to stream one conference game a week on his streaming service. They agree for the same reasons the NFL agreed. They get more money out of the deal and keep casual fans exposed to the game who might not watch the SEC’s streaming channel. Now ESPN is streaming about the same number of SEC games per week as they are broadcasting now.

Repeat this process for the NBA, MLB, NHL, Big Ten, ACC, etc. Soon the ESPN app has as many streaming rights as it has broadcast rights now.

Under the current cable paradigm, ESPN is paid about $7/cable subscriber. But lots of people pay the network who don’t watch ESPN programming. But the diehard sports fans couldn’t live without this type of service and would easily pay more than $7/month to subscribe. Using this scenario they would have to find the optimum amount they could charge while still attracting the most customers.

But here’s the clincher. Maybe they allow you to sign up for the Disney Ultra Premium Plus subscription model for only $40/month. And maybe that includes all Disney programming: shows, every single Disney movie ever, every single Marvel show/movie, Star Wars cartoons/movies, and – of course – ESPN programming. Now a family guy like me can choose between this or Netflix or another streaming model – and it’s no contest. Disney wins every single time. Every. Single. Time.

All this to say I don’t believe leagues are going to keep all broadcast rights to themselves. They need to expose new potential fans to the game and they will not lose much (if any) subscribers/viewers by selling some rights to other medium distributors (like ESPN). So there’s no/extremely limited downside. And the upside of these lucrative contracts is unbelievable. The leagues aren’t going to let that type of money walk out the door. It’s a win-win for the league to sell these rights and they’re going to continue to do so.

Maybe ESPN loses some revenue/profit with this model. But it’s not like it’s going to zero and I’m not even convinced it’s a losing proposition for them. Meanwhile, I repeat my bullish thesis from before: Star Wars. Pixar. Frozen. Princesses. Marvel. Parks. Movies. Television. Merchandise. Amazing pricing power. Amazing brand recognition. Oh, and don’t forget the new park in Shanghai opening this year.

Just my thoughts. I could be wrong. It wouldn’t be the first time!

Matt
MasterCard (MA) Ticker Guide
Long DIS

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And Disney is playing a prominent role in disruptive streaming bundles like Sling TV.

@Matt Just to clarify, Disney is playing a prominent role through disruptive streaming services like Stream TV, which included ESPN when it launched almost a year ago, nearly 6 months Disney warned against subscriber losses.

I would just point out that Disney is not the “content creator.” That would be the NFL, NBA, NHL, etc.

@Goofy I don’t think I completely agree with this. While ESPN’s biggest costs are sports league licensing, they also have a lot of original programming. I would even venture that the majority of what gets aired is not live. Here’s a short list off Wikipedia:

• SportsCenter – The flagship program of ESPN, a daily sports news program delivering the latest sports news and highlights
• Around the Horn – Competitive debating between four sports writers across the country
• Baseball Tonight – A daily recap of the day’s Major League Baseball stories and games that airs throughout the baseball season
• College GameDay (basketball) – Weekly college basketball show airing from the Saturday Primetime game of the week site
• College GameDay (football) – Weekly college football preview show airing from the site of a major college football game
• E:60 – An investigative newsmagazine program focusing on American and international sports
• Mike and Mike in the Morning – A simulcast of the ESPN Radio morning show, focusing on current sports stories
• Monday Night Countdown – Weekly recap show aired on Monday evenings during the NFL season, also serves as the pre-game show for Monday Night Football
• Outside the Lines – Talk and debate show that examines critical sports issues on and off the field of play
• Pardon the Interruption – Tony Kornheiser and Michael Wilbon debate an array of sports topics
• SportsNation – Poll-driven show based on audience participation, including material generated or suggested by viewers
• Sunday NFL Countdown – Weekly preview show that airs on Sunday mornings during the NFL season

People cheer the live events, but they consume the sports talk programming. That’s the secret to sports talk radio. That’s the secret to sports television. Sports is a topic people will talk endlessly about.

Last year I subscribed to major league baseball through mlb.com.

@KC I think this is where ESPN’s real problem lies in the future, rather than with subscription TV. ESPN needs to make sure its licenses allow it to digitally stream its licensed content. The leagues may be resistant to this since they have their own competing products, but I expect that when contracts are negotiated in the future, the costs of subscription TV licensing will go down to reflect the lower subscription numbers, but the costs of streaming TV licensing will go up as those numbers grow.

Streaming is going to be the future no doubt about that.

@Charlie Disney has been pioneering this space for years now. They even partnered with Nielsen a couple years ago to create a ratings measurement system for digital streaming so they could justify ad rates.

Fuskie
Who invites anyone who is interested in The Walt Disney Company to check out the public DIS board…

http://discussion.fool.com/disney-dis-102704.aspx?mid=32060914

Ticker Guide for The Walt Disney Company (DIS), Orbital ATK (OA), Blue Nile (NILE), Intuit (INTU)
Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)

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Hey Matt,

What you describe is pretty much exactly what we have today. I subscribe to GameCenter for hockey and MLB after a month or 2 when they cut the price in half. I wish those included all games. Instead they blackout all the ones being played on cable. I agree with your logic and I can’t see the league turning down opportunities to get more revenue for some of the games.

What would be great would be for consumers to be able to get the non blackouts without committing to a cable bundle as you have to today. Hopefully, that will be an option in the future - and content isn’t exclusive to one place.

What makes me more comfortable with Disney is that they are part of the Sling offering. They are open to adapting as people change their habits. Comcast, on the other hand, is spitting and fighting it.

Cheers,
Doug

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This year the NFL did a trial, streaming one of it’s games exclusively on Yahoo.

You’ve been able to subscribe to and stream NFL’s Sunday Ticket (which is every game, every week) through devices like Playstation for a few years’ now.

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You’ve been able to subscribe to and stream NFL’s Sunday Ticket (which is every game, every week) through devices like Playstation for a few years’ now.

The Yahoo! thing was different however. In my experience most streams today (i.e. Watch ESPN, Comcast, NBC Sports Extra, etc.) are very subpar and have this weird film effect compared to the traditional broadcast. This Yahoo stream was exclusive and more importantly had the same quality as a traditional broadcast. Perhaps you can’t tell on your mobile device, but streaming on a TV the difference is jawwing.
Sincerely,
Charlie

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Yes, you are undoubtedly correct. I was referring to everything else they produce (e.g. movies, shows, etc.).

I thought you were talking about Disney’s cable and television profits, not the entire corporation. If you want to include Broadway, movies, Princess-on-Ice, and all the rest, fine, but that’s a different discussion.

I understand what you’re saying, but I respectfully disagree. Let’s use your worst case hypothetical scenario where cable continues to bleed subscribers for the next five to ten years and then rapidly implodes (which I don’t necessarily agree with but admit it is one of many possible future scenarios).

I know of no one in the cable industry who thinks this isn’t going to happen, indeed, it is happening already. For the first tine ever cable (and satellite) subscriptions are falling. Streaming is growing. Local cable MSO’s are fattening pipes to accommodate multiple simultaneous streams, as well as 4k quality and other to-be-announced or to-be-invented features.The only question, it appears to me, is timetable.

In this scenario, Disney is caught off guard (even though they still have a decade to get ready for this) and has to start a streaming model from scratch. Or, since they already own a huge hunk of Hulu, they move everything over there.

You’ve missed the point. There is no reason for the leagues to continue paying a middleman to do this when they are already doing it themselves. Now that doesn’t mean that ESPN will completely disappear, as you point out there is lots of other sports-ish programming: talk shows, highlight shows, etc. although I can guarantee you that no cable operator is going to pay anything close to $7/mo per sub for that. It is true that sport-radio stations (the closest analog I can think of) have a nice little business doing that sort of thing, but it is not the great and wonderful business that ESPN is. There are significant costs in doing that sort of ancillary programming which must be done in real-time or near-real-time (very little call to listen to sports talk shows from 2013, you see) and which must be amortized almost immediately. History, HGTV, and most others can ‘fill out’ a schedule with some repeats from three years ago and get use out of repeat programming. Even the networks can sell reruns into syndication. Not a big market for that for 5 year old Sportscenters.

I also agree that the leagues may not strip ESPN of all live action programming, but if you were the leagues would you put your premiere programming on somebody else’s tier when you have a store of your own?

But here’s the clincher. Maybe they allow you to sign up for the Disney Ultra Premium Plus subscription model for only $40/month. And maybe that includes all Disney programming: shows, every single Disney movie ever, every single Marvel show/movie, Star Wars cartoons/movies, and – of course – ESPN programming. Now a family guy like me can choose between this or Netflix or another streaming model – and it’s no contest. Disney wins every single time. Every. Single. Time.

Congratulations on creating the fattest, least focused bundle of all. If I want a service that includes some sports, but not all (and only occasionally my home team), some movies (but only Disney), some super heros (but only Marvel) then you’re right. I would predict that is a vanishingly small percentage of consumers; if anything the world is moving the other way, where I want to buy what I want to buy, and don’t want you to force me to buy what I don’t want to buy.

Of course Disney could incentivize this package to make it attractive, but as people in marketing say “incentive” is just another word for “discount”, and if there’s one thing Disney hates, it’s discounts. Somebody, somewhere back to corporate has to make up the difference. Is it the sports programming? The studios? The theme parks? What?

And,fwiw, you keep overstating my thesis. I don’t think the leagues are going to keep “ALL” programming for themselves. Just the good stuff. I don’t think ESPN is “going to zero.” I do think that the one brand that carries up to 75% of the corporation’s profit in one of its most significant divisions faces a looming threat - and from many sides. As cable MSO’s lose customers, ESPN gets less revenue. They have NO control over that. As streaming picks off super-sports fans who buy the MLB or NFL package, ESPN’s programming becomes less valuable to the cable MSO’s, which must decide if it’s worth continuing to pay $7 a month to carry it. Consumers are already deciding to eschew fat bundles for slim, and replacing slim with laser targeted streaming options.

Almost none of this is in Disney’s or ESPN’s power to change, and all the name recognition in the world won’t change these macro-economic trends. As I say I don’t know if this will take a year or two or five, but there is little doubt that it will happen. Perhaps ESPN will figure out a way to convince the leagues to keep paying the middleman cut, but if there’s one thing I’m sure of, it’s that the league would rather have more money for itself, not less.

Yes, I think ESPN will be around in ten years. No, I don’t think it will be nearly the factor that it is today.

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I bought some today - I’ve been waiting for a while and am very happy at this price for such a great, enduring company!

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I want to buy what I want to buy, and don’t want you to force me to buy what I don’t want to buy.

Amen. Amen. Amen.

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Hey Goofyhoofy,

Great response. A few thoughts (while again acknowledging I could be wrong about everything):

I know of no one in the cable industry who thinks this isn’t going to happen, indeed, it is happening already. For the first tine ever cable (and satellite) subscriptions are falling. Streaming is growing.

Yep. That’s why my hypothetical completely accepted your possible scenario. Not denying this possibility at all. I just don’t know the future, so I just admitted cable “imploding” in 5-10 years is a very real possibility but not an absolute certainty. That seemed like a fair statement to me. But since you don’t know of anyone in the industry who disputes this theory, let me point out a few:

And, BTW, TW’s subscriber numbers were up, not down: http://www.ibtimes.com/what-cord-cutting-time-warner-cable-a…

So, yes, your doomsday scenario is entirely possible but just not certain.

You’ve missed the point. There is no reason for the leagues to continue paying a middleman to do this when they are already doing it themselves.

And

I also agree that the leagues may not strip ESPN of all live action programming, but if you were the leagues would you put your premiere programming on somebody else’s tier when you have a store of your own?

To the first point: Yes, there is!

To the second: Yes! Emphatically yes!

First, if the leagues ever want to grow and survive they need new viewers. That means they need exposure to people that aren’t necessarily die hard fans. When casual fans watch more, they become more dedicated fans, assuming the product is good. Selling your worst game of the week to ESPN is not a good way to showcase quality programming and hence won’t win sports leagues new fans. Hence, sports leagues know they have to sell rights away to quality games.

Second, there is no downside to the sports leagues for this. Or very, very little downside. If I’m a die-hard sports fan, it’s not like I’m not going to subscribe or watch football via the NFL’s proprietary streaming service because ESPN also shows one or two games a week. Hence, the NFL won’t lose any die hard fans and can still collect from lucrative contracts it sells to ESPN.

The NFL and other sports leagues have made a kajillion dollars under this way of life, They’re not about to simply throw the whole system overboard to try out something completely new. Plus, like I’ve said, they need as much exposure as possible, so they can continue to convert more and more fans along the way. Monopolizing the way people watch games is not the way to do that!

Boxing is a great, great example of this. All “big” boxing matches are on PPV or premium cable services now. These are lucrative contracts for boxing but the sport is dying. Why? Because there is no exposure to casual fans and there simply aren’t any new fans. Most young people have probably never even seen a match! By limiting the way people could watch the sport, they’re slowly killing it (even while making mad profits in the short term).

Congratulations on creating the fattest, least focused bundle of all. If I want a service that includes some sports, but not all…

Two points:

  1. This is like ESPN’s current model, which seems to be doing all right. I mean, ESPN shows a live game or two every night of some sport but it’s not nearly all the games. It’s “some” games with lots of highlights afterward of all games. That model absolutely works. It’s proven!

  2. I’m trying to do this shorthand, so I’m just writing from the top of my head, but these are the numerous media properties Disney owns outright or 50% of: all the different Disney channels, all the ESPN channels, A&E, History, H2, fyi, Military, Crime and Investigation, all of the ABC properties, all the Lifetime channels…the list is massive! Yes, all that adds up to a fat bundle! No, it’s not focused! But that’s because it’s so broad. In other words, it has something for everyone.

Going back to my own family, we consist of three males, three females of all ages. And this bundle would offer something for all of us. And, indeed, it hits the sweet spot for most of us. Between Lightning McQueen, the Force, Princesses, Elsa, Buzz Lightyear, Lifetime movies, history documentaries, and reality shows, there’s something here for everyone. I’m a sports fan, but I don’t need to watch every single game. I need to watch some games and highlights of all games. That’s the model that makes ESPN tick.

And what other leagues couldn’t offer is a highlight show of all games across all leagues. I don’t have time to watch an hour long show for each league. I have time to watch one hour show featuring the best highlights of all games across all leagues on any given night. Even you’ve acknowledged ESPN will be able to keep this model, which is the exact same model they have now, which has proved wildly successful.

And all this assumes they don’t make things really, really interesting with Hulu. They own a third of Hulu. Who owns the other two thirds? Comcast and Fox? Can you imagine the super-streaming service those three content creators could form around Hulu?

I’m just spit-balling here, Goofyhoofy. I’m just saying the future is wide open and Disney could very well grow in a post-cable world. Or we might not even see a post-cable world. Cable prices might come down, streaming prices will go up, and the two might meet in the middle. I don’t know.

This I do know though: 1) Sports leagues need to get their product in front of as many people as possible; 2) They make lots of money from third party distributors of their programming currently.

Awesome conversation Goofyhoofy. You really made me think through this which is always a worthwhile endeavor. I appreciate the back and forth!

Matt
MasterCard (MA) Ticker Guide
Long DIS

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Great discussion! I have a few questions for the board about ESPN.

What effect will cord-cutting and unbundling have on competition and cost to broadcast games?

It seems to me that all of these cord-cutting measures will reduce the value of broadcasting games, thereby reducing the competition and cost broadcasters are willing to pay for the rights. Leagues may gain a larger share of a smaller pie, but are they willing to do so? What effect would it have on revenues, which will then affect salaries?

How much does the brand matter? Big egos want to be on the biggest stage. There well could be a disrupter coming, but right now it seems to be on ESPN. Right now colleges use, “You’ll be on ESPN” as a major recruiting tool. Will, “All of your friends and family be able to stream your games for $xxx/year” have the same effect?

If total sports networks as we know them go away, who are the winners and losers? I have no idea how the financials for each league/team break down. Is MLB subsidized by the NFL, for example? The boxing example seems like a warning for the others. Do they all make more money by being on a shared platform?

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But since you don’t know of anyone in the industry who disputes this theory, let me point out a few:

Yes, people in the cable industry, whose lives depend on the cable industry and whose bonuses are predicated on the future of the cable industry are loathe to publicly admit that the industry is changing. I get that. I am reminded of the CEO of Regal Entertainment who said (paraphrase) “the movie industry is alive and vibrant, we see no threat from large home screen TV’s” and went on to announce “and we have hired Goldman Sachs to investigate our strategic opportunities”, which is code for “how do we sell?”

And, BTW, TW’s subscriber numbers were up, not down:

You know, pulling one outlier statistic out of the air does not an argument make. The next sentence says: "This is the first annual increase in net video subscribers by any cable provider since 2009, according to research from Leichtman Research Group (LRG). The last company to post an increase was Insight Communications, which was acquired by TWC in 2011. If you’re looking for the last net increase for a major cable player, says LRG President and Principal Analyst Bruce Leichtman, you’d have to go back to 2006

So, yes, your doomsday scenario is entirely possible but just not certain.

Nothing is certain. Ponder this, tho. ESPN is a high leverage business; it costs them (literally) not an extra dime to add 10,000 viewers. Likewise if they lose 10,000 viewers, every dollar (or, the $60,000 they lose every month) is 100% from the profit column. By the numbers, ESPN has lost 7,000,000 viewers in the past 18 months (because the cable MSO’s have lost 7,000,000 viewers), so that is a net loss to ESPN of $650,000,000. (It’s actually more, since that is just subscriber fees, and with a smaller audience they also can’t charge as much for the commercials, but hey, why rub it in?)

When a car plant loses customers, they make fewer cars. That’s not a good thing, but at least their expenses go down: they buy less metal, fewer windshields, fewer tires, lay off workers, etc. ESPN doesn’t get to do that. That’s why the programmers - all cable programmers - are so worried about the cable-cutting phenomenon. That’s the implications of high-leverage. Terrific when you’re on the way up, difficult to manage on the way down.

Meanwhile, most of ESPN’s contracts for carriage run through 2018, so they’re protected for a while (indeed, their carriage rate increases by over $1 per sub - but a cord cutter is a minus $7.)

I don’t disagree that the leagues will continue to work with ESPN, although they will also try to play Fox against them and get more bidders in the arena if possible. And yes, ESPN can fill with a bunch of highlight shows (for which they pay royalties) and such, but there is NO WAY the MSO’s pay $7 a sub for that. ESPN has some value as a sports channel. ESPN has great value because it has live play-by-play, which surely will continue, it’s just a question of “how much” and “at what price”.

If you’re asking me who needs who more, ESPN or the leagues, it’s ESPN, by a mile. The leagues will still have the four 3-letter networks, other sports channels, and their own streaming or dedicated channels. ESPN has the NFL, MLB, NHL, and NBA, and usually not more than one or two of them at any given time. Without that programming the channel is just a bunch of yammering idiots saying “And hey, did you see that one?”

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