ESPN, Not Mickey Mao, Missed Q3 2016.

There is no shortage of reasons why Disney missed, including the speeding-up Cable Division’s opting for

Streaming services; the NBA raising broadcasting prices on ESPN through the “step-up” agreement; $100 million surprised losses from Alice: Through the Looking Glass; the Zika virus in Miami; local and global terrorism; decline in travel numbers from Latin America due to unrest in Brazil and Venezuela; and Brexit adding to the injury with a strengthening dollar to slowdown tourism even more.

Of course, all eyes are on the performance of Disney’s media networks division, and specifically cable networks, which houses ESPN. The Q3 result seems encouraging that the loss in subscribers may have been partially offset by the growth in the skinny bundle.  The sports channel is currently a member channel of Dish Networks Sling TVVerizon Communications Custom TV and Sony‘s PlayStation Vue bundles.  While the bundle cost is dropped to $25, a significant savings, we don’t think it will change future users’ viewing preference.

Yet, after losing more than 10 million subscribers in the last 2.5 years (per 2016 Nielson’s data), Disney stock’s bloodline, ESPN, accelerated its downward slide by losing more than 100,000 daily members into Q3, as part of the cord-cutting movement toward to streaming services.   Considering the average $80 per year subscription fee, it is estimated that ESPN has lost close to $3 billion in revenue for the last 3 years.   The alarming part is that the loss in revenue, while accelerating, spreads over all sports channels, including ESPN2, ESPNU, FS1, NBC Sports Network, and NFL Network.  The common industry trend is due to the universal cord-cutting behavior and ridiculously high rights fee for the leagues.

Currently, the rights fee is estimated at $6 billion a year and rising.  ESPN has dropped to around 89 million subscribers in Q3 2016.  So, that’s still $7 billion in subscriber revenue a year.  What would happen if cord-cutting eventually drove that number down to its breakeven level, say, 75 million subscribers, in less than 140 days based on the current speed?

So for ESPN to stay profitable, you have to live in a world that believes the cord-cutting behavior is just a fad.

Therefore, even for the most die-hard fans of ESPN, who insist that “sports is too popular” to defect, have realized the reality that ESPN is no more the golden growth boy for Disney.

Quietly, Disney has been planning for the inevitable, including raising rates to mitigate subscriber losses, exploring new platform providers or even streaming options.  Disney and Comcast have put millions into Virtual Reality as the only way to rival Netflix.

However, we bet that these moves, putting short-term patches on, will not stop the subscribers’ loss in the long run.


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