Why Media Investors Will Be Listening to Disney's CEO Today
The spotlight will be on Disney (DIS) - Get Report and ESPN on Thursday when CEO Robert Iger hosts an investor conference call to talk about the company's calendar third-quarter earnings.
The owner of the Star Wars franchise, the ABC network and ESPN will issue an earnings statement shortly after the close of trading in New York, and the Iger-led conference call will begin at 5pm on the East Coast, 2pm on the West Coast.
This has been a turbulent three months for Disney and ESPN, its sports powerhouse and the engine behind much of the company's profits. Ratings have slipped ever so slightly, along with subscribers. Some 300 employees were laid off this fall, and just last week, the folks in corporate shut down the popular Web site Grantland.
It's clear that ESPN is looking to cut costs, a point made clear when Iger dropped the bombshell on Aug. 4 that the sports network was experiencing "modest" subscriber declines. Disney's shares fell 6% on Iger's comment, though the stock did rebound since late-September after hitting a 52-week low.
Iger's August comments combined with Time Warner's announcement Wednesday to cut its 2016 profit forecast speaks to the overriding concern of media investors: cord-cutting is happening faster than expected. And as more households terminate their pay-TV contract, or choose not to get one altogether (the so-called "cord-nevers), that's putting more pressure on traditional television companies.
TheStreet's Jim Cramer, Portfolio Manager of the Action Alerts PLUS Charitable Trust Portfolio, commented on Disney:
"I am concerned after Time Warner that the company could have similar problems with cable but at the same time Star Wars and Shanghai Disney are fourth quarter and 2016 events."
"You can buy some now and some after but only if you have a multi-year perspective, which his actually the way to own Disney. But I hazard to tell you what CEO Bob Iger has to say on the call after the dangers outlined in Time Warner's call."
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On the Disney investor call, Iger is sure to highlight the latest edition of the Star Wars franchise, The Force Awakens, which will hit theaters at the end of the year. He's also likely to mention that Disney has had a wealth of success with its theme parks and recent films like Inside Out and Avengers: Age of Ultron.
But he'll need to address the question on every investor's mind: What's going on with ESPN?
"Disney is being careful in their strategy," Robin Diedrich, a consumer analyst at Edward Jones, said. "ESPN is an anchor to the whole basic TV package as we know it today... It's the primary reason why many people get pay-TV."
Even ESPN, cable's most-watched network, is not immune to a dwindling pay-television subscriber base.
The speed with which investors sold Disney shares must have been a surprise to Iger, given that Disney's cable networks, of which ESPN is easily the largest, have been a consistent provider of revenue and operating income to a $51 billion-a-year company that also includes the ABC Network and Disney Studios as well as divisions dedicated to consumer products and theme parks.
Disney's cable networks contributed about 50% of the company's operating income in the quarter that ended June 30, while accounting for about one-third of its revenue, results nearly identical to the same period a year earlier. Disney shares have outperformed the rest of the media sector in 2015, rising 23% compared to the S&P Media Group, an index of the 18 largest media and advertising stocks that has gained 4.1% this year.
Even prior to the August stock spasm, Disney had already started experimenting with streaming ESPN.
At the beginning of this year, Disney gave rights for ESPN and Disney Channel to air on the Dish Network's
(DISH) - Get Report new live television streaming service, Sling TV. Viewers could cut their cable plan in favor of paying $20 per month for 19 channels. Since Sling is live television, viewers can't really fast forward through the commercials, and for now, Sling TV only offers one stream per account. However, it marked the first time audiences could watch ESPN's live games without a pay-TV contract.
"It's all designed to attract consumers or households that are either cord-nevers or cord-laters," Disney CEO Iger said in an investor conference call in February. "We believe that there is an attractiveness to or a real justification for trying to convince, particularly millennials, to sign up for some form of subscription TV when they might not have signed up for any."
Iger described the stream as an experiment rather than a full commitment to moving ESPN completely over-the-top, about which he said, "If we were to do that now, it would be somewhat precipitous of us."
Analysts such as Derek Baine at media research firm SNL Kagan and Todd Juenger at sell-side research and brokerage firm Bernstein, agree with Iger that bringing ESPN over-the-top may not be the best move for Disney right now, even if it ultimately may be inevitable in the near future.
"Disney's bread and butter comes from major multi-channel operators," said Baine in a phone interview. "To do something that would severely cannibalize that, I don't think it would be in their best interest."
In Juenger's report released last week, the Bernstein analyst says that if ESPN went over-the-top, other networks would follow, and then households might discover that other group packages were more attractive, thereby posing a threat to ESPN.
"Such networks (or groups of networks) could retail at a much lower price point and still have decent margins," Juenger said in the report. "Heck, we believe companies [Discovery (DISCA) - Get Report , Viacom, AMC Networks (AMCX) - Get Report , Scripps Networks Interactive (SNI) , or Time Warner's Turner] could team up and offer a mini-bundle, retailing at $15, with close to 50% gross margin. It would have scripted drama, comedy, non-fiction, lifestyle, news, kids, (and even some sports)."
So, not only is ESPN caught in the balancing act of holding on to its roots in traditional television and dabbling in streaming content, but licensing fees for the games themselves are adding into the mix. With sports games being one of the last exciting shows to watch live, fees for NFL, MLB, and the NBA are increasing from network competition. The LA Times reported that starting last year, "Monday Night Football" increased by $800 million per season.
"The cost of sports rights have been going up forever," said Diedrich. "It just keeps getting more and more competitive every year because you have more and more companies that are vying for these sports rights."
Despite the competition for licensing rights, no other company comes even close to ESPN's affiliate fees. It's still the most expensive network to broadcast. According to SNL Kagan, ESPN brings in $6.55 per subscriber per month in affiliate fees. The next highest is Time Warner's TNT at $1.58. Thursday's affiliate fees results will help to illustrate how many ESPN subscribers are out there.
"People are going to look closely at the affiliate fees because ESPN and some of the other major operators have been saying that they are not losing as many subscribers as are reflected in the Nielsen numbers," said Baine. "People want to see if that's gonna show up in the earnings like that. The proof is gonna be in the pudding."
As costs go up and viewing methods fluctuate, ESPN has also chosen to lay off 300 employees. Some popular names like television host Keith Olbermann and columnist Bill Simmons, who founded Grantland, were among them.
"Beginning today, we will be enacting a number of organizational changes at ESPN to better support future goals," John Skipper, president at ESPN, said in a message to employees posted online late last month. "A process that will include the elimination of a number of positions, impacting friends and colleagues across the organization."
Of course, Iger would prefer to talk about the global event that will be Star Wars VII: The Force Awakens. The film comes out Dec. 18 in theaters across the nation and box office predictions are pretty much in agreement that the movie is going to break records. Thursday, though, before talking about The Force, Iger will need to clarify what's going on with ESPN.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.