Less than a month ago, I wrote a 2016 outlook on Walt Disney (DIS) stock. I noted that ESPN was still a profit machine, accounting for 53% of the media company’s bottom line. The new Star Wars had just come out to great reviews and a record-setting opening weekend, and the impending opening of Shanghai Disneyland promised to create another meaningful, perpetual revenue stream.
I could have previewed any stock on Wall Street, but I chose to preview DIS stock because as an investor, I really respect its incredible, diversified portfolio of entertainment entities. Put simply, it’s unrivaled.
And truth be told, I see CEO Bob Iger as an incredible dealmaker, having put together a string of great deals to buy Pixar (2006), Marvel Entertainment (2009), and Lucasfilm (2012).
While I concluded that 2016 would “stack up to be a great year” for Disney’s stock price, that prediction is already looking less and less likely, particularly in light of recent threats coming to light surrounding its prized most prized network, ESPN.
DIS Not Diversified Enough
Yes, Disney’s portfolio is remarkably diversified between a whole lot of high-quality cable networks, films, theme parks, and intellectual property. But unfortunately, the source of Disney’s profits can hardly be considered to be diversified at all, which is easily the company’s biggest weakness.
Two recent developments regarding cash cow ESPN could signal an ominous 2016 for DIS stock. First of all, a recent survey conducted by marketing firm Civic Science found that over 50% of cable subscribers would be willing to cut ESPN from their package if it meant saving a few dollars each month.
ESPN reportedly charges providers about $6 per subscriber per month to carry the sports network, a fee more than four times the next-most-expensive network, TNT, which commands $1.48 monthly for the privilege of carrying it.
Sure, the results of one survey alone doesn’t mean Disney stock is doomed. After all, actions speak louder than words. But seeing as ESPN subscribers are falling — Disney has lost 7 million of them, going from 99 million to 92 million in just two years — consumers are starting to actually “cut the cord.” In other words, consumers are talking the talk and they’re starting to walk the walk as well.
The second development that DIS stock owners should keep in mind is the revelation that Disney won’t be bidding on the rights to NFL Thursday Night Football, instead letting rivals CBS (CBS) and Twenty First Century Fox (FOX, FOXA) duke it out.
Given the specter of skyrocketing content costs, it makes sense. But it also sends a signal to markets that there is a limit to how much DIS will spend on rights, allowing other companies the opportunity to encroach on its territory. That, in turn, gives it less negotiating power with cable companies.
So, despite the money that Star Wars is sure to keep throwing off, and even though Shanghai Disney should be a hit, DIS remains at the mercy of ESPN. And right now, that’s a bad thing.
As of this writing, John Divine did not hold positions in any of the companies mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
