The world’s most popular cable channel is in big trouble. Walt Disney Co‘s (NYSE:DIS) ESPN has been losing subscribers to cord-cutting over the last five years, but the situation now seems to be getting out of hand. According to TV ratings arbiter AC Nielsen, ESPN lost 621,000 subscribers in the month of October, more than double the channel’s average churn of 300,000 subscribers per month, and the largest monthly subscriber drop in channel history. But that’s just part of the horror story for Disney stock.
DIS also lost 607,000 ESPN2 subscribers and another 647,000 ESPNU subscribers during the same month.
Luckily for investors, Disney stock has taken it all in stride, notching 2.5% higher after CEO Bob Iger provided upbeat 2017 guidance which, among other things, predicted modest ESPN growth. However, DIS stock is down 5.5% year-to-date.
DIS Stock: How Bad Is the ESPN Problem?
Disney does not frequently break out subscriber trends for its cable channels leaving investors to have to rely on third party channels. The company at first dinged Nielsen over what it termed as ”failures over the years to accurately provide subscriber data,” prompting Nielsen to issue a recall for the initial data.
“This most recent snapshot from Nielsen is a historic anomaly for the industry and inconsistent with much more moderated trends observed by other respected third party analysts. It also does not measure DMVPDs and other new distributors and we hope to work with Nielsen to capture this growing market in future reports.”
The DVMPDs that Disney is talking about here are a direct challenger to traditional multi-channel video programming distributors such as Sony Corp (ADR)‘s (NYSE:SNE) PlayStation Vue and Dish Network Corp‘s (NASDAQ:DISH) Sling TV. Unlike MVPDs, which deliver content through pipes, DVMPDs distribute content via the internet, usually through a set top box.
Nielsen has, however, stuck with its original report saying:
“The month over month decline in coverage that most cable networks saw was driven primarily by an overall decline of approximately half a percentage point (0.55) in the Cable Plus universe, meaning fewer households are subscribing to pay TV via traditional cable MSOs, telcos or satellite providers.”
There’s some evidence that Nielsen’s numbers could be accurate despite DIS’ quibbling. The company recently reported Q3 earnings, and the numbers were as revealing as they were damning. The company suffered another double whammy after posting top and bottom line misses, but even more worryingly recorded its first revenue contraction in more than 15 quarters.
And Twenty-First Century Fox Inc‘s (NASDAQ:FOX, NASDAQ:FOXA) Fox Sports 1 has recently overtaken ESPN in weekly ratings, the first time in history that ESPN has lost the coveted top spot to a rival channel.
ESPN has been bleeding subscribers over the years due to cord cutting, growing popularity of skinny bundles that exclude costly services such as ESPN and cord trimming (scaling down your TV package). Consumers are simply tired of paying an arm and a leg for services that they hardly ever use.
Instead of throwing a hissy fit every time Nielsen throws out numbers that paint its ESPN gem in a bad light or suing companies like Verizon Communications Inc. (NYSE:VZ) that are trying to modernize cable channels, DIS stock needs to embrace the changing times. October could have been an anomaly, but there’s no denying that ESPN has lost 11 million subscribers since its 2011 peak of 100.1 million.
In the past, ESPN has been pretty successful at offsetting a shrinking subscriber base by increasing affiliate fees for carrier partners such as Comcast Corporation (NASDAQ:CMCSA). The channel is able to do this because of its sheer popularity and high ratings.
ESPN now brings in about four times as much revenue per subscriber compared to rival channels such as Fox Sport 1, TNT and the NFL Network. ESPN accounts for about a third of Walt Disney stock’s revenue and close to 40% of the company’s operating income. But if the channel’s ratings continue to fall, ESPN’s pricing power will decrease and the channel will be unable to command premium rates. Therefore, subscriber atrophy is not nearly as pernicious in the short-term as falling ratings, and this could really hurt Disney stock.
Bottom Line on Disney Stock
For all its cable woes, Walt Disney’s movie business has enjoyed a banner year. The company’s latest release, Doctor Strange, is still sitting at the top of the box office and has out-grossed Fox’s Trolls for the second week running. Doctor Strange now boasts an impressive worldwide gross of $492.6 million.
DIS stock has enjoyed its best year ever at the domestic box office with revenue of $2.3 billion surpassing last year’s record high. The company’s latest strategy of releasing a stream of comic book adaptations while also relying on past successes such as its Pixar franchises has clearly been working like a charm.
The segment’s $5.85 billion in global movie ticket sales through the first 10 months of the year puts it only behind the all-time high of $6.9 billion set by Comcast’s Universal last year. But with a handful of releases such as Mouse House yet to hit theaters later in the year, Disney should have little trouble setting a new box office record in 2016.
DIS’ Studio Entertainment segment is the company’s third-largest ($9.44 billion in FY16 revenue), and brings in roughly the same revenue as ESPN. A few more homeruns like these could help it eclipse the giant channel, which might help calm jittery investors.
But given the strategic importance of the channel to Disney stock, you can expect it to become a battleground stock over the next couple of quarters. However, DIS stock still looks like a prime long-term holding.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
