The dust still is settling from reports that Walt Disney Co (NYSE:DIS) may end up acquiring Twitter Inc (NYSE:TWTR) before the odds-on favorite Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) gets a chance to. And yet the rumor mill already is hinting that Disney is actually more interested in nabbing Netflix, Inc. (NASDAQ:NFLX).
Never let it be said the market doesn’t always serve up a fresh batch of drama.
Disney stock edged lower when the suggestion of a Twitter buyout was first floated on Monday of last week; it seemed like a poor use of Disney’s time and resources. DIS shares didn’t move much higher on Monday of this week as the market shrugged off the impact of the potential pairing. Shares are modestly slumping today — Tuesday — as well, with most traders not quite sure what to believe.
The thing is, not only is a bid for Netflix far more plausible, but there’s a solid strategic logic to it that very well could end a two-year slump for Disney stock.
Netflix Solves a Problem
As was the case with the possible Twitter buyout, take the rumors that Netflix is a new target with a grain of salt. The idea was only supplied by the proverbial, unnamed “people familiar with the matter” and has been unconfirmed by the potential buyer.
Still, there’s a compelling logic to the premise — enough logic that there may well be some truth to the rumors.
It’s not exactly a big secret that while Disney’s theme parks and movies are doing as well as ever, its TV properties — namely ESPN — are struggling. Although revenue for the division was up last quarter, the subscriber count was down again, as were ratings.
Part of this struggle (arguably the biggest part) is rooted in the cord-cutting movement. ESPN is commonly packaged with most cable television bundles, with the cable providers passing along payment to the channel’s content creators. The size of that fee paid to Disney for ESPN’s feed is ultimately based on viewership, though. If fewer consumers are cable subscribers, fewer consumers get a chance to tune into the sports broadcast it delivers.
An online venue would give ESPN a chance to sell ads or subscriptions, or both, to the crowd that’s interested in sports but not willing to buy an entire and often expensive cable package just for access to sports programming.
Compelling Metrics
But interest in watching sports online is minimal at best, right? Well, it may be greater than you think.
Twitter’s first online broadcast of an NFL game in mid-September drew a crowd of 2 million. The figure pales in comparison to the 48 million that watched the same game via a cable feed. But cable providers have had decades to establish the habit. It was the first time Twitter had ever broadcast a live game, and viewership may have been handicapped by the fact that the app needed to view the game was not only not available for all devices, but wasn’t available until shortly before the first broadcast.
Perhaps a better example of what owners of Disney stock could expect from a foray into online broadcasts is how relatively well Yahoo! Inc. (NASDAQ:YHOO) did with its first and only broadcast of an NFL game last year. It attracted a total of 15 million viewers. Although its viewer-per-minute metric varied from about 10% to 20% of that achieved by a cable broadcast of an NFL game, the Bills/Jaguars matchup was hardly a must-see.
And again, Yahoo was a venue that had never broadcast a live NFL game before. It will take more than one such broadcast to retrain consumers.
Even the fact that Amazon.com, Inc. (NASDAQ:AMZN) is entertaining the idea of getting into sports broadcasts means Walt Disney Co may want to establish its presence in the online market fast, just to make sure it’s the name to beat when the online delivery vehicle is the norm.
Netflix would not only be the easiest and fastest vehicle to do that, but it would provide Disney a platform and an audience for all of its other content.
See, while Disney finally decided in August to create a streaming ESPN product, that online-only venue won’t air the sports content delivered via cable. Those cable broadcasts are often the games and events viewers want to see most.
Bottom Line for Disney Stock
While it remains to be seen just how truly interested in Netflix Disney is, there’s no denying Disney has to do something along these lines if it wants to salvage is cash cow ESPN. Regardless of what it does, however, the migration to an online presence isn’t apt to fully offset what it’s losing as the dominance of cable television shrinks.
It’s not often appreciated, but for years, ESPN enjoyed outsized revenue compared to other programming. For years, ESPN commanded on the order of 18% of the fees passed along by cable companies to cable channels, yet only garnered 3% of total viewership.
As they say, though, the jig us up. The advent of over-the-top television and online broadcasting has leveled the playing field, and the value of a sports fan is no longer perceived as being leaps and bounds better than a non-sports viewer.
In other words, even if ESPN gains back lost viewers (and the cable viewers it will lose in the future), it’s unlikely Disney will recapture the revenue it was able to create with ESPN before the advent of so many other viewing alternatives.
Still, Disney stock is better served if the company takes some action than no action at all. Netflix would be a clearly fruitful fit, even if CEO Bob Iger doesn’t yet know exactly which direction the pairing would go.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
