Walt Disney Co (NYSE:DIS) could do no wrong up until two years ago. Disney and DIS stock were firing on all cylinders. With the purchase of LucasFilm, Pixar and Marvel Studios, DIS stock is set up for the next hundred years — literally — as far as content goes.
And while DIS still hasn’t figured out how to make money for online entertainment — even the popular Toontown and Club Penguin never made much coin — the other divisions more than made up for it.
Until ESPN blew up.
There are several reasons why ESPN is struggling. First, ESPN cost DIS stock a lot in expenses by overpaying for NBA and NFL games, somewhere around $8 billion. That’s a lot of money and, worse, these are fixed costs.
Disney can’t offload or reduce them.
Disney Stock and the ESPN Problem
The revenue side of the equation is another problem. Revenue comes from two sources: advertising and cable subscription fees. Both of these are variable. Advertising depends on eyeballs. Yet eyeballs are looking elsewhere — as ESPN has lost about 15 million subscribers over the last six years. With fewer viewers, there is less demand for the channel, which means distributors aren’t willing to pay as much, so it becomes a death spiral.
The most vocal critic of ESPN believes the numbers show the network losing money by 2021.
Another problem is that ESPN shifted away from its core programming of sports. Take a look at the schedule and you’ll see what I mean. Finally, as part of this, ESPN started getting political. People want to watch sports, not political commentary. Not only that, ESPN started spouting left-wing politics. This was a colossal mistake. First, by embracing one ideology, ESPN and Disney immediately alienate 50% of the audience. Second, sports by nature carries conservative values. Sports are about individual achievement, exceptionalism, personal responsibility and hand-to-hand combat.
So what happens to ESPN? The company has to spin it off. It has no choice. It is dragging down the results of the rest of the company. Yes, DIS stock can survive this because of its diversified businesses. However, jettisoning ESPN would be a great thing for the stock.
It would also be a sucker’s bet for investors. If Disney stock shareholders get shares in a spinoff, they should immediately sell them. Who wants to own a piece of a collapsing network?
There is one other scenario that may come to pass. Disney could get an offer to purchase ESPN, and possibly Disney’s other media networks. Or it could happen after the spin-off.
There is one man who could buy up the darn thing, and who has the clout to renegotiate deals with the NBA and NFL, crack the whip to get cable distributors back on board, and push the left-wing politics out of programming.
That man is Dr. John Malone of Liberty Media.
Malone pioneered cable TV. He buys up cash-flowing assets, because cash flow is the single most important thing that allows him to draw ultra-cheap debt for his empire. If you look at every purchase he’s ever made, almost all have had reliable cash flow. When you look at all of his businesses and how they report, they report OIBDA and EBITDA.
Bottom Line on DIS Stock
ESPN has cash flow. He could stem the expense bleed by renegotiating these contracts. He knows cable inside and out and could strike deals to boost revenue. As a Libertarian, he would quash the left-wing politics and get ESPN back to focusing on sports.
He’s also a content guy. While his investments in content have been limited, they have been highly targeted. Liberty owned Starz! for ages. He hired Chris Albrecht to start up original programming. Once that was established, Malone got a seat on the board of Lions Gate Entertainment Corp. (NYSE:LGF.A) and I correctly predicted the two companies would merge.
ESPN would make sense, provided he gets all the parties on board. It would also mean a big cash infusion for DIS stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns DIS stock. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
