Think you know Walt Disney Co (NYSE:DIS)? It’s obviously the dominant name in kid-friendly films, and it operates the most magical theme parks on the planet. If you think the value of DIS stock is first and foremost a reflection of success (or failure) on those fronts though, think again. Its television properties like The Disney Channel, ABC and of course the beleaguered ESPN actually make up the organization’s biggest division (as measured by revenue), and this so-called Media Networks arm is also the biggest contributor to the bottom line.
And that’s a problem. It’s also the crux of the reason the DIS stock price hasn’t advanced one iota since mid-2015 despite the reboot of the always-marketable Star Wars franchise and park attendance that’s still solid despite last year’s big increase in ticket prices. More than anything else, Walt Disney needs to win your television set in the face of an accelerating cord-cutting movement.
Here’s a closer look at where Disney makes its money, and why the recently-announced but not-yet-launched online-streaming video services have their work cut out for them.
A Picture Says It All
How does the old saying go? Charts don’t lie? If that’s the case (and it is ) the graphic below is concerning.
Studio revenue has been broadly growing, driven by the Star Wars reboot and a couple of successful Marvel films. Though the past couple of quarters for its studio arm didn’t compare favorably on a year-over-year basis, those reports were up against The Force Awakens, an unfair comparison to a $2 billion movie.
Theme Parks and Resorts revenue as well as earnings have been slow and steady growers too. As the chart makes clear, however, Media Networks’ numbers are edging lower. It matters, as that one arm accounts for more than half the company’s bottom line. If it is struggling, Disney stock is as well.
And for the record, ESPN is the biggest rainmaker in the Media Networks unit. If it’s in trouble, that failure can’t be buried by growth from Disney TV and ABC.
The reasons for lack of progress for its Media Networks’ business are plentiful, with some proving to be a greater drag than others. The clearer ones are alternative video venues. Consumers used to watch television and maintain their subscriptions to cable service because it was essentially the only choice, and the only means of accessing most sports programming.
Not so anymore. Netflix, Inc. (NASDAQ:NFLX) combats the perceived need for cable television, at least for some, while ESPN is no longer seen as the only reputable source for athletics-based entertainment. Some NFL games, for instance, are now being aired by Amazon.com, Inc. (NASDAQ:AMZN) to Prime members, underscoring the slow but steady shift from traditional to alternative venues for professional sports leagues.
It’s not just a technology-driven shakeup that’s making things tough on the sports-television business though. Professional video-gaming is not only a real thing now, paying to watch these tournaments is a real thing now. Some of these events have drawn bigger viewerships than events like NBA finals games.
There’s also the not-so-minor reality that the sheer amount of programs, channels and diversions has exploded now that the capacity to create them and broadcast them has soared. It’s a cultural shift that not only doesn’t lend itself to all of Disney’s legacy businesses, but a shift the company still isn’t entirely sure how to combat.
Looking Ahead for DIS Stock
Yours truly has said before that the launch of ESPN’s and Disney’s online alternative to cable-provided options is a healthy move that puts the company’s content/revenue destiny in its own hands, but won’t fully offset the financial headwind its Media Networks arm is now facing.
For the time being, I maintain the assessment. The company’s television business is taking on water faster than the company can bail it out.
While new consumer-friendly options that reflect the growing preference for a la carte subscriptions to internet-streamed video content is a good start, it’s just one step of many that need to be taken. Disney’s television has a relevancy problem as much as it has a delivery problem, and until the company realizes that its “television content as usual” mindset that worked a decade ago doesn’t work anymore, DIS stock is going to remain bogged down.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
