Disney (DIS) is the world’s largest entertainment company with a market capitalization of ~$183 billion. The company is famous for its well-known characters like Mickey Mouse & Donald Duck, as well as the Star Wars and Marvel cinematic franchises.

Disney also owns ESPN, the predominant television channel for professional sports. Lately, Disney’s Media Networks segment (which houses ESPN) has been under pressure because of declining subscriber numbers.

The consumer trend of cord-cutting (reducing or eliminating cable subscriptions to save money) has impacted ESPN and resulted in some interesting headlines:

  • Barron’s: Is It Time for Disney to Wave Goodbye to ESPN?
  • Forbes: Disney Acquisition of Netflix Imperative as ESPN Viewership Continues to Decline
  • However, the decline in ESPN’s subscriber numbers is unlikely to be material to Disney’s long-term investment prospects.

    This article will describe in detail why concerns surrounding ESPN are overblown, and why Disney still has robust growth prospects moving forward.

    Business Overview & ESPN Concerns

    Disney is divided into four operating segments:

  • Media Networks
  • Parks and Resorts
  • Studio Entertainment
  • Consumer Products & Interactive Media
  • A breakdown of each Disney segment by revenues and operating income can be seen below.

    Disney Financial Data

    Source: Disney 2016 Annual Report, page 31

    2016 was a strong year for the aggregate House of Mouse, although the company did see a slight revenue decline in the Consumer Products & Interactive Media segment. Studio Entertainment in particular had a phenomenal year on the back of blockbuster movies like Finding Dory and Captain America: Civil War.

    2016 also saw continued decline in ESPN subscriber numbers. However, the sports broadcasting network still has a substantial following.

    The following excerpt from Disney’s 2016 Annual Report shows that there are currently ~90 million subscribers to the ESPN channel, with additional subscribers to ESPN2, ESPNU, ESPNEWS, and the SEC Network.

    Disney Subscriber Numbers

    Source: Disney 2016 Annual Report, page 2

    ESPN is losing roughly 300k subscribers per month – or approximately 0.3% of its 90 million subscriber base. The reason behind this decline is well understood by Disney’s management and investors alike.

    ESPN is a premium channel and charges cable providers accordingly. By offering bundles that exclude the expensive ESPN network (known as ‘skinny bundles’), cable providers can reduce their monthly charges and appease consumers who might otherwise resort to more affordable sources of entertainment. These declining subscription numbers are unlikely to impact Disney in the long-term.

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