ESPN Sports expenses weighed down Disney’s Force-ful quarter
LOS ANGELES — ESPN, the sports network that drives Disney’s profit engine, has hit a soft patch. Subscribers have fallen by about 7.2 million over the last three years, according to Nielsen, and it’s coming off a round of layoffs. As more people cut the cord to watch programming online, its perch on top of the pay TV empire is looking unsteady at best.
The network’s troubles are a bellwether for one of TV’S biggest challenges: the ever-increasing cost of sports rights and whether consumers want to keep footing the bill.
The conundrum was reflected in Disney’s quarterly earnings Tuesday. Even though “Star Wars: The Force Awakens” helped Disney’s earnings soar 32 percent to a record $2.9 billion, its television profits slumped by 6 percent, in part due to increases in the cost of sports-broadcast rights. It was Disney’s second profit decline in the TV segment in the last four quarters. Shares fell 3 percent to $89.48 in afterhours trading, the lowest level in more than a year.
Major media companies have invested $130 billion in sports rights over the next several years, Morgan Stanley analyst Benjamin Swin- burne said in a recent investor presentation. But the cost of those rights is increasing faster than the revenue those companies reap.
Leading the pack of big spenders: Disney and its ESPN juggernaut, which accounts for an estimated 29 percent of those long-term contract rights, from “Monday Night Football” to the NBA playoffs. Should the ad market falter and the pay TV audience decline even faster than its current 1 percent a year — the “bear case” — Disney’s overall profit growth rate for the next four years could be nearly halved, Swinburne said.
Disney CEO Bob Iger sought to rebut worries on Tuesday’s conference call, saying ESPN actu- ally saw a mild uptick in subscribers after the quarter ended. (Nielsen put ESPN subscribers at 91.4 million in January, down from 94.5 million a year ago.) Iger surmised the improvement had to do with good sales of Dish Networks’ Sling TV online bundle of channels, which includes ESPN for a relatively inexpensive $20 a month.
“This notion that either the expanded basic bundle is experiencing its demise, or that ESPN is cratering in any way from a sub perspective, is just ridiculous,” Iger said. “Sports is too popular.” He said the company would be looking for more opportunities to sell ESPN into so-called “skinny bundles” that are cheaper than most pay TV packages today.