The cord-cutting craze has become as popular as ever, with U.S. consumers dropping high cable TV subscription fees for lower-cost streaming services like Netflix, Amazon Prime and Hulu.
With live sports being less conducive to such services, many analysts and investors have felt that ESPN would be somewhat immune to cord cutters. However, the latest report shows that the live-sports network has lost 7 million subscribers over the last two years — quite a bit more dramatic than chief executive Bob Iger’s admittance in August that ESPN had suffered “some subscriber loss.”
In fact, ESPN has lost 7% of its subscriber base in the last two years, down to 92 million from 99 million, and it doesn’t look like it’s going to stop.
Is there hope?
Disney’s (NYSE:DIS) market cap currently sits at $200 billion. In April 2014 when the market cap was $137 billion, analysts at Wunderlich Securities valued ESPN at $50.8 billion based on discounted cash flows. Thus, ESPN’s fall should be more than alarming to investors.
The short-term upside is that Disney is far more than a cable TV company. And despite subscriber losses, the company still managed to increase revenue and operating income from its media networks by 10% and 6%, respectively, over the last year.
But despite its successes elsewhere in its business, its current share price and valuation are at risk long term if the ESPN situation goes from bad to worse.
I’m optimistic
Disney didn’t get to where it is now without learning to adapt. Running for decades on its parks and animated films, it purchased Capital Cities/ABC in 1996, which brought ESPN into its fold.
A decade later, it saw how Pixar could complement its studio entertainment offering and bought the company. Marvel Studios and Lucasfilm followed and Disney has been nothing but wildly successful with Pixar and Marvel — I’ll let you know how the Lucasfilm one pans out a month from now.
