Walt Disney Co ’s stock has fallen close to 20 percent since the firm published third quarter results. During the earnings conference call, CEO Bob Iger created quite a stir with his blunt comments about the decline in subscriber base and lower advertising revenues from ESPN.
“We are realists about the business and about the impact technology has had on how product is distributed, marketed and consumed. We are also quite mindful of potential trends among younger audiences, in particular many of whom consume television in very different ways than the generations before them,” he said.
Cord cutting fears got stoked, and investors were left stunned. They had assumed all along that ESPN’s bouquet of live sports would shield it from streaming services. What was worse was that Walt Disney Co ‘s cable operations accounted for close to half its operating income for the fiscal year to date. The hammering of the stock that followed was inevitable.
Things are not as bad as they seem
Walt Disney Co ‘s Chief Operating Officer Tom Staggs is trying his best to undo that damage. Speaking to analysts at the recently concluded Bank of America Merrill Lynch 2015 Media and Entertainment Conference, Staggs said that despite the fears, ESPN retained its core strengths.
ESPN is not only “number one in terms of foresee value,” but also generated “the most local ad sales, HD upgrades, and broadband subscriptions” for Disney.
Furthermore, Staggs alluded to the fact that ESPN’s reach extended much beyond “linear TV,” with strong presence on digital platforms like mobile apps and ESPN.com. During a recent weekend, when the sports network aired 48 college football games, digital viewership soared by over 60 percent, he said.
And Staggs is bullish about the revenue generating prospects of these platforms. He said that as these platforms evolve, Walt Disney Co will integrate them in to lucrative bundles that will include more content from its other platforms.
What does it mean for Walt Disney?
Staggs has presented a strong case. ESPN fears do seem to be overblown. Management has already stated that 96 percent of all sports programs are watched live.
ESPN has licensing agreements with the NBA, the NFL and Major League Baseball that run well into the next decade. As such, it’s highly likely that even if consumers opt for over-the-top packages, ESPN will continue to remain a vital part of any streaming cable bundles.
Besides, since cord cutting has dominated investor chit-chat, they have overlooked a number of other positive developments.
First, the Star Wars franchise will return this fall. Some box-office forecasts are veering towards $2 billion. Combine that with the hugely successful Pixar franchise, and the studio division looks set for strong long-term growth.
Walt Disney Co ‘s theme parks are also performing well. From 2009 to 2014, revenue jumped by 50 percent. Shanghai Disney is on track to open next spring. Analysts expect around 20 million visitors in the first year alone.
The stock looks a discount at current levels. Company executives seem to agree with that assessment. No wonder they repurchased shares worth over $2 billion!
“The market is giving us an opportunity to deposit stock at meaningfully lower prices,” Staggs said last week, “and so we’ve taken big advantage of that opportunity.”