Disney's (DIS) ESPN Woes Continue: Can It Make A Comeback?

There seems to be no end to the plight for The Walt Disney Company’s (NYSE:DIS) ESPN, as the media behemoth continues to lose subscribers. Per Nielsen data cited by the New York Post, the company lost approximately 3.8% of its subscribers in the month of May, excluding gains from over-the-top services (OTT).

Declining subscriber count and higher programming costs have been a cause of concern for some time now. Disney’s primary cash cow, ESPN, has been under immense pressure as the Pay-TV landscape continues to change owing to migration of subscribers to online TV. Falling subscriptions will have a telling effect on the network’s ad revenues. Per Nielsen, the company’s subscriber base stood at 86.9 million as of May, compared with the year ago subscriber count of 89.8 million.

In the recent past, dismal performance of ESPN has also dragged down Disney’s overall financial results. In the second quarter of fiscal 2017, Disney’s Media Networks segment’s revenues gained 3% to $5,946 million, primarily on the back of 3% increase in Cable Networks revenues. However, the Media Networks operating income declined 3%. Sharp decline in Cable Networks operating income was due to dismal performance of ESPN. Weaker results at ESPN can be attributed to increase in programming cost in comparison with the preceding year, which overshadowed the affiliate and advertising revenue growth.

In the third quarter, the company expects programming costs to increase 8% year over year due to $600 million in incremental costs linked with the first year of its fresh NBA contract. Out of $600 million expenses, $400 million is anticipated in the third quarter.

Can ESPN Bounce Back?

Disney is striving to bring back ESPN’s golden days. In an effort to attract online viewers, the company has inked a deal with video streaming, data analytics as well as commerce management company BAMTech. Further, the company has the option to acquire majority of the stake in BAMTech, in future. It stated that it will use BAMTech to create an ESPN-branded, OTT video streaming service that will cover a variety of sports. Further, Disney is putting a lot of effort to make content accessible to more customers. It earlier announced that AT&T’s DirecTV will feature channels like ESPN, ESPN2, ABC, Freeform, Disney Channel, Disney XD as well as Disney Junior in their subscription packages in the upcoming DirecTV Now OTT service.

Recently, the company declared that it is focused on making innovative digital products. ESPN's mobile apps’ reached monthly viewers of nearly 23 million and spent above 5.2 billion minutes engaging with ESPN. The company further stated that mobile apps are going to play an important role in the future of media and ESPN is on the right way by taking the advantage of the trend with a wide range of apps.

Conclusion

While Disney’s movie business and theme park business continues to impress investors, its Media Networks continues to hurt their sentiment. For the time being Disney’s problem can be recapitulated in one word - ESPN.

Disney, which shares space with Twenty-First Century Fox, Inc. (NASDAQ:FOXA) , has outperformed the industry in the past six months driven by blockbuster performance of its movies. The company’s shares have gained 9.6%, while the Zacks categorized Media Conglomerates industry has increased nearly 4.2%.

Zacks Rank & Key Picks

Disney currently carries a Zacks Rank #3 (Hold). Better-ranked stocks worth considering include NTN Buzztime, Inc. (NYSE:NTN) and Central European Media Enterprises Ltd. (NASDAQ:CETV) . Both these stocks carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NTN Buzztime shares have increased more than 17% in the past three months.

Central European Media Enterprises shares gave gained more than 34% in the past three months.

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