While Disney’s stock price has been on the rise recently, climbing 7.7 per cent this year and closing at $112.38 Monday, some analysts are still worried about ESPN’s impact on the larger corporation. One of those is Jefferies analyst John Janedis. Fierce Cable’s Ben Munson writes that Janedis sent a note to clients Monday raising his target price on Disney stock from $100 to $110, but also saying that ESPN costs and limited revenue growth opportunities will likely prevent Disney from rising even higher:
Jefferies analyst John Janedis said that Jefferies Sports Tracker suggested that “core” live sports hours across ESPN’s properties have peaked at around 3,000 over the past couple of years.
“Going forward, we expect hours to remain flattish, but with the abundance of sports programming/networks, we are concerned the availability of sports inventory could pressure sports advertising growth. We lowered our F18 and beyond cable network advertising to +2% vs. our prior +3%,” wrote Janedis in a research note.
The impact of cord-cutting on ESPN isn’t new, and neither are the worries about their growing rights fees (the article mentions how their NBA contract almost doubled to $1.1 billion this year), but the idea that advertising revenue growth for live sports is limited because of hours peaking is interesting. It’s probably mostly right, too.
Yes, there are more live sports events that ESPN could theoretically add without an extra contract (for example, they have a bunch of content that’s primarily featured on ESPN3 right now, including things like drone racing and the CFL), but airing more of those events on their TV networks wouldn’t necessarily move the needle relative to airing or re-airing studio programming. That’s why Janedis’ note is focused on “core” live sports hours. There aren’t many marquee properties out there, and any that do come up might be worth more in costs than what ESPN projects they’ll bring in in revenue. The network is keeping a close eye on that, which may be part of why Turner outbid them for the Champions League. So yes, it’s hard to see ESPN revenue growing from televising more events.
One area where this could change is if something not currently big becomes a major viewing hit. If programming like drone racing or eSports really takes off and starts pulling in viewers, then there might be opportunities for ESPN to expand coverage there without major costs, and to experience advertising growth as a result. However, at the moment, that doesn’t look all that likely.
There’s another factor in advertising growth that needs to be considered, though, and that’s audience. If ESPN airs the same number of live sports events and pays the same price for them, but suddenly sees more people watching them and can thus charge more for advertising during those events (presuming the advertising market stays the same), that’s another way to hit revenue growth. This is where things like Nielsen out-of-home viewing (which has been a big boon for ESPN) could matter, as well as ESPN’s strategy of getting into most skinny bundles and eventually offering some form of ESPN-lite over-the-top service. Cord-cutters mean that ESPN is in less homes in a traditional cable package sense, but if the network can reach more viewers through other means, there are perhaps opportunities there. However, if cord-cutting accelerates and those people don’t pick up ESPN in another way, the reverse could happen and ESPN ads could be worth less.
It should be noted that Janedis’ overall note is a positive one, raising his target price for Disney stock by $10. He doesn’t think the company’s going to come crashing back to the lower level it was at any time soon. And despite his bearishness on future ESPN revenue growth, he also believes the network’s cost-cutting (and layoffs in particular) will help them keep from holding Disney back too much. Here’s what he wrote about that:
We believe ESPN will need to cut ~$160M in costs to manage to 8% programming and production expense growth. With the sports rights locked in, the largest opportunity ESPN has to cut costs is headcount. Recent press reports suggest that ESPN will cut from its on-air personalities (among other areas) over the next several months. The upcoming potential round of layoffs follows a prior round of that took place in October 2015. As a reminder, at that time ESPN laid off about 300 employees, or about 4% of its workforce, mostly non audience facing positions.
Janedis seems to think those cuts are achievable, and that ESPN is going to be able to at least stop holding Disney back. That’s a change from some of the concerns we’ve heard about ESPN on recent Disney earnings calls. Still, he makes valid points about it being tough for ESPN to show much further advertising revenue growth, and about the challenges they’re facing from cord-cutting and rights fees. ESPN carries plenty of value for Disney, which is why the idea of selling or spinning it off has drawbacks, but it does appear to have more challenges in the way of its growth than some of the company’s other divisions.