The Big Lead

Disney Cites Higher Rights Fees, Less NBA Finals Games and Talent Terminations in Big ESPN Profit Decline

By Ryan Glasspiegel

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Disney stock was down about 4% in after-hours trading after the company announced that it missed revenue forecasts. A large part of the reason for that was their cable business, and a large portion of that is ESPN.

Said Disney’s earnings report:

"Cable Networks revenues for the quarter decreased 3% to $4.1 billion and operating income decreased 23% to $1.5 billion. Lower operating income was due to a decline at ESPN. The decrease at ESPN was due to higher programming costs, lower advertising revenue and severance and contract termination costs, partially offset by affiliate revenue growth. The programming cost increase was due to a contractual rate increase for NBA programming, partially offset by a decrease in the cost of time for ESPN programming aired on the ABC Television Network. Lower advertising revenue was due to a decrease in average viewership and lower units delivered including the impact of two fewer NBA finals games, partially offset by higher rates. Affiliate revenue growth was due to contractual rate increases, partially offset by a decline in subscribers."

Breaking this down bit by bit:

  • Everybody knew that the costs were going up sharply. ESPN’s NBA costs more than tripled this season, going from $400 million per year to $1.4 billion.
  • When ESPN laid off about 100 on-air talents in April, they ate the costs of all the employees’ future money right away. Many of the people laid off had multiple years left on their contracts, and instead of incurring those costs as they came ESPN decided it was better to take their medicine now with them.
  • It was a big deal for ESPN that the NBA Finals were five games this year when they were seven in 2016. The way this works on Disney’s financials is ESPN pays ABC for the airtime and then gets the revenue. So, while they had to pay less for airtime, they lost out on potentially over $100 million revenue right there (Ad Age estimated they’d lose up to $130 million if the series was a sweep).
  • This year, ESPN aired the Western Conference Finals, which were a sweep. Last year they had the Eastern Conference Finals, which went six games. That difference also matters a good deal.
  • While cord cutting continues to affect ESPN — they lost about 2-3 million cable subscribers year over year (and gained some of those back in skinny bundles like Sling TV), they made more money in the quarter than they did in 2016 because they charged the remaining subscribers’ cable companies more per month.

Much will be made of the announcements about an OTT streaming network and acquiring a majority stake in BAM Tech as mechanisms for mitigating further attrition in cable subscribers. It will be interesting to see how many people are willing to pay money to stream the niche sports.

If you’re looking for a silver lining, one year from now ESPN profits should be up. Unless they have big layoffs again, they won’t have the big restructuring costs. NBA costs will be constant instead of up big. If they get more than nine games in the conference and NBA Finals — pretty please let that be the case — they’ll have more ad revenue on their tentpole events.