Is Disney Fixed
After the release of Disney’s 2017 4th quarter results the stock has been on an upswing. This is a big deal for the markets and for Disney shareholders, because the stock had been in a rut for the past two years. Although Disney’s 2017 4th quarter results failed to meet or exceed analyst expectations, investors we’re optimistic about Disney’s future after getting more details about Disney’s streaming service. Is the hope of what a Disney streaming service could become enough to have fixed Disney?
Why Was Disney Broken?
Cord Cutters and ESPN broke Disney. First the Cord Cutters. If you aren’t aware, the term “cord cutters” is used to describe people or households that stopped subscribing to cable or satellite services. The chart below describes cord cutter households as, Without Pay TV Households.
Looking carefully at the second and fourth row of the chart above the number of cord cutters continued to increase from 2012 to 2016. In 2017 it’s expected that over 20 million U.S. adults will cut the cord. Without getting into too many details and stats, what we are trying to point out is more and more people are walking away from cable and satellite television.
Now ESPN. Since peaking at 100 million subscribers in 2010 - 2011, ESPN subscriptions have steadily declined as people have walked away from cable and satellite television. Currently ESPN has just under 90 million subscribers. In 2014 ESPN decided to re-up on their NBA deal, and negotiated a new deal where ESPN pays the NBA $1.4 Billion a year, which is three times more than the previous deal. This current deal lasts through the 2024-2025 season. We can only assume the hope was that the NBA would help to bring back subscribers, but it hasn’t.
ESPN, Disney, and The Cord Cutter.
As cord cutting turned from an incident to a trend Disney was late to react. Bob Iger, Disney’s CEO continued to be bullish on cable and would not spin off ESPN as a standalone app like many analyst thought they should. Using the ESPN NBA deal as an example, in 2015 if you wanted ESPN but didn't want to pay for the other hundred channels that come with cable you couldn't get one without the other. The cost at ESPN continued to rise as cable subscriptions continued to decline. With every quarterly report over the past two years analysts continued to magnify the loss of ESPN subscribers and the channel's expenses, which would send the stock price falling.
Chart By E-Trade. The small orange boxes represent the date when Disney reported quarterly earnings.
Disney and ESPN didn’t read the cord cutting trend correctly and overpaid for the NBA, and it came back to bite them.
4th Quarter 2017.
In early November 2017 Disney’s stock showed some signs of life and started trending upwards (look at the move up on the chart after the last orange box). On November 9th the company reported its 2017 4th quarter results, and despite missing expectations the stock continued to rise. Below are the business operations where Disney missed and beat analyst's estimates.
EPS: $1.07 vs. $1.12
Consumer Products: $373M vs. $470M
Studio Entertainment: $218M vs. $364M
Media Networks: $1.48B vs. $1.58B
Parks & Resort: $746M vs. $735M
Why is the Stock Rising After not Meeting Expectations?
Because of expectations. Earlier this year Disney announced that it would be removing its content from Netflix and starting its own streaming service. Disney plans to roll out its streaming service in 2019. Also the company plans to launch ESPN Plus in 2018. Disney officials did not explain how ESPN Plus will work, if it will be an app that a cord cutter can subscribe to like an HBO Now or if it will be an upgrade of the current ESPN app which requires you to have a cable subscription. The expectation of the streaming services has caused investors to put their money into Disney. From the recent reaction of the stock price on the news of the streaming service, it appears Disney may be fixed in the eyes of investors.
What’s does the Seville Report Think?
There are still too many questions surrounding the streaming service for us to believe that it can fix what’s broken with Disney. How will the ESPN Plus app work? Will consumers be able to pay a monthly subscription for the app and watch ESPN on their phones, Apple TV, Fire Stick, or other devices? And for the Disney streaming service, what will be the ratio of adult content to children content? Disney has announced that Star Wars: The Last Jedi director Rian Johnson has been picked to develop a Star Wars series for the new streaming service. Will Star Wars and Marvel content be enough to get an adult to subscribe to a Disney streaming service? Also how long does Disney foresee the streaming service taking to turn a profit? Bob Iger mentioned that the cost of Disney’s streaming service will be “substantially below” that of Netflix. Until we get answers to these questions it's difficult to say Disney is fixed.