Walt Disney reported fourth quarter earnings Thursday that matched Wall Street estimates, but the stock is down more than 5% Friday after revenues came up just short of expectations. Disney is a wildly diverse company with theme parks, movie studios, cruise ships, consumer products and the ABC TV network. But once again, cable networks were the driving force behind Disney’s earnings, responsible for 57% of the company’s total operating income. The cable channel doing most the heavy lifting for Disney is ESPN, which along with a contribution from the Disney Channel, generates more profits than the rest of Walt Disney combined.
Disney acquired Capital Cities/ABC in 1996 for $19 billion, which was the second largest takeover in U.S. history at the time. The majority of the deal revolved around the ABC network and its stations, which were valued at roughly $11 billion combined. Another component of CapCities was the expanding sports channel ESPN (this was pre-ESPN2, ESPNU, ESPN The Magazine, etc.).
Disney execs certainly recognized the potential value of ESPN. Disney’s CEO at the time, Michael Eisner, thought ESPN offered two clear paths to growth: international expansion and exploiting the ESPN brand at Disney’s theme parks and retail stores. He told the New York Times when the merger was announced, “We know that when we lay Mickey Mouse or Goofy on top of products, we get pretty creative stuff.” Eisner added. “ESPN has the potential to be that kind of brand. ABC has never had our resources, and we haven’t had ESPN. Put the two together and who knows what we get.”
ESPN has blown up, but not quite how Eisner envisioned. ESPN international affiliate revenues currently represent just 11% of ESPN’s affiliate fees, according to research firm Wunderlich Securities. ESPN Zone sports-themed restaurants were a bust and all but two in Southern California were shuttered by 2010. ESPN is hardly integrated into Disney’s theme parks or retail shops.
But Disney is grateful for those $6.1 billion in affiliate fees from ESPN that help stabilize revenues each quarter. Ad revenues at ESPN, now $3.3 billion, can fluctuate depending on the economy (total ESPN revenues, including the networks, magazine and website, are $10.3 billion). Affiliate fees, paid by cable companies to channel owners each month, have steadily grown 8% annually at ESPN in recent years. ESPN and ESPN2 are both in more than 100 million homes and command $5.13 and $0.68 per month, according to SNL Kagan. The next highest among widely available channels are TNT at $1.18 and Disney Channel at $0.99 says Kagan. The average fee for basic cable channels is $0.26.
ESPN is worth $40 billion according to a research report this summer from Wunderlich or barely ten times earnings before interest, taxes, depreciation and amortization of $3.9 billion. Disney as a whole is currently worth $84 billion (Hearst owns a 20% stake in ESPN with Disney owning the rest). The CapCities purchase worked out great for Disney, but only because of the growth of ESPN, as the value of ABC has deteriorated dramatically over the past 15 years. Wunderlich figures that the ABC Network is worth $1.7 billion, or just 4% of ESPN’s value, and the ABC Station Group another $2.6 billion.
The reality is that there is not another media property in the world worth as much as ESPN because no media asset delivering content generates close to as much money. Wunderlich pegs the value of the Disney Channel, which is one of the most valuable channels and has the third highest affiliate fees, at $10 billion. It is even uglier in print. The current market value of the New York Times is $1.3 billion. The only media companies in the world worth more than $40 billion are News Corp. ($58 billion) and Comcast ($96 billion). The value of News Corp. is spread out among dozens of media assets, while Comcast derives most of its value from being a cable provider.
There are fears that spending on sports rights fees will crimp ESPN’s profitability going forward as competition heats up from Fox Sports and NBC Sports. ESPN recently agreed to double the annual rights fees it pays for Major League Baseball and last year reached an eight year, $15.2 billion deal to broadcast the National Football League.
The reality is that the value of sports on television is only increasing, as much of the viewing public moves to watching programs on delay, limiting the effectiveness of advertising. It is a problem that ESPN does not have to worry about as 99.4% of sports events on TV are watched live, according to Disney CFO Jay Rasulo.
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