Disney (DIS) earnings were announced yesterday, and as you might imagine, they were massive. Quarterly earnings were up 28% for Disney’s fiscal quarter ending Jan. 2nd - way above Wall Street expectations. The reason is simple enough: Star Wars: The Force Awakens premiered, and it did not disappoint. The Force Awakens quickly became the highest grossing movie in North America ever...by far, grossing over $906 million so far, easily lapping the $760 million boasted by James Cameron’s Avatar in 2009, and pushing the company’s net income to $2.88 billion.
So why did holders of Walt Disney Co stock see a drop of more than 3.00% this morning? The answer is simple: Cable TV...specifically, ESPN.
Despite their name being synonymous with world-class theme parks and big, crowd-pleasing films, at the end of the day, Disney’s cable networks bring in the most revenue for the company...by far. While Marvel, Pixar, and Star Wars movies have made for some of the biggest movies of all time in recent decades, Disney’s film division only accounts for about 15% of all operating revenue. Disney parks and resorts meanwhile account for a more robust 31%, but that’s still dwarfed by cable networks, accounting for 43.3% of Disney’s revenue in 2014.
ESPN has long been the jewel of Disney’s cable empire, but as bundled cable packages increasingly become “unbundled,” and viewers get wind of how expensive it will be to keep ESPN, many are opting out. Like nearly every traditional cable channel, there’s little question that ESPN will be losing viewers in the coming years, but just how many, how quickly remains to be seen. And that uncertainty has Wall Street spooked.
Disney’s Looking Great! (Compared to the Competition)
While Disney’s movies and parks continue to break records, their cable television division has been acting a bit...goofy. In fact, in Q4 2015, cable television revenue fell by 6.00%, and there’s much concern that the bleeding won’t stop any time soon.
Yes, it’s true: Disney’s cable networks are struggling. But the mouse house is hardly alone in the wonderful world of struggling cable networks. Viacom (VIAB), owner of Nickelodeon, MTV, Comedy Central and many other networks has seen their stock dive more than 50% in the last year. CBS (CBS), owner of Showtime, The CW, and well, CBS, among other networks, has lost nearly 20% of its value year-to-date. And 21st Century Fox (FOXA), owner and purveyor of the massive FOX empire, has tumbled more than 25% since this point in 2015.
Over the same period, Disney dropped about 12%. Not great by any means, but considering the baked-in pain across the board for cable companies, it’s really not that bad.
Never Bet Against the Mouse
Look, there’s plenty of reason to assume more pain is on the way for Disney. In fact, everyone who’s got a horse in the traditional media race is in for a rough time ahead as streaming services like Netflix (NFLX) continue the slow and steady dismantling of traditional bundled cable packages. But Disney CEO Bob Iger has proven to be very forward-thinking and savvy, having overseen the purchase of Pixar, Lucasflim, and Marvel by the studio...and we all know how that panned out.
So, yes, it’s a bad idea to invest in traditional cable companies. But it also seems shortsighted to lump Walt Disney Co in with loathed behemoths like Time Warner (TWC) and Comcast (CMCSA). After all, once the dust settles and cable TV is dead and buried, Disney will still own Luke Skywalker, Iron Man, and their own stable of stalwart characters going back almost 100 years, as well as a $146.9 Billion market cap. Do you really think they won’t be able to weather the storm and take a leading position with whatever the next phase of entertainment media proves to be?
DISCLOSURE: The author has a long position in Walt Disney Co.