Walt Disney (DIS) generated about $11.1 billion in revenues in its latest quarter with $5.1 billion or 46% of the total from media networks. Even a larger portion of its Q3 '12 quarterly operating income of $3.2 billion was from media networks - $2.1 billion or 65%. Over the same period, cable networks, which include ESPN among others, generated $3.6 billion of revenues and $1.9 billion of operating profit which represents 32% and 59% of its total revenue and operating income, respectively. ESPN represents a large portion of these revenue and operating income streams. In its Q3 '12 results, Walt Disney mentioned a rare decline in ESPN. This article will discuss three major competitors of ESPN and why ESPN leadership position in sports TV may have started to erode and subsequently could cause shares of Walt Disney to underperform. The three major competitors include, in order of strength, NBC Sports, which is jointly owned by Comcast (CMCSA) and General Electric (GE), Fox Sports, which is owned by News Corp. (NWS), and CBS Sports, owned by CBS (CBS).
NBC Sports is part of NBC, which was owned by General Electric until it sold a 51% majority stake of NBC to Comcast in late 2009. This deal created significant synergies for NBC sports division and Comcast's own sports programming. The new NBC Sports will be headquartered in Stamford, CT, which is only about 70 miles away from ESPN headquarters in Bristol, CT. The merger gives NBC Sports a much stronger presence in sports. It combines NBC's traditionally strong presence in Olympics and national sports broadcasting with Comcast's strength in regional sport networks.
In a recent blow to ESPN, NBC Telemundo, the Spanish broadcasting version of NBC, won the rights to transmit the men's and women's World Cup in Spanish in the U.S. from 2015 to 2022 for the amount of $625 million. ESPN was the incumbent broadcaster in English and Spanish in the U.S. for this major sports event. In addition, the merger is thought to have influenced NHL to extend its contract with NBC Sports for an additional 10 years.
From a strategic and financial standpoint, the new NBC Sports is a much more powerful competitor to ESPN. Prior to the acquisition, NBC was part of a larger industrial company, which could not and/or did not want to grow the sports network. For example, in the 2000s NBC Sports was outbid by ESPN for the MLB and NBA rights and NBC unsuccessfully ventured into emerging sports most notably with the Arena Football League. In addition, NBC generated about 10% of GE total revenue before it was sold. Even more, Comcast's regional networks generated less than 5% of the company's revenues in 2008. Fast forward to 2011. The cable networks (which includes Comcast legacy networks) and the broadcast television segments generated $14.9 billion of revenues or 26.7% of Comcast revenue and $3.5 billion of operating profits or 32.7% of its operating income. Clearly, the new majority owner of NBC will be a lot more interested and capable of growing the TV business, including the lucrative area of sports.
Fox Sports' bid of $475 million won the company the U.S. rights to broadcast in English the World Cup. More recently Fox Sports announced that it is launching a sports network in Spanish for the Los Angeles area, which will cover over 100 games of the Angels, Dodgers, and Clippers teams. Also, the company purchased the majority stake it did not already own in Fox Pan American Sports network and launched Fox Sports in Brazil. This was followed by an announcement that News Corp will purchase ESPN's 50% equity stake in ESPN STAR Sports (a sports TV program in Asia). In addition, Fox Sports extended its contract with the NFL through 2022. And finally, early this year, the media published rumors that Fox is going to launch a national sports network in direct competition with ESPN.
Similar to Walt Disney, News Corp is a media empire. The difference is that the Fox Sports is much smaller portion of the parent company compared to ESPN. The cable network business, which includes Fox Sports, generated $9.1 billion or 27% of total revenues during the fiscal year ending June 30, 2012 and $3.3 billion or 61% of operating profit. Fox Sports' position can be further strengthened after the company separates its publishing business from the TV and film segment. The reason is that the publishing business is compressing the valuation of the company, thus making it more difficult for the TV and film business to grow and compete.
The last major competitor of ESPN is CBS Sports, which is part of CBS Corp . The company, similar to NBC/Comcast and Fox, is trying to expand further into sports. Recently, it signed commentator Doug Gottlieb who was formerly at ESPN. Currently, CBS Sports broadcasts such sporting events as NFL on CBS, NFL Super Bowls (shared with NBC), College Basketball Final Four games, College football on CBS, and the U.S. Open in tennis. While CBS Sports is smaller compared to ESPN, NBC Sports, and Fox Sports, it has a strong presence in college sports with its CBS Sports College Network.
ESPN is still the dominant cable network in sports including its Monday Night Football, Wimbledon, the Euro Cup, strong presence in MLB, and the Home Run Derby. However, ESPN is facing both increasing pressure from NBC Sports, Fox Sports, and CBS Sports as well as higher costs of its sports programming. It has already lost the broadcasting rights for the World Cup and its competitors are making gains in ESPN's turf. A prolonged slowdown in ESPN growth could negatively affect Walt Disney's common stock. In addition, a number of sport leagues offer customers to watch their games directly on the Internet, which bypasses the cable networks entirely and may also negatively impact ESPN. Disney's cable network segment is also under attack in its children programming by Nickelodeon, part of Viacom (VIA), Cartoon Network, part of Time Warner (TWX), Qubo (NBC), and PBS Kids, but this is subject to another article. At this point, the risks of owning Walt Disney stock seem to outweigh the benefits. Investors in Walt Disney may be better-off taking profits. Especially after the stock is up about 50% in the past five years compared to a loss of 3% for the S&P 500 Index.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.