With a better understanding of the value of Disney’s (DIS) major non-media segment, it’s much easier to move on to an analysis of the media properties, which account for most of the company’s value. In particular, Disney is the owner of one of the most prized properties in the industry, ESPN. Many investors attribute Disney’s 44% return in 2013 to the success of the highly popular sports network. So investors should understand the value drivers of this franchise. Disney is a member of the PowerShares Dynamic Media Portfolio ETF (PBS), which seeks to provide exposure to an index of media stocks.
ESPN has been a central beneficiary of rising content values, as we discussed in the series Potential consolidation for cable-TV providers. The network reportedly receives $5 per month for each subscriber that receives the channel—more than any other non-premium network. Because it’s part of a basic cable bundle, subscribers can’t reduce their bill by opting out of receiving ESPN.
As content providers have renewed contracts with cable and satellite companies to distribute their programming, they’ve been able to garner heavy step-ups in pricing. Cable and satellite providers have had little choice but to accept the increased fees or risk subscriber losses if they refuse to carry popular programming. The result has been a rapid increase in the cost of content at a rate of as much as 20% to 24% in two years.
The result, as depicted above, has been a rapid growth in ESPN’s affiliate revenue, or the fees charged to cable and satellite companies. ESPN accounts for 24% of Disney’s overall revenue, highlighting the importance of the segment. Its affiliate fees have grown 70% since the fiscal year ending in 2006. With the popularity of sports programming at all-time highs, ESPN is able to generate revenue from a variety of sources, which we’ll examine in the next segment. To be sure, though, the network’s popularity is likely to remain a key value driver for Disney into the future.