Competitors become interested
While the value of ESPN has been an important contributor to the 44% return on Disney (DIS) in 2013, the envious operating results has paved the way for certain unintended results. The growing value of sports programming has not been lost by competitors in the media industry, such as Fox (FOX), Time Warner (TWX), CBS (CBS), or NBC, which is owned by Comcast (CMCSA). Several of these companies are members of the PowerShares Dynamic Media Portfolio ETF (PBS), which seeks to provide exposure to an index of media stocks.
Sports rights locked up
ESPN’s success has been a catalyst for the launch of competition for sports programming. NBC recently launched its NBC Sports channel, while Fox introduced its own Fox Sports 1 and 2 channels this fall. The impact of this dynamic could be multifold over time. First, this could lead to increasing costs for the acquisition of sports content, which would pressure the profitability of networks like ESPN. Second, there could be a fracturing of audiences as more varied sports programming diverts viewers’ attention.
Importantly, ESPN has at least a temporary defense against the first dynamic. The chart above shows the expiration of ESPN’s programming contracts with several sport leagues. Except for NBA basketball, which must be negotiated and renewed by 2016, and NASCAR, by 2015, ESPN has much of the most valued sports content locked up until 2020. Also of note in the chart is the incredible step-ups that sports leagues were able to charge upon contract renewal, which shows the high value placed on sports programming.
Regarding the second dynamic, competitors are bringing new sports programming to viewers, like bicycling, UFC, and college athletics. For the time being, this is simply adding to the value of sports networks as viewers consume the additional programming. However, over time, this dynamic risks splintering sports audiences into smaller slices, which would reduce revenue generating capabilities. Only time will tell whether this new crop of programming can achieve the popularity to have such a result, but for now, the trend bears monitoring.
The rise in competition is a natural result of outsized economic returns in a capitalist system. It shows ESPN’s value to the Disney enterprise. Appreciation of the value is a critical point in understanding the Disney media franchise. Given everything we’ve discussed up to this point in the series, we can now move on to the final part to get a sense of Disney’s value as an investment going forward.