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What Is the Growth Outlook for Disney Cable and Broadcast Business?

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Disney’s Media Networks segment

The Walt Disney Company’s (DIS) Media Networks segment earns a majority of its revenues from affiliate fees, advertising revenues, and the ABC television network.

In fiscal 1Q16, Disney’s Media Networks segment had revenues of $6.3 billion, up by 8% year-over-year and operating income of $1.4 billion, a decline of 6% year-over-year. As the chart below indicates, Cable Networks accounted for 71% of Disney’s Media Networks revenues while the Broadcasting business comprised the remaining 29% in fiscal 1Q16.

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Cable Networks segment

Disney’s Cable Networks business had revenues of $4.5 billion in fiscal 1Q16, up by 9% over fiscal 1Q15. The growth in revenues was largely driven by higher advertising revenues and affiliate fees, which were up by 3.5% after adjusting for currency fluctuations.

In fiscal 1Q16, Disney’s Cable Networks had higher programming and production costs as the Media Networks segment broadcast six New Year’s Eve and New Year’s Day college football games in fiscal 1Q16. In fiscal 2Q16, Disney expects these programming and production costs to be in the “down high teens.”

In fiscal 2016, Disney expects its “cable programming and production costs to be up low to mid-single digits for the year.” This is because in fiscal 2016, Disney’s ESPN doesn’t have “any major new sports rights contracts kicking in.” Disney is facing increasing competition for sports telecasting rights from 21st Century Fox’s (FOXA) Fox Sports and Comcast’s (CMCSA) NBC Sports.

Comcast makes up 3% of the PowerShares QQQ Trust Series 1 ETF (QQQ). For an investor interested in the television sector, QQQ holds 5% of the sector. QQQ also holds 8.8% of Microsoft (MSFT).

Disney expects its affiliate revenues for the Media Networks segment to grow at a compounded annual growth rate (or CAGR) in the “high-single-digit” range over the next three years.

Broadcasting

Disney’s broadcasting business had revenues of $1.8 billion in fiscal 1Q16, a rise of 7% year-over-year with an operating income of $223 million. Disney’s broadcasting business saw its operating income decline by 7% as a result of higher equity losses from the company’s investment in Hulu and an increase in programming costs.

In the next part of this series, we will look at why Disney believes that ESPN will start gaining subscribers.

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