The Walt Disney Company’s (DIS) Media Networks segment includes the company’s broadcast and cable television networks, television distribution and production, domestic television stations, and radio networks and stations. But the Media Networks segment’s affiliate fees make up a larger component of its revenues than advertising.
In fiscal 2Q16, affiliate fees comprised 54% of the Media Networks segment’s total revenues of $5.8 billion while advertising comprised 34%. When Disney was asked at the company’s fiscal 2Q16 earnings call whether the company is likely to shift to an advertisement based model in the next five years rather than affiliate fees for its Media Networks segment, Disney replied in the negative.
Disney stated that even in a changing programming distribution marketplace and subscriber losses, it still believes that a distribution model is the best way to go. The company believes that there is a high demand for its programming not only in the US but also in international markets. This is reflected in the way that Disney has always priced ESPN robustly.
As the chart above indicates, according to a 2014 report by the Wall Street Journal, ESPN costs an average of $6.04 per month in 2014. This cost is expected to increase to $8.37 per month by 2018. Disney believes that an advertising revenue based model for Media Networks could result in uncertainty as advertising is a cyclical business. By contrast, companies like Viacom (VIAB) keep advertising as a key component of revenues.
Outlook for Media Networks
Disney reiterated its outlook for its domestic affiliate fees at its fiscal 2Q16 earnings call stating that it expects affiliate fees to grow in “high single digits” at a compounded annual growth rate between 2013 and 2016. It expects its “cable operating income” to grow at a compounded annual growth rate in the “mid-single digits” during that same period.