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Why Disney Expects Programming Costs to Rise

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Disney expects a rise in programming costs

In fiscal 2017, The Walt Disney Company (DIS) expects its programming costs for its Cable Networks business to rise by around 8% year-over-year. The company stated during its fiscal 2016 earnings call that the reason for the rise in programming expenses is its deal with the NBA.

The NBA entered into a sports programming deal with Time Warner’s (TWX) Turner network and Disney’s ESPN in October 2014 for $24 billion. The agreement came into effect in October and will last through 2025. Disney also stated during  its fiscal 2016 earnings call that it expects this NBA deal to drive $600 million of its programming expenses.

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In fiscal 4Q16, as the chart above shows, Disney’s Cable Networks saw its revenues fall 7% to $3.9 billion due to falling advertising and affiliate revenues at Disney’s ESPN. Operating Income at Cable Networks also fell 13% to $1.4 billion in fiscal 4Q16. The decrease in operating income resulted from lower revenues at ESPN and rising programming costs.

Time Warner also expects a rise in programming costs

Time Warner (TWX) is another company that expects a rise in programming costs in fiscal 4Q16. Time Warner has always maintained that it would strive to maintain Turner’s growth rate for its programming costs in the “high-single digits.” However, next year, it expects its programming costs to rise in “double-digits,” as its licensing of sports programming contracts comes up for renewal.

One of the reasons for the higher programming costs is Time Warner’s deal with the NBA (National Basketball Association). Time Warner’s Turner division will pay higher licensing fees to the NBA for using its licensed programming starting in fiscal 4Q16.

However, Time Warner stated during its fiscal 3Q16 earnings call that it doesn’t expect the increase in programming costs to be a sustained trend. Instead, it expects the rise to moderate over time.

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