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Could Higher Programming Costs Hurt Disney’s Margins?

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Impact of rising programming costs on margins

The Walt Disney Company’s (DIS) programming expenses have continued to rise, mainly due to higher programming contract renewal fees. Sports content costs form the bulk of the company’s programming expenditure.

To be competitive in the market, cable companies need to pay high content costs. These costs are similar to the fixed costs incurred by media networks such as Comcast (CMCSA) and Viacom (VIAB).

As shown in the graph above, despite rising programming costs, Disney’s Media Networks segment has maintained a margin above 10%. Higher carriage and advertising income continue to mitigate content costs for the company.

Investment in content by leading players

Last year, Boston Consulting Group and SNL Kagan predicted that ESPN will spend nearly $7.3 billion on content, and Netflix (NFLX), NBC, and CBS (CBS) will spend $6 billion, $4.3 billion, and $4 billion, respectively.

It is estimated that ESPN spends more than $3 billion every year on NFL (National Football League) and NBA (National Basketball Association) sporting rights, pressuring its margins. To offset margin pressure, ESPN continues to charge one of the highest rates in the basic cable channel industry, of ~$7.50 a month per home, according to SNL Kagan.

In 4Q17, Disney’s Cable Networks revenue stood at ~$4 billion, almost flat year-over-year, while its operating income was $1.2 billion, 1% lower than in 4Q16. The fall in operating income was mainly due to lower average viewership.

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