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How Disney’s Programming Costs Affect Its Margins

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Operating margin trends

Leading media conglomerate The Walt Disney Company (DIS) continues to invest heavily in strong content, which is not only driving expenses but also suppressing margins. In 4Q17, the company had an overall operating margin of 20.6%, compared with 21.6% in 4Q16, due to a 7% YoY (year-over-year) decline in operating income. Over the last five quarters, the company’s operating income has fallen at a compound annual rate of 1.8%.

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What’s driving programming costs?

The graph above shows Disney’s operating margin trends over the last five quarters. In 2Q17, the company’s margin was the widest. The company’s Cable Networks segment incurs the bulk of programming expenses, due to higher sports content expenses. In 4Q17, Cable Networks’ operating income fell 1% YoY, mainly due to contractual rate increases for the National Football League, college sports, and Major League Baseball. In the same period, the company’s broadcasting operating income fell 11% YoY to $1.5 billion due to lower advertising revenue and program sales. The company exited fiscal 2017 with sport telecast rights worth $45 billion, with nearly $19 billion expected to be paid in the next three years.

In fiscal 2017, Disney spent ~$7.4 billion on television program licenses and rights, representing a 12.5% rise YoY. Its film and television costs grew 14.8% to $5.3 billion. On September 30, 2017, CBS’s (CBS) and Turner’s (TWX) program costs had grown 50% and 7.6%, respectively, while NBCUniversal’s (CMCSA) programming and production expenses had fallen 27.8% YoY.

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