Back, Back, Back... How Can ESPN Buck The Downward Trend?

Walt Disney Co (NYSE: DIS) reported mixed Q1 numbers on Tuesday, weighed down by its struggling ESPN segment. Disney’s Q1 EPS beat consensus estimates by $0.05, but quarterly revenue of $14.78 billion missed by $480 million.

The company addressed ESPN’s lackluster performance in its earnings press release. Cable Networks revenue declined 2 percent in Q1, and operating income in the segment plummeted 11 percent. The company said that ESPN suffered from higher programming costs and lower advertising revenue.

“The programming cost increase was driven by contractual rate increases for NBA and NFL programming, partially offset by the shift in timing of College Football Playoff (CFP) bowl games relative to our fiscal quarter end. Six CFP games were aired in the first quarter the prior year, whereas three CFP games were aired in the current quarter,” the PR says.

Disney blamed the College Football Playoff schedule for ESPN’s lower advertising revenue, but ESPN’s struggles are nothing new.

Adapting To A New World

Last quarter, Disney reported that ESPN lost a record 621,000 subscribers in the month of October. Disney’s excuse for ESPN’s poor performance was higher costs associated with the Olympics and a decline in daily fantasy sports advertising.

Of course, ESPN is certainly not the only TV provider out there struggling to adapt to the new digital world. According to the latest report from Nielsen, the average cable network lost 2.1 percent of its subscribers in the most recent period. In addition to ESPN (-3.5 percent) and ESPN2 (-3.4 percent), Comcast Corporation (NASDAQ: CMCSA)’s Esquire (-33.2 percent) and Viacom, Inc. (NASDAQ: VIAB)’s Nicktoons (-9.6 percent) were among the hardest hit.

Time Warner Inc (NYSE: TWX)’s HBO was also among the biggest losers in pay cable subscribers, down 5.5 percent. However, HBO’s over-the-top subscription service now has more than 1 million subscribers, up 25 percent from a year ago.

Bucking The Trend

Some cable networks are even bucking the trend in pay cable subscriptions as well. Nielsen reports subscriber growth at AMC Networks Inc (NASDAQ: AMCX)’s Sundance (+12.1 percent) and Twenty-First Century Fox Inc (NASDAQ: FOXA)’s FXX (+7.5 percent) and FX Movie Channel (+5.1 percent).

In the sports world, the NFL Network seems to be treading water much better than ESPN is. NFL Network ratings are down just 1.3 percent from their 2013 peak.

Stop The Bleeding

Disney must figure out something to stop the bleeding at ESPN, and RBC Capital Markets analyst Steve Cahall believes the rise of digitally-distributed over-the-top cable services may be the network’s saving grace.

“Hulu is set to launch soon, DirecTV now recently launched, and Bob Iger last night indicated that they’re going to be on Google as well as some others,” Cahall said on CNBC.

RBC has a $130 price target on Disney’s stock. Shares are up 1.6 percent in early Wednesday trading.

Image: USAG- Humphreys, Flickr