Cord-cutting poses threat to core cable product but chief confident in diversification steps
©Getty Images; Bloomberg; Pixar/Disney
When Walt Disney chief executive Bob Iger revealed last summer that there had been some modest subscriber losses at sports cable network ESPN he did not expect the turbulence that followed.
The world’s most profitable cable network and Disney’s largest division had appeared immune from the impact of cord-cutting — the cancellation of a cable or satellite television subscription in favour of online alternatives. Mr Iger’s comments, which were limited to Disney and ESPN, triggered a sector-wide sell-off of media stocks. If the mighty ESPN was vulnerable what hope was there for anyone else?
But Mr Iger, who recently marked 10 years as chief executive, is not panicking. In a wide-ranging interview at Disney’s Burbank headquarters, he says the company, which last month reported its best ever quarter, has diversified revenues thanks to its investments in content and brands in anticipation of the day when ESPN’s growth rates slowed.
“We concluded that the old ‘content is king’ adage was absolutely true,” he says, adding that the shift has strengthened Disney’s hand in an era of technological disruption and sweeping changes in audience viewing habits.
“I look at the assets that we bought in Pixar, Marvel and Lucasfilm, and I look at ESPN, and I see brands that will hit bumps along the way because of disruption, but which will be fine long term.”
It was clear that ESPN’s growth would slow eventually, he says. When he was appointed chief executive “we saw how large ESPN and our media networks were to the bottom line. We had come off of a decade of tremendous growth and we believed that while we could continue to grow them . . . we would not grow them at anywhere near the rate that they had grown in the past.”
Profits at the sports network increased in 2015, despite ending the year with 92m subscribers — 3m fewer than the previous year. “We’re going to continue to grow ESPN,” he says. “Just not at the rate that we’ve grown it.”
The question is whether the investments in content and new ways of distributing ESPN will be enough to offset any slowdown. Mr Iger is confident they will, pointing to the network’s inclusion in so-called “skinny” bundles — cheaper cable subscriptions that have fewer channels than traditional packages — as an example of how the company is responding to changing consumer behaviour.
“ESPN is still a huge profit centre and it should get a lot of attention,” he says. “It’s not about whether the number of subs goes down from 95m to 90m or 85m. It’s about what’s the long-term health of ESPN, and to what extent will ESPN continue to be in demand by consumers. Because if you conclude that it will be, then we’ll figure out a way to get it to consumers — and consumers will figure out a way to access it.”
Not everyone thinks a slowdown in ESPN growth will be pain-free. Disney was downgraded by several analysts at the beginning of 2016 on concerns about cord-cutting affecting the network.
“Growth rates in cable network operating income could continue to be a drag on the overall company over the coming quarters even though there is likely to be some quarterly variation,” Kannan Venkateshwar, a Barclays analyst, said recently.
However, the growth of Disney’s other businesses has outpaced ESPN’s in recent years, lessening the company’s reliance on the channel. The group has theme parks, a movie studio and a consumer products division, as well as the media networks group, which includes ESPN and the ABC channel.
The company does not break out ESPN’s individual performance, but it is by far the largest piece of its cable television division, which in 2010 accounted for 59 per cent of Disney’s $7.59bn operating income.
Cable remains Disney’s largest business but its share of operating income has fallen: in 2015, it accounted for 46 per cent of Disney’s $14.68bn operating income as theme parks, film studio and consumer products grew at a more rapid clip.
This is due to the intellectual property Disney now has at its disposal. Marvel movies such as Iron Man, The Avengers and Guardians of the Galaxy have added billions of dollars to Disney’s top line, while Disney Animation, which was ailing a decade ago, has been revived under the leadership of Pixar founders John Lasseter and Ed Catmull.
Zootopia, Disney’s latest release, broke opening weekend records for an animated movie last week while a sequel to 2013’s smash Frozen is in the works. Frozen is also being developed into a Broadway show, with Disney hoping to repeat the success of its Lion King musical, which has grossed more than $6bn worldwide over the past 18 years.
With Pixar, Marvel and Lucasfilm, Mr Iger says he has been able to minimise the risk in film production. “We used to have huge volatility in our movie studio. It could make $200m one year and $800m the next,” he says. “Now, there will be some fluctuation, like a big Star Wars movie in a given year, but [the returns] are going to be much more steady. And they will deliver to our bottom line.”
This has not gone unnoticed on Wall Street, with some analysts suggesting that market reactions to reductions in ESPN subscriber numbers may have been overblown.
“It is wrong to overlook the growth coming from businesses which contribute half of Disney’s profits,” Jason Bazinet, analyst at Citi, wrote in a recent research note.
Alexia Quadrani, analyst with JPMorgan, said Disney’s ability “to monetise its brands across its businesses” was “likely to overshadow other concerns and drive upside to shares”.
As analysts and investors continue to scrutinise ESPN, Mr Iger says comparisons with other media companies ignore the breadth of Disney’s businesses.
“We’re not a media company. We’re in the food business, the transportation business, the vacation business, the hotel business, the technology business, the consumer products business, movies, TV, books, games. I believe that we are very differentiated from the rest of the companies in our space.”
Chief executive Bob Iger speaks in front of Shanghai Disney Resort model in July
Disney to reboot ‘Star Wars’ for China
The release of Star Wars: The Force Awakens last December focused attention on how Disney uses content across its various businesses, with new attractions based on the film series planned at its theme parks and $3bn of toys and other merchandising sold in the first quarter.
While the movie broke opening records and exceeded expectations in the US and Europe it did not perform as Mr Iger had expected in China, the world’s fastest-growing movie market, where it grossed $125m — less than in the UK. “We thought it would be bigger,” says Mr Iger.
Chinese audiences were not as familiar with the Star Wars story because the original films were never released there in the 1970s and 1980s. “We have work to do in China in familiarising people with the film and the franchise. When a guy gets on a flying vehicle with a furry character and says, ‘Chewie, we’re home’, everybody in the US just starts clapping. In China, they think ‘Who is Chewie?’”
The opening in June of Disney’s Shanghai theme park, its first in mainland China, should increase awareness of the company’s characters and stories. Mr Iger says the $5.5bn development is one of the most ambitious developments Disney has ever undertaken. “Maybe since Walt amassed 30,000 acres of central Florida with a vision of building a big theme park there.”
It may have more success in China with Rogue One, the first spin-off Star Wars film, which comes out at the end of 2016. The cast includes two Chinese stars — Donnie Yen and Jiang Wen — who will resonate with the country’s audiences. Disney plans to make more movies in China, says Mr Iger. “We’re going to ramp up our moviemaking production in China significantly.” |
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