Is The ESPN Customer Base About To Be Cut To Pieces?

  • Walt Disney is under pressure slowing sub growth for ESPN.
  • Bundles from Sling TV (DISH Network) heighten that concern.
  • Shanghai Disney Will Not Save Margins.

Walt Disney's (NYSE:DIS) quarter should be about the studios and the expansion opportunities at its theme parks but something unnerving may be happening that could de-value the ESPN asset and needs to be watched.  Not today, probably not in this operating cycle, but it threatens the long part of the revenue tail.

Dish is Forcing Choice

DISH Network (NASDAQ:DISH), through Sling TV, its over the top programming service, is offering stripped down bundles that make/allow you to choose between Fox News/Sports or ESPN/Disney.  Both bundles are being offered for $20 but they are not offered together. Rather than fight the tide, DISH seems to be giving consumers what they want and letting the content providers fight out the battle for subscribers. Today, Sling TV is a very small player compared to the major cable companies and forcing a consumer to choose is likely to have little impact on the revenues of such a large entity.  However, the direction is clear.  Consumers now have the ability to choose.

Sling Offering

Hulu Appears To Be Close Behind

According to the Wall St Journal, Hulu will be launching a similar service as early as 1Q17 and since Hulu is co-owned by Disney and 21st Century Fox, it will be interesting to see if consumers are able to get the same price point for a smaller array of channels or if consumers are served a super-sized offering they may not want.

Bernstein Sees Dish Leading the OTT Charge

Do the content providers see that over the top is the way of the future?  Bernstein analyst, Todd Juenger, recently speculated that the reason the Viacom -B (NASDAQ:VIAB)/Dish distribution renewal didn't end with a knock down, drag out fight was that Dish really wanted favorable rates on Sling and is shifting its focus from traditional platforms.  In his note, the analyst speculates: "Dish blacks out everybody… but not Viacom. Dish spews harsh rhetoric at everybody… but not Viacom. Has Dish gone soft?"

Are Sling Margins Higher than Blended?

The analyst goes on to speculate that Sling has higher margins than Dish and if this is the case, Sling has created its own limited shelf space by limiting the breadth of the content platform by fixing the $20 price point. It seems likely that when Hulu's service launches in the new year, the company will try a higher priced bundle and if it fails, the writing is on the wall. Not immediately, since ESPN/Disney is the likely winner but future price increases will be in jeopardy.

Take this quote from Roger Lynch on the 1Q16 Dish earnings call:

"the OTT business is going to be a competitive business...The nature of this industry is that there is not a lot of exclusive content...  I don't think it's going to be exclusive content that's going to drive the differentiation... anyone who is going to succeed in OTT is going to have to be able to move very fast to be able to continue to innovate quickly and build their brand and grow their business and try to get scale that will bring them some other benefits in programming costs and the advertising side."

Customer Segmentation Has Begun

If Disney is the winner on the Sling platform today, or it can broaden the content platform on Hulu when the service launches next year, these issues should have little impact on near term results.  However, segmenting the subscriber base is a serious threat and if Bernstein is right and the thin platform is more profitable, thin channel bundles, regardless of the carrier, are here to stay and will pressure studios.

Shanghai Disney May Contribute Less Than Analysts Expect

Yes, the opportunity to leverage developing economy labor in a premium priced theme park is a great opportunity in the long term but Disney only has a 43% equity stake and only gets 70% of the park's management fee.  Over time, this will be a great contributor to the top and bottom line growth but there is likely another shoe to drop as expectations come down one more time.

David Eller David Eller   on Amigobulls :
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