Disney (DIS) shares are falling fast after some bad publicity at one of its biggest cash cows.
ESPN is reportedly planning to fire hundreds of people to offset a slipping profit margin. The ESPN firings are a blow to the sports network’s image. Its parent company’s stock is feeling the brunt of that blow.
Disney shares are down 1.5% today after falling 1.5% in the final three trading hours yesterday once news of the ESPN firings became public. Part of Disney’s decline can likely be chalked up to the pullback in the market as a whole the last two days. Stocks have fallen 1.4% since the start of trading yesterday.
But the ESPN firings could signal a problem for one of Disney’s biggest moneymakers. The rising cost of broadcast rights is weighing on ESPN’s profits. New deals for broadcast rights to Monday Night Football, the new college football playoff, Major League Baseball and the U.S. Open tennis tournament add up to a whopping $29 billion – roughly 260% more than the network’s previous deals for those sports.
The advent of DVR means that most people record their favorite TV programs these days. Sports, however, are one of the few events people still watch live – making their broadcast rights more valuable.
As the cost of sports broadcast rights continues to escalate, ESPN will have to keep shelling out big bucks if it wants to maintain its spot as the self-proclaimed “Worldwide Leader in Sports.” Rival sports networks such as NBC Sports, the CBS Sports Network and Fox Sports 1 have been popping up everywhere in recent years.
Staying ahead of the competition will come at a great cost for ESPN. Eventually, there won’t be enough people to lay off to prevent the higher costs from slowing ESPN’s profit growth.
It hasn’t happened yet, however. Last quarter, in fact, ESPN was a major contributor to Disney’s earnings growth, as operating income from the company’s cable networks increased 15% year over year.
The last two days aside, ESPN is doing way more good than harm to Disney’s bottom line. That said, whenever a company has to lay off 300-400 people because of declining profit margins, it’s never a good sign.
More From Wyatt Investment Research