Walt Disney Co. (DIS, Financial) is a major player in the world of entertainment, but technological innovation is slowly disrupting the entertainment market as on-demand video slowly replaces traditional cable networks. Cord-cutting has increased over the last year, and the growth of services like Netflix (NFLX, Financial), Amazon (AMZN, Financial) Prime Video, Hulu and YouTube is only going to accelerate even further.
Disney’s media networks division, which includes ESPN, accounted for nearly 42% of the company’s revenue for the third quarter. The segment faces an increasingly uncertain future due to cord-cutting.
ESPN’s subscriber base has shrunk from 100 million in 2011 to 88 million currently. Disney overrode the impact of the 12% loss in its customer base by raising the subscription price from $4.69 to $7.21, a nearly 53% increase. This is not a sustainable growth path, however, because prices do not remain elastic as competition continues to increase.Â
YouTube, Amazon and Facebook (FB, Financial) have proven they are not afraid to pay millions of dollars for sports broadcasting rights. Due to the competition between them, they will not hesitate to absorb losses, if necessary, in order keep their customer base growing.
For instance, in September, Techcrunch reported Facebook and the National Football League had announced a multiyear programming deal to distribute game highlights and recaps on the social network.
All the tech giants have noticed the rapid growth of mobile video consumption, and none of them want to be left behind. With billions of dollars on their balance sheets, these companies are bending over backward to attract users to their platforms. YouTube is the undisputed leader in the public video world; and Facebook has now launched Watch, its own video platform. Amazon Prime is growing quickly and the company added Amazon Video Direct, which aims to bring content creators into its fold. Then there are streaming video-on-demand providers like Netflix and Hulu with a large chunk of the market.
None of these companies are going to give up on their ambitions to capture the fast-growing internet video market. That puts pay TV on the chopping block and, over time, it will have a huge impact on traditional broadcast networks.
But Disney is not just sitting and watching the future slip through its fingers. It has already invested in Hulu and, according to The Guardian, plans to launch its own streaming service in 2019.
Disney should not have waited this long to move into the streaming market, but better late than never. The company has no choice but to take the streaming route if it wants to stay relevant in the connected world. In the medium term, things are going to be very difficult for the company to keep its media networks segment growing. Disney will be depending on its parks and resorts and movie production units to cover for weakness in the media networks segment.
Disclosure: I have no positions in the stock mentioned above and have no intention of initiating a position in the next 72 hours.
