Disney’s Media Networks unit, its biggest top-line contributor, posted a 3% YoY drop in revenue to $5.5 billion in the quarter. Media Networks represents 43% of Disney’s overall revenue and is comprised of its broadcast and cable TV operations.
The lackluster performance at Disney's Media Networks unit is partially due to lower ESPN viewership. ESPN is now subscribed to by just 87 million homes, down from 100 million in 2010, according to Nielsen data, per Los Angeles Times. Additionally, average ESPN viewership dropped 7% and 11% YoY in 2015 and 2016, respectively, according to Forbes. Consumers are increasingly substituting costly pay-TV subscriptions with cheaper online digital alternatives, likely affecting live sports and ESPN viewership.
In turn, this decline in viewership is taking a toll on ESPN's ad revenue: A decrease in impressions on the network more than offset an increase in average prices of ESPN ad units, according to Disney CFO Christine McCarthy. Decreasing ad revenue is problematic as ESPN also faced higher programming costs — mainly driven by an NFL contractual rate increase — in the quarter. ESPN has historically been a key driver of revenue for the Media Networks segment, and generates roughly 40% of Disney's top line, according to Hudson River Capital Research.
However, Disney plans to launch its ESPN streaming service in 2018 to recoup losses associated with declining viewership. The service, dubbed ESPN+, will be accessible through the ESPN app and offer highlights and thousands of live sporting events.
Though ESPN+ positions Disney to appeal to viewers turning away from linear TV, the streaming service will still face competition from other digital online alternatives — CBS plans to launch a 24/7 live sports streaming service, for example. Disney could bundle its other planned streaming service, which will house Disney content, with ESPN+ for a discount to differentiate the offering from competitors.
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