Many investors assumed the box office smash “Star Wars: The Force Awakens” would lead to another sizable leg up. The film did gross $529 million in its opening weekend after all. That was an all-time movie industry record.
But it just isn’t happening. Disney shares topped out in late July, made a lower high in the fall rally, and are now some $15 off their summer peak. Turns out the Dark Side of the Force isn’t the biggest threat to Disney. It’s the nation’s cord cutters, and the impact they’re having on the firm’s cable business.
You see, Disney owns the ESPN cable network. That business accounts for almost half of the overall company’s operating revenue, and about a third of its sales. ESPN has long dominated the cable sports business, allowing it to charge more than $6 a subscriber to the cable and satellite service providers. That cost is then folded into the price of channel bundles that many Americans subscribe to.
|Star Wars hasn’t been enough to save Disney shares.|
But an increasing number of cable customers are “cutting the cord” — canceling their service and choosing to watch TV directly through the Internet or dedicated streaming services. That has investors worried sick about slumping revenue and earnings growth at the important Disney division.
The firm revealed last month that it bled more than 3 million ESPN subscribers in the fiscal year ended Oct. 3. It now has only 92 million subs, the lowest level in 10 years. Operating income growth at the network has already dropped from the high-single-digit rate to the mid-single-digit rate, and that could slow further in the quarters ahead.
There’s another problem, too. One analyst at BTIG Securities recently downgraded Disney to “sell,” pointing out that ESPN has spent billions to acquire rights to various sporting events. The firm shells out roughly $2 billion a year to broadcast select NFL games, and it’s poised to spend $1.4 billion for NBA matchups next year. If it can’t spread those costs out over an increasing subscriber base, it could hammer results down the road.
Long story short, one of the generals of the Dow Jones Industrial Average is under attack — and it’ll take a lot more than a light saber and the Light Side of the Force to fight this enemy off!
So what do you think about Disney’s woes? Can the media giant get back on track, or is the threat from cord cutters too serious? How about the Star Wars phenomenon? Will future ancillary revenue (ticket sales to the sequels, toy licensing revenue, future theme park attractions tied to the movies, etc.) eventually put the ESPN concerns to rest? Do you own Disney shares? Why or why not? Share your thoughts below.
The markets are always trying to tell us things — we just have to do our best to listen to their messages. I wrote about interest rates and what they’re doing and why yesterday. Then overnight, several of you weighed in with your thoughts.
Reader Peter said: “The Federal Reserve has its head in the sand when it comes to understanding the deflationary forces at work. They are deathly afraid of debt deflation and are putting on a brave face in hopes that their credibility will not go down the tubes.”
Reader Donald L. said: “I’m not sure what Fed interest rates are saying, but I suspect the absence of movement in commercial rates is saying that there is little loan demand at any rate due to reduced business activity. By any measurement or indicator, this is not a good thing and portends poorly for the economy next year.”
Reader Doglover echoed the comments about the lackluster economy, saying: “If you are a regular reader of the weekly (public) report from ECRI, you are unlikely to be very surprised by what is happening. They have been reporting that the U.S. and world economies are in a long-term downtrend with no clear end in sight.
“Although productivity may be increasing, the year-over-year rate of growth has been declining for years. Inflation is falling steadily, and there is little indication that it is going to increase anytime soon There is oversupply of goods worldwide, so companies have no reason to hire workers to increase production and as a result, workers have declining resources to purchase goods.”
On the other hand, Reader $1,000 Gold said it’s not the time (yet) to worry about a slumping economy. The comments: “We have one more good up wave coming up before this ends in a recession a few years down the road. It ain’t over until the Fed inverts the yield curve.”
I appreciate the observations. If you haven’t added yours to the mix, make sure you hit up the comment section below.
You know that credit cycle turn I’ve been talking about for months? It manifests itself in many ways, one of which is the dramatic tightening in IPO market conditions. Per Reuters, only $28.7 billion in initial public offerings managed to get out the door in 2015. That’s a whopping 48% plunge from a year earlier, and it makes this the worst year since 2009. As one analyst said: “It just felt good and then the wheels came off” starting in the summer.
Deutsche Bank (DB) has been targeted in several regulatory and legal probes, so it’s not exactly surprising to hear the giant German bank may have conducted up to $10 billion in trades to help Russians illegally move money around. U.S. investigators are probing if Russian citizens used DB to conduct “mirror trades” — simultaneous buys and sells in Russia and abroad — to get around reporting requirements, according to Bloomberg.
Burritos, anyone? More E. coli cases were identified in a handful of states, including Kansas, North Dakota, and Oklahoma, according to the Centers for Disease Prevention and Control. They were linked to the embattled restaurant chain Chipotle Mexican Grill (CMG). But the company says it is changing the way it sources and processes ingredients to increase food safety.
Congratulations to Space Exploration Technology Corp., or “SpaceX,” for its successful launch and return of an upgraded Falcon 9 rocket. The firm headed by Tesla CEO Elon Musk launched a bundle of small satellites into orbit, then managed to land on a barge – the first successful roundtrip after a handful of failures.
What do you think about the late-year collapse in IPO activity — does it bode poorly for 2016? How about the latest food scare at Chipotle? Any thoughts on the success of Musk’s rocket system? Use the website here to comment if you get a chance.
Until next time,
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