Disney's ESPN Woes Could Continue In The New Year

In a research report, Salmon suggested that ESPN represents around 65 percent of Disney's domestic affiliate fees, and ESPN2 adds another 5 percent. According to the analyst, the company's "outlier" monthly subscriber fee of around $7.18 sets up the company for "larger structural challenges." Specifically, cheaper TV packages without ESPN will continue gaining in popularity and newer distribution channels including OTT (over-the-top) skinny bundles and DTC (direct to consumer) products won't counteract the losses.

Salmon continued that Disney previously signed distribution deals back in 2012 and renewals will begin in fiscal 2017 and peak the year after. While many of these agreements are not public, including the length and expiration date, the analyst believes it averages around five years, with the exception of Comcast Corporation CMCSA, which was signed for 10 years.

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The analyst further suggested that continued growth in sports rights costs "compounds the challenges" to affiliate fee growth. While ESPN doesn't have any major rights agreements coming up in the near-term, the NFL and MLB have new rights, which will be seen in 2021 and 2022, respectively.

"Consensus has begun to reflect these challenges with Cable Networks FY2018 revenue estimates about 6 percent lower now than they were last December ($18.3 billion from $19.4 billion), but we believe estimates will continue to decrease from here," the analyst wrote.

Bottom line, the analyst is expecting Disney to see a 4.3 percent MVPD (multichannel video programming distributor) subscriber loss for its ESPN channel in fiscal 2017 and this will accelerate to 4.8 percent the following year.

Shares of Disney remain Market Perform rated with a price target lowered to $90 from a previous $95.

Full ratings data available on Benzinga Pro.