Disney ( DIS ) has been minting money for years through its prominent cable networks such as ESPN, which contributes approximately 35% to the company's value, according to our estimates. This can be attributed to high profit margins of over 45% that Disney enjoys on ESPN networks. On the other hand, the broadcasting business has been a low value contributor for the media giant, primarily due to lower margins of around 16%. The broadcasting business contributes close to 13% to the company's overall revenues, but the contribution towards profit is much lower (6% in 2013), reflecting lower margins in this business. Broadcasting networks such as ABC rely heavily on advertising income. The broadcasting advertising trends are uneven, as they are driven by various events such as political campaigns and sports. However, ABC has managed to lower the split between advertising and non-advertising income from 70% in 2007 to 55% in 2013. As the non-advertising income grows at a faster pace than advertising income, ABC can look forward for stable growth outlook in the long run.
What Drives The Broadcasting Business?
Disney's broadcasting business includes ABC Television Network and TV production business. ABC Television Network has 239 local affiliate stations, which reach about 99% of U.S. TV households. It broadcasts programs during all parts of the day and the majority of its revenue comes from selling advertising slots on its networks. It also generates revenues through TV production business, which produces content under the banner of ABC Studios and ABC Media Productions. It then distributes and sells this content globally. The broadcasting business contributes close to 7% to Disney's value, according to our estimates.
ABC broadcasting derives revenues primarily from three sources: advertising fees, retransmission fees and TV production and distribution. While the retransmission consent and TV production and distribution have been trending upwards, advertising income has declined significantly over the years from $4.09 billion in 2007 to $3.25 billion in 2013. This can be attributed to a mix changes in viewership and their impact on the advertisement marketplace. It must be noted that advertising income accounts for majority of broadcasting revenues (around 55%) .
Advertising income for broadcasting networks such as ABC is a product of viewership, effective ad pricing and ad spots per week. For ABC, estimated average viewers have declined over the past years as cable networks have become more popular than ever, which has reduced viewership of broadcasting networks. ABC broadcasting viewers were estimated around 2.82 million in 2013. Going forward we expect this decline to continue as the cable networks continue to gain momentum. ALso a factor will be the continuing rise of alternative video platforms such as Netflix ( NFLX ).
ABC Network's effective ad pricing represents the price that advertisers pay per 1,000 impressions of the advertisement to the broadcasting network, net of fees distributed to advertising agencies. The effective ad pricing has improved in the past few years. It stood at an estimated $6.59 in 2013 as compared to $5.98 in 2011. We expect the ad pricing to continue to grow in the coming years primarily due to a recovery in the economy, which will encourage advertisers to spend more. ABC's efforts to maintain and improve the quality of its programming will aid to the ad pricing growth. The big broadcast networks have fierce competition that will act as a motivator for them to improve the quality of programming.
The U.S. advertising market trended well in 2013, despite the absence of the Olympics or high political spending. While the overall U.S. advertising revenues grew by 1.3% in 2013, the broadcast TV declined by 5.7%. This can be attributed to the absence of heavy political advertisements versus the prior year. Television as a medium continues to lead with more than 57% share of the overall advertising market. We expect a slight uptick in 2014 advertisement spending primarily due to the U.S. midterm elections. If we look at ABC's advertising revenues, we don't expect much of change from the current levels of $3.25 billion, both in the near term as well as in long run, as higher effective ad pricing will be offset by declining viewership. Overall, broadcasting business will continue to grow due to higher TV production and distribution income. We estimate the overall broadcasting revenues to be northward of $7 billion by the end of the forecast period. However, it must be noted that any meaningful change in the broadcasting revenues wouldn't have much of impact on our price estimate due to the low value contribution of this business to Disney's overall price estimate.
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