ESPN taking a $900M hit from reduced subscriber reach, analyst says

A steep drop in subscribers over the last two years has resulted in a $900 million annual hit to ESPN's bottom line.

That's the conclusion of hedge fund manager Eric Jackson, who used his "Tech and Media" newsletter to showcase some pretty compelling data from 10-K filings to the Security Exchange Commission rendered by ESPN's parent company, Walt Disney. (Hat tip to Fortune's Matthew Ingram for uncovering Jackson's posting.)

From these filings, Jackson confirmed numbers reported earlier in the year by SNL Kagan -- between 2013 to 2015, ESPN lost about 7 million total subscribers, with the flagship channels ESPN and ESPN 2 each dropping 4 percent from a high of 99 million to 95 million subs today. Dropping most dramatically was ESPN Classic, which is down 16.1 percent to 26 million subscribers.

The launch last year of the SEC Network, which has around 63 million subs, has helped "mask" a huge drop in affiliate revenue from ESPN's other networks, Jackson contends.

How huge? Based on an average per-subscriber carriage fee of $6.61 for ESPN, $0.83 for ESPN2, $0.63 for the SEC Network and $0.22 for ESPNU, the national sports conglomerate is taking in around $650 million less each year in affiliate fees compared to two years ago, Jackson writes. 

Meanwhile, he estimates the resulting loss of advertiser reach has shaved off another $200 million to $300 million from ESPN's bottom line. 

ESPN's declining subscriber base was, of course, a big story over the summer, after Disney reduced its guidance during its second quarter earnings report. Subscriber losses at the most profitable multichannel network, coupled by huge video customer losses for pay-TV operators, sent stocks cratering throughout the pay-TV and media sectors. 

Following huge staff cuts at ESPN in October, the news was much better during Disney's third quarter earnings report. Disney's media networks, which include ESPN, the Disney Channel and ABC, recorded a 27 percent increase in revenue to $1.8 billion. 

Still, there is concern from Jackson and other analysts that ESPN's subscriber numbers could get even smaller. A narrative has emerged in recent weeks among analysts suggesting that in obtaining high, $6-plus per subscriber fees from pay-TV operators in its last rounds of negotiations, ESPN left contract holes that allowed these operators to downgrade its networks in skinny bundles. 

Analysts accuse Disney/ESPN of essentially valuing price inflation over minimum guarantees on carriage. 

"We feel bullish about ESPN and ESPN's business," said Disney CEO Bob Iger, according to a Seeking Alpha transcript of his remarks. "We like the environment, because we think long-term it gives us more opportunities. I should also add that ESPN has been at the forefront of using technology to create more compelling product for its consumers and to be present on more platforms."

For more:
- read this Fortune story
- read this memo from hedge funder Eric Jackson

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