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Why Disney stock is down even as Star Wars crushes box office records

Photo by Andrew Burton/Getty Images

Star Wars: The Force Awakens has crushed the competition at the box office, making the $4 billion price Disney paid for ownership of the Star Wars franchise look like an enormous bargain — especially when you consider that even more money will come pouring in from ancillary licensing deals. Disney also owns Marvel Studios, which has become an increasingly reliable engine of hit content, spawning not only an endless parade of movies but also critically acclaimed television shows like Jessica Jones that could be an even better home for Marvel properties than the cinema. Combine those two franchises with Disney's effective long-term stewardship of Pixar, and the company is clearly positioned as the dominant content franchise of the future.

Yet Disney stock is down a bit over 1 percent on the year, with almost $2 billion in market value having been eliminated. And it really all comes down to one thing: ESPN.

Cable television is dying

Live sports has been an important part of the television ecosystem for decades, and ESPN has been one of the most successful and important networks throughout the cable television era. But in the 21st century, live sports has truly emerged as the killer app for linear cable television.

The first factor was the rise of the DVR, which has made it cheaper and easier than ever before for people to record their favorite shows and watch them at their leisure. This has been great for television artistically, since it means creators can now more readily assume that every single episode of their show will be consumed in sequence. But in business terms, it's devalued the audience, since marketers know that DVR-watchers are skipping ads. But people don't normally like to record sports and watch them later — they watch live, meaning a sports viewer has increasingly become more valuable than a non-sports viewer.

Streaming television services then came along and made live sports even more valuable. Suddenly the vast majority of basic cable networks became a fundamentally dispensable commodity. A Netflix or Hulu Plus subscription would give anyone a vast array of programming to watch without the need for a cable subscription. But for sports fans, cable remained vital.

Which meant that sports became even more vital to cable companies. Cable companies are blessed to face little to no competition in most circumstances, but they do need to worry about non-consumption of pay television. Ensuring that ESPN is in your bundle of channels was the key to avoiding non-consumption, so ESPN could demand increasingly high fees from cable companies that wanted to carry it.

But this is the year it all started to fall apart. As of the fiscal year that ended on October 3, ESPN had 92 million subscribers — down from 95 million in 2014 and 99 million in 2013. Every pay television operator under the sun still subscribes to ESPN, but fewer and fewer people are subscribing to cable.

The unbundled future is risky

The overall cable bundle in which you pay a high price for a ton of content works out to be a pretty good deal for most consumers. And it's been a great deal for live sports, since it means they collect high fees not just off the large number of sports fans in America but also off the large minority of Americans who don't watch sports. But it's not a good deal for everyone, and more and more of the people for whom it's not a good deal are opting out and relying on streaming services or à-la-carte purchases for their entertainment needs.

And the problem with the bundle is that the more people who opt out of it, the worse a deal it becomes. More and more content owners will want to try to reach the cord-cutting audience, which means that subscribing to the bundle will be necessary for a smaller group of people, which means that even more people will opt out. The move to a purely over-the-top world in which everything is consumed via the internet will happen in fits and starts, but once the process is underway it's unstoppable.

And that's very scary for ESPN. In theory, the channel could thrive in a post-bundle world by becoming its own sports-specific bundle. As the incumbent worldwide leader in sports, the network is better positioned than any other particular provider to assemble the ultimate omni-sport package that every sports fan in America would buy. But the chance of someone else — Fox Sports, NBC Sports, or even a brand new upstart — doing this isn't zero. And the chance that sports itself will completely unbundle with each team selling its own games to its own fans isn't zero either.

So while ESPN is hardly doomed, it's gone from a situation in which its dominance was guaranteed to a situation in which its dominance is not guaranteed. And as goes ESPN, so go Disney's other cable channels — they are all plunging into a very uncertain world.