The Washington PostDemocracy Dies in Darkness

Disney has a money problem that even ‘Star Wars’ can’t fix

"Star Wars: The Force Awakens" director J.J. Abrams attends the blockbuster's China premiere on Dec. 27 in Shanghai. (Photo by Hu Chengwei/Getty Images for Walt Disney Studios)

Since "Star Wars: The Force Awakens" first blasted into international theaters Dec. 15, Disney's blockbuster has broken virtually every box-office record in history, becoming on Sunday the fastest film in history to make $1 billion worldwide.

But investors haven't exactly rewarded the media titan: Disney's stock has tumbled more than 6 percent since that premiere, and even analysts impressed with perhaps the biggest film franchise on earth say it's not enough to shield the Big Mouse from its greatest challenge.

Disney's real threat, analysts say, is in cable TV: particularly, in the heavy long-term costs it pays to air sports on its struggling juggernaut ESPN. As more viewers opt to pay less for cable — or cut the cord altogether — Disney's heaping of stunningly pricey sports-TV contracts looks riskier every year.

"Even the Force cannot protect ESPN," BTIG Research analyst Rich Greenfield recently wrote in a note downgrading the stock to "sell." The sports channel long "viewed as the crown jewel of the Disney empire ... now appears poised to become Disney’s most troubled business as consumer behavior shifts rapidly."

ESPN is Disney's biggest single business and its most profitable cable channel, and the Big Mouse once regarded it as a virtually unstoppable media force. The traditional cable bundle, in which channels are offered only in bulk, made it an especially sweet deal: The largest chunk of the cable bill goes to ESPN — about $7 a month — whether a subscriber watches it or not.

[The business of ‘Star Wars’ comes with a huge catch]

To maintain that stronghold, and to ward off rivals like Fox Sports 1 and NBC Sports, ESPN has spent aggressively on massive multi-year contracts for the sports broadcasting rights. In 2011, ESPN agreed to pay more than $15 billion for 10 years of rights to air NFL games — nearly four times what Disney would pay for Lucasfilm, owner of the "Star Wars" and "Indiana Jones" mega-franchises, a year later.

But the speed at which cord-cutters have slashed their cable bills has shaken the industry. Seven million U.S. households have dropped ESPN in the last two years, Disney said last month in a federal filing, shrinking the field for the "Worldwide Leader in Sports" to 92 million homes, its lowest subscription base in nearly a decade.

Disney is a massive empire with some of the strongest film and merchandising moneymakers on the planet, and it has a safeguard that many similarly threatened media giants lack: Its vast, world-spanning machine of toys, theme parks, video games, cruise lines and, of course, the corporate "synergies" linking those businesses together. (A "Force Awakens" trailer was given star treatment in October during a halftime reveal on ESPN's “Monday Night Football.")

[In media universe, the force is strongest with Disney, Universal]

And, of course, there's the "Star Wars" franchise, whose seventh film has already posted the world's best-selling opening weekend, biggest first week and single-day records for any film — beating those worldwide records, most impressively, before even premiering in China, the world's second-biggest movie market. Disney has already planned a series of "Star Wars" blockbusters — including the live-action spin-off, "Rogue One: A Star Wars Story," set for premiere next December — for yearly release through at least 2020.

Disney's stock ended Monday up about 1 percent, and is up 12 percent from its August low, when investors sold off many media companies that warned their TV businesses were slowing. But the recent sell-off in Disney's shares shows investors and analysts are beginning to take ESPN's woes seriously. ESPN recently laid off 300 workers and severed expensive deals with name-brand talent like Keith Olbermann and Bill Simmons.

While many have praised Disney's prescient investment in Lucasfilm — the next year of merchandise for "Force Awakens" is expected to bring in $5 billion alone — its moves in cable have been far more criticized. Disney has licensed lots of content to streaming video services like Netflix, a short-term moneymaker that Greenfield said hurt its long-term goals. Cable giants have argued that big improvements to streaming make it easier for viewers to drop live TV, and for advertisers to pay less.

[Disney warms to streaming video]

The simple way to keep cord-cutters paying and preserve ESPN could be offering it up on streaming video directly, a move even Disney chief executive Bob Iger has called "an inevitability." But the "direct-to-consumer" business brings its own hassles: namely, fights with cable companies like Comcast who buy and bundle channels for sale to TV watchers, and who have their own business interests to protect.

The bundle has also offered Disney such a lucrative cash stream that cheaper online streaming services have not come close to matching. If a third of ESPN's subscribers, or about 30 million households, shifted to paying for the channel online, the sports network would need to charge three times as much, or about $21 a month, to make its money back.

Iger, the Disney chief, has sought to calm investors worried about ESPN's fortunes, saying rising cable-subscription fees and increased advertiser spending would help the sports giant stay on top. Speaking on Bloomberg TV last week, Iger said, "We have lost some subscribers, but we believe we will continue to derive growth from ESPN. It will just not be at the rate it was before."

As for the expensive rights deals, Iger said they have served their purpose: "To serve the ESPN fan well, to essentially perpetuate a competitive advantage ESPN has, and to continue to support the strength of its brand. ... We haven't second-guessed that at all."

Like Ken Burns's "The Civil War," "Star Wars" depicts an epic conflict. So we mashed them up. (Video: The Washington Post)