ESPN Is Becoming A Problem For Disney

In a note to clients on Friday, Barclays analyst Kannan Venkateshwar downgraded shares of Disney to "Underweight" from "Equal Weight," citing increasing investor attention around the struggles at ESPN, Disney's flagship sports network.

According BusinessInsider, Barclays argues that as the traditional cable bundle begins to fall apart, ESPN — which as we've noted time and again is the most expensive network for carriers to broadcast — is the most exposed to what Venkateshwar calls a "secularly fragmenting media environment."

And this argument basically says the traditional cable bundle is going away and not coming back.

Here's Venkateshwar:

"In a secularly fragmenting media environment, ESPN is the most exposed. This is because ESPN's business model depends on the cross subsidy of the pay TV bundle. Consequently, given ESPN's fixed cost structure and variable revenue model, subscriber losses are likely to have a disproportionate impact on the business model. In our opinion, ESPN accounts for a disproportionate share of Disney's cash flow and the gap between OCF (7%) and EBIT growth (17%) over the last 2 years likely already points to this pressure from subscriber losses. 

This issue could be compounded by potential step ups in cost recognition."