By Cyrus Sanati
February 8, 2012

Is it time for Disney to finally banish ABC from the Magic Kingdom? The media conglomerate’s broadcast division was yet again the only real bruise in what would have been a relatively blemish-free quarter. ABC’s anemic growth rate, coupled with its earnings cyclicality, has been a drag on Disney’s stock for years, and its future doesn’t look positive given the way people consume media in the 21st century.

But instead of cutting its losses and selling ABC, Disney executives are reportedly gearing up to double down on the dying brand by forming a partnership with Spanish-language powerhouse Univision to create yet another 24-hour cable news network – in English. Looking beyond the odd premise of such a network, the cost to get such a venture up and going in an already crowded field of cable news stations may not be worth the headache and could become yet another albatross around Disney’s neck.

Disney’s broadcast division, which includes the ABC network and its eight ABC-owned affiliates, reported yesterday a 7% decline in revenue and a whopping 23% decline in operating income for its fiscal first quarter, compared with the same time last year. The rest of the company, which includes its cable networks, like ABC Family and ESPN, as well as its theme parks and movie studios, met or beat revenue and profit expectations.

Disney (DIS) blamed the poor showing at ABC on lower affiliate revenue following the end of Oprah Winfrey’s popular talk show and a decrease in political ad spending, as it was not an election year. While both may explain a decrease in revenue, it doesn’t make up for the huge decrease in profits. ABC has the fewest owned and operated affiliate stations, so the decrease in revenues from losing Oprah and the political ads shouldn’t have moved the needle as much as it was moved.

ABC’s entertainment division and its news division, which is looking increasingly like an entertainment outlet, continues to suffer from a fall in viewership, making its ad space worth less today than in the past. ABC ended the fall season dead last among the four networks among 18 to 49 year olds, down 1% in viewership from last year. That compares to the 2% and 14% increase in viewership at Fox and CBS, respectively, in this key marketing demographic.

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The company was reportedly close to selling off ABC in the spring of 2010 to a consortium of private equity firms, but that deal never materialized. Since then, Disney has been chopping costs and slashing employees at ABC in what appeared to many in the industry to be an attempt by management to make the division look as lean and as profitable as possible to attract new buyers. But ABC’s poor performance may have scared off would-be suitors.

Another news network?

So instead of just cutting its losses and ejecting the division through some sort of tax-free spinoff or fire sale, Disney appears set to invest even more money in ABC. There is now talk that ABC is close to announcing the formation of its own 24-hour cable news network in partnership with Univision. It would meld its gutted ABC news division with Univision’s news division to create a station catering to the Hispanic market. Sounds like an interesting idea, but what is odd is that instead of the station being in Spanish, it would be in English. The thinking at ABC is that the growing number of Hispanic Americans who speak English will want to watch a network news channel that is geared to issues affecting “their community” and that advertisers will then have a direct link to this increasingly affluent ethnic group.

That seems like a risky bet built on a false premise. All the other 24-hour cable news networks are divided across the ideological spectrum, with News Corp’s (NWS) Fox News catering to conservatives, Time Warner’s CNN catering to moderates and Comcast and Microsoft’s MSNBC appealing to liberals (Fortune is owned by Time Warner (TWX)). It is unclear why a Hispanic-American, who speaks English, would care about elections back in their grandparent’s homeland or about other Hispanic-Americans in other parts of the country.

When asked about the reported Univision deal, Disney CEO Bob Iger declined to comment during a call with shareholders. “I’ve said before that ABC is a platform that we continue to invest in from a content perspective, and ABC News is a very important part of that platform,” he said. “And we have an interest in seeing that ABC News continues to flourish and giving it an opportunity to look for and create some growth opportunities on its own.”

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ABC News is but a shell of what it used to be and its ratings have plummeted as more Americans get their news from other mediums, like the internet (viewership of flagship shows Good Morning America, Nightline and World News improved during the 2010-2011 season, but ratings are down significantly from where they were 15 years ago). Executives inside ABC News are being shuffled around in an attempt to breathe “new life” into the news division. The answer, unfortunately, has been to appeal to the lowest common denominator in a cheap attempt to lure in viewers. So stories like “how male porn stars are trying to cater to women,” are more likely to lead the network’s iconic news daily Nightline than a hard news topic considered “boring.” The end seems near.

Disney would be smart to just cut the cord before it is too late. It derives very little, if any, synergies from ABC and ad revenue is expected to fall going forward as viewership continues to drop off. Attempts to cut costs while maintaining quality programming that people want to watch has eluded ABC entertainment and ABC News executives for a decade, and there is no reason to believe that they will ever get it right.

The old mainline broadcast giants simply cannot capture the viewership they once could due to the plethora of information and entertainment choices now available to consumers. If Disney cannot find a buyer, it could always spinoff ABC to its shareholders in a tax-free spinoff. That would give shareholders the opportunity to decide whether they want to keep ABC as part of their portfolios or dump it. At the right valuation, ABC could be worth owning. But for now, it seems to be dragging Disney’s valuation down – preventing shareholders from having their dreams of strong profits come true.

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