Lots of people aren't convinced by Disney CEO Bob Iger's argument that ESPN will continue to dominate for years to come

Disney shares are tanking following the company's quarterly earnings release on Tuesday.

It appears investors are spooked about ESPN and whether the recent dent in its subscriber numbers, and the huge consumer behavior change away from watching TV in the traditional way, will lead to uncertainty about its long-term future. Many people are moving away from big cable subscriptions with scheduled TV on a box in the living room to on-demand video, via myriad devices, from over-the-top digital services like Netflix.

Disney has reduced its expected percentage subscriber growth for ESPN for the year from high single digits to mid single digits. Ad revenue at ESPN dropped 3% year-over-year in the third quarter (although this was against a tough comparison, as the FIFA World Cup took place in 2014.) And the company admitted on the earnings call it had experienced "modest sub[scriber] losses."

Any nervousness around ESPN is a huge concern for Disney. As BTIG analyst Rich Greenfield pointed out on Tuesday night, cable accounts for half of Disney's profit. It's a fundamental part of the business.

Disney CEO Bob Iger addressed ESPN right from the outset on the company's earnings call, in a lengthy defense of the unit.

But that wasn't enough for the analysts on the call (you can read the full transcript at Seeking Alpha here). They began a barrage of questions:

• First up was Michael Nathanson, at MoffettNathanson, on those subscriber losses.
• Then came Alexia Quadrani at JP Morgan, on how Disney can balance the shift from linear TV to over-the-top platforms.
• Then Sanford Bernstein's Todd Juenger asked what kind of protections or options Disney is looking for if subscriber losses accelerate.
• BAML's Jessica Reif Cohen asked about TV viewing habits (admittedly not in relation to ESPN, but films.)
• Nomura's Anthony DiClemente asked about ESPN guidance, with reference in the increase in broadcast rights fees the NBA will bring on board in 2017.
• Doug Mitchelson from UBS wanted to know whether the "moderating" EBIT growth in Disney's cable networks from 2013 to 2016 had anything to do with currency, or whether it was just subscriber growth.
• Ben Swinburne from Morgan Stanley asked about ESPN and ABC ad sales, and whether Disney expects those businesses to grow over time.
• Nearly all the questions on the call were about ESPN!

Wall Street isn't really convinced by Disney's responses

Writing in his e-mail newsletter, Ironfire Capital founder Eric Jackson, summed up what he thought Disney's Iger was saying: "Don't worry about OTT and other threats to the bundle because people love our programming and we just locked that programming up for a decade. We'll make that programming available in whatever digital format presents itself." (It's the same argument made by Stratechery's Ben Thompson.)

But Jackson says that argument isn't foolproof. ESPN (and indeed the rest of the market) is entering unchartered territory when it comes to digital, OTT services.

"What if OTT and any new digital format is one-tenth as profitable as the Euro-socialist cable bundle? If you trade analog dollars for digital dimes, how do you wave your hands and chance basic economics?" Jackson writes.

ESPN gets around $6 per cable subscriber. How will that compare with online-only subscribers? And, all the while, sports broadcasting rights fees are going up and up. The Wall Street Journal has previously cited analysts saying ESPN would need to charge $30 for an OTT offering to bring the same amount as a cable bundle. Will people pay that kind of amount when their current OTT services like Hulu, Netflix, and Amazon Prime Instant Video cost a fraction of that?

Iger argued that these new services, like Netflix are "more friend than foe" because they're a customer of Disney's (when it comes to movies and programming beyond live sports.) He said that Americans watch around 5.5 hours of TV every single day. Iger said that's going to go up to around 6 hours due to technology services like Netflix making it easy to view TV on-demand, and in a cheaper way than on cable services.

He concluded that Disney, ABC, and ESPN are well-positioned to take advantage of disruptive technologies - like streaming and skinnier cable bundles - but it still believes its traditional expanded service will be solid "for years to come." And for that reason, he doesn't see a reason to launch an "over the top" service that would allow customers to buy ESPN as a standalone product, without an expensive bundle of other channels. It's got all the sports you need to watch, why would people stop paying for that?

Jackson mocks this response: "It's all good. When the zombie apocalypse comes, our daughters will be watching Teen Beach 2, our sons will be watching Jessie, and Dad will be watching football. When a company goes out of its way to communicate how some big immovable object is not a problem, it's a problem."

ESPN, Disney's "big immovable object" and the most-watched cable station in America, may still be mountainous in size for some time to come. But its glacial speed at which it is reacting to changing viewing habits could prove costly. Cord-cutting in the US accelerated in the first three months of 2015, according to research firm Moffett Nathanson. The cord-cutters are chipping away at the iceberg - ESPN has lost more than 3 million subscribers in a little more than a year. And those consumers are demanding a more a la carte way to consume their content.

That hasn't gone unnoticed.

• Jefferies analyst John Janedis downgraded the rating on Walt Disney stock from buy to hold, due to the company's reduced earnings expectations and revised outlook for the cable segment.
• BMO Capital Markets' Dan Salmon downgraded the stock from outperform to market perform. On ESPN, the note read: "After CEO Iger raised the possibility of a direct-to-consumer product for ESPN in a recent interview, it appears this is not a near-term option ... we believe keeping the DTC option in the quiver will keep ESPN affiliate fee growth in the 'skeptical' column."
• Morgan Stanley analyst Benjamin Swinburne noted Disney's "incremental subscriber erosion from cord-cutting/shaving" and FX headwinds.

Jackson summarized in his newsletter: "Watch for other cable players with similar affiliate sub fee revenue cash cows now at risk to show weakness tomorrow on the backs of this report. The cable bundle revolution will be televised - over the top."