- ESPN is getting crunched by cord-cutting and astronomical increases in sports rights fees.
- In response, Disney plans to offer the network’s content via streaming in the coming years.
- Here’s how six analysts feel about that move — and why some believe a sale of ESPN may make sense.
ESPN has long been a cash cow for Disney, but some analysts now think it’s time to sacrifice it.
Although the iconic sports network generated close to $20 billion in revenue in 2022 and turned roughly a quarter of that sum into profit, according to estimates from Wells Fargo, it’s currently between a rock and a hard place as cord-cutting continues and fees for live sports rights soar.
Ten years ago, over 100 million US households paid for TV, and ESPN made money from each — whether they watched sports religiously or never tuned in. Since then, about 40% of pay TV customers have canceled in favor of streaming services.
At the same time, ESPN is grappling with the skyrocketing costs of broadcasting games. The average annual value of the NFL’s latest media deal rose nearly 77% from the prior deal, according to Bank of America, which estimates ESPN will face a similarly painful 71% increase when it renews its NBA rights next year.
To stop the inevitable bleeding, Disney has telegraphed that it will soon sidestep cable entirely with a direct-to-consumer (DTC) offering for ESPN. But that plan carries serious risk, as it would jeopardize still-sizable cable revenue without guaranteeing that enough sports fans would support such a product. (Disney already offers ESPN+, a streaming service that shows some sporting events but doesn’t have major games or shows like “SportsCenter” and “First Take.”)
There are also some industry observers who argue that the House of Mouse should consider selling ESPN to a rival or a private equity firm, though that’s seen as a long shot.
Whatever Disney decides, it must move quickly. ESPN shocked sports fans in late June with another round of layoffs that included well-known pundits like Jalen Rose and Todd McShay. And in the long term, it must contend with dwindling profit margins, which could fall to almost a third of current levels by 2030, according to Wells Fargo.
Insider polled six Disney analysts to hear takes on what the company should do with ESPN, and the perceived value of the so-called “Worldwide Leader in Sports” varied widely. Most said that CEO Bob Iger should hold onto the network, though some were more reluctant in that view and still others disagreed entirely. Disney and ESPN didn’t respond to requests for comment for this story.
Why a move to streaming is risky business for ESPN
Disney’s ESPN dilemma drove Macquarie’s Tim Nollen to downgrade the stock in May. He told Insider that, “With this as a big, big question mark, I found it hard to be bullish on Disney stock.”
While Nollen said the inevitable launch of ESPN outside of the cable makes sense in theory, he warned that finding the right price for it will be a huge challenge.
“The trick now is they have to go through the act of actually coming up with, how are they going to take it off the linear bundle,” Nollen said. “What happens to Disney’s overall growth? What happens to pay TV’s growth at that point, or decline?”
Several other analysts — including Barton Crockett of Rosenblatt Securities, who has a buy rating for Disney shares — seconded those concerns about cannibalizing cable revenue.
“If they offer ESPN direct, it would accelerate the pressure on the pay TV bundle,” Crockett said. He added: “But that pressure’s coming probably anyway — one way or the other,” given that consumers have been trained to expect content through on-demand streaming services.
When Disney releases a DTC version of ESPN, it must attract tens of millions of subscribers to replace the affiliate fees it collects from cable providers. This year, ESPN’s affiliate fees are expected to be $13.9 billion, according to Wells Fargo. To replace that, analysts Insider spoke with said Disney would likely need to charge $20 to $30 per month for ESPN DTC in addition to bringing in money from advertising and other revenue streams.
That’s a lot less than a typical monthly cable subscription, and there are many sports fans who’d happily pay it. Nollen estimated 35 million current cable customers would switch to ESPN DTC.
However, it’s much harder to know how many non-cable customers would pay for ESPN on its own. If Disney can’t lure households that have already cut the cord to a new DTC service, it would need to charge each user more, which could shrink its audience and hurt ad revenue. That gamble may be worth taking, Nollen said, but there’s no guarantee of success.
“If you take that long-term view, which Disney always does, and you model out and you think that that’s the run rate for subscriber numbers and revenues and earnings that ESPN streaming can deliver, then yeah, it probably is financially responsible,” Nollen said. “But in the near term, it’s a big risk. It’s a big ask to investors to endure the transition.”
Will Disney play 3-D chess or ‘cut bait’ on ESPN?
Plus, a steadily shrinking subscriber base is only part of ESPN’s problem. It must also contend with the perpetually rising costs of sports rights that the network can only rent, Crockett noted.
Since 2010, the cost of sports rights has risen at a compound annual growth rate of 8.4% per year, according to Citigroup, which also estimated Disney spends $7.2 billion per year on sports rights — well below the $10.8 billion it was reportedly set to spend in 2023.
Leagues have Disney over a barrel when it’s time to renew rights deals, and they know it. The NBA and NFL have no reason to cut linear networks like ESPN or Comcast’s NBC a break despite weakness in cable since deep-pocketed tech giants like Amazon and Apple are looking to bolster their growing streaming services with live sports.
“There’s a lot of three-dimensional chess because I think you’ve got changes in rights and changes in consumer preferences, and all of it looks kind of cautionary,” Crockett said.
Though unloading ESPN would be painful, Crockett thinks it may be the wise move.
“It might be sensible for Disney to cut bait and make an earlier exit from sports than they’d want to,” Crockett told Insider. “I think that their belief is that sports can anchor a broad platform of Disney+ and Hulu and that they’ll be able to compete. And I think that’s a tough road.”
William Cohan, a banker-turned-author who once evaluated M&A deals on Wall Street, has advocated in his Puck newsletter that Disney trade ESPN for Comcast’s one-third stake in Hulu, give or take a few billion dollars. Doing so would help solve Disney’s issues in streaming and sports while giving Comcast an ESPN-NBC Sports super-network with better bargaining power.
“This deal would make Iger look smart, would get Disney the rest of Hulu, plus a bunch of cash to use to pay down debt and invest in streaming, and offload the headache of ESPN to Comcast, which would probably be in a better position to manage the decline and the higher cost of live sports,” Cohan recently remarked in Puck.
Sports may still be a must-have since Disney can’t ‘out-Netflix Netflix’
Still, selling ESPN isn’t an obvious home run for Disney, which owns 80% of the network (Hearst owns the rest). In fact, four of the six analysts Insider spoke with think it’s worth keeping.
“ESPN is a differentiator for them,” said Joe Bonner, an analyst at Argus Research who has a buy rating for Disney. He added: “The whole thing about competitiveness is you want to differentiate from your competitor and not be exactly the same.”
Disney is already in an uphill battle with Netflix in streaming since the latter’s first-mover advantage gave it a huge head start, Bonner noted. Competing with it head-on could backfire.
“Can you out-Netflix Netflix? I don’t know,” Bonner said.
Besides, selling ESPN could be a headache for Disney, Bonner pointed out, since its long-term TV contracts would complicate any possible deal.
Brandon Nispel, an analyst at KeyBanc Capital who sees modest upside for Disney shares, agreed that severing ESPN would be a serious challenge. He suggested Disney should keep it unless an offer from a prospective buyer blows Iger and his board away — adding it’s not immediately clear who that buyer would be.
However, Nispel acknowledged that ESPN’s glory days as a big-time earner are over. Even if the network successfully pivots to streaming, its revenue might not be as consistent since fans could easily cancel when their favorite sport is out of season, unlike with cable.
“We’ve passed peak profitability on sports TV,” Nispel said. “And streaming economics — the characteristics at streaming are that you can churn very easily — make it really difficult for us to see them being able to really monetize in streaming.”
‘The method of monetizing sports is broken’
But there are big believers in ESPN’s future, including Citigroup’s Jason Bazinet. The analyst told Insider he “certainly wouldn’t sell” the network if he were Disney, especially since he’s bullish on its ability to thrive as a standalone service.
While the cable bundle may never come back into vogue, Bazinet said he thinks Disney should try to work with NBC and other networks to create a sports-only streaming bundle with all the games. Even a monthly price as high as $55 would cost half as much as the average cable bill, he said.
“It’s not [that] the sports business is broken — it’s [that] the method of monetizing sports is broken,” Bazinet said. He added: “The whole trick is, ‘How do we extract the sports and just put them on their own trajectory?'”
Though a sports bundle is compelling, Bazinet also believes ESPN can succeed in streaming on its own. He estimates that a DTC version of the network could boost Disney’s stock price by $19, assuming the company can lure back a few million sports fans who previously ditched cable.
Those who don’t watch sports cut the cord at roughly twice the rate of sports fans, Bazinet’s research shows. Even still, he estimates that 15-20 million sports fans don’t have cable, and his base case is that 20% of them would consider buying ESPN on its own.
Disney’s profit-maximizing price for an ESPN streamer is $22, according to Bazinet’s calculations. At that price point, he thinks 33 million households would subscribe. And if some of those sign-ups are cord-cutters, Bazinet said Disney would still enjoy a small marginal gain based on his estimate that ESPN makes $21.50 per month from affiliate and ad fees.
To prevent churn among fans of only one sport, Bazinet said Disney could bundle ESPN with Disney+ and Hulu — as it likely will, since it already bundles ESPN+ with its entertainment platforms — or offer a sizable discount to customers who pay upfront for a year.
One of Wall Street’s top Disney bulls, Wells Fargo’s Steven Cahall, also happens to love ESPN. He believes an ESPN streamer priced at $20 per month that launches late next year could drive significant revenue growth and billions in profits without causing rampant cord-cutting.
“Sports-rights costs are fixed,” Cahall wrote in an April note. “DIS has all the technology and overhead to expand its DTC offerings. ESPN DTC is zero incremental cost and potentially billions in incremental revenue.”
Sports fans would jump at the chance to get ESPN directly, in Cahall’s view. He estimates the standalone service would attract 24 million subscribers and up to nearly $29 in average revenue per user in its first three to four years, which is nearly five times what ESPN+ brings in now.
Even analysts who aren’t as optimistic about ESPN’s streaming future as Cahall and Bazinet agree that it’s worth a swing, given Disney’s limited alternatives. But if the network strikes out, its latest round of layoffs may not be the last.
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