A clash of business models between ESPN and… its owner?
Disney’s big dilemma for ESPN is whether and when to fully embrace a future without cable.
Broadcast and cable networks still make billions of dollars per year from the traditional TV model. ESPN is a huge beneficiary, because media companies earn monthly subscriber fees from pay-TV providers regardless of how many people watch their programming. Niche channels make just a few cents a month per subscriber, while sports networks charge several dollars.
Disney makes more money from cable subscribers than any other company, and that’s solely because of ESPN. ESPN and sister network ESPN2 charge nearly $10 per month combined, according to research firm Kagan, a unit of S&P Global Market Intelligence. That’s at least four times more than almost every other national broadcast or cable network, according to Kagan.
Disney requires pay-TV providers to include ESPN as part of their most popular cable packages. It’s a no-brainer for TV providers, who wouldn’t dare drop ESPN.
Meanwhile, the non-sports world is cutting the cord.
And why is that a clash?
While Disney makes more than $10 a month per subscriber for sports, it makes far less for entertainment networks such as Disney Channel and FX, which draw lower audiences and don’t command high advertising rates.
If Disney can get a cord cutter to pay $8 per month for Disney+ and $6 for Hulu, it’s a huge win for the company.
The reverse is true for ESPN. Swapping an ESPN subscriber for an ESPN+ customer, who contributes average revenue of less than $5 per month, is a significant loss for Disney. ESPN+ is a streaming service with limited content.
Disney Chairman Bob Iger, who was CEO until last year, told investors when he launched Disney+ that Disney was “all in” on streaming video.
But ESPN isn’t. ESPN’s strategy is to cling to the cable bundle for as long as possible, knowing it can draw potentially billions of dollars from U.S. households that are each paying $120 for the network even if they never watch it.
Some analysts have even questioned whether Disney should spin off ESPN, allowing Chapek to focus more clearly on streaming. An ex-Disney executive, who recently left the company and asked not to be named, said there’s “strategic misalignment” between the parent company and ESPN, and the businesses no longer belong together because Wall Street doesn’t look kindly on declining assets. The executive said having ties to the legacy bundle will weigh down a company’s stock multiple.
Mickey rakes in $9 billion — that’s billion, with a “b” — from carriage fees, plus billions more in advertising. That’s a lot of jack, but the key fact buried in there is the money it earns from people paying for ESPN who don’t watch it. What happens to the bottom line as those folks steadily leave for a more a la carte approach with streaming? Well, one thing you can bet on is that Disney ain’t giving that money up without a fight.
Should the number of pay-TV bundle subscribers drop to a level well under 50 million U.S. households, Disney would likely take ESPN to consumers in a more complete streaming package, said two people with knowledge of the company’s plans. At that point, the economics would flip, as most of the people paying for linear TV would be sports fans. Disney could likely make more from a full-service sports streaming service than it would make in a wholesale pay-TV distribution model.
In other words, prepare to get your asses charged off, sports fans.