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Walt Disney Co Is Ready to Take ESPN Over the Top

By Adam Levy – Jul 13, 2016 at 12:00PM

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The entertainment giant is planning a direct-to-consumer product featuring niche sports and programming.

Image Source: ESPN

It was inevitable. Walt Disney (DIS -0.01%) CEO Bob Iger even said it himself last summer -- ESPN will soon be sold directly to consumers.

The Information reports the Worldwide Leader is planning to launch a package of live programming that consumers will be able to buy straight from the source. Now, this isn't full-blown ESPN, as it won't include high-value content like MLB or NFL games. Instead, it will cater toward niche leagues and some college sports.

ESPN is proactively looking to shake things up after losing seven million subscribers from 2013 through 2015. The move represents a big first step from the business that accounts for a huge portion of Disney's most profitable segment. Strong demand for ESPN's new offering could spark more direct-to-consumer streaming services from ESPN and Disney.

Combatting the skinny bundle

During Disney's first quarter earnings call, CEO Bob Iger told analysts that ESPN's drop in subscribers "was largely due to the fact that ESPN was not part of skinny bundles".

To combat that, Disney is actively in talks with traditional distributors as well as newer platforms like Sling TV to get its networks in those smaller bundles. On the company's second quarter earnings call, Iger added that "we will continue to look pretty expansively at current and new entrants in the marketplace". Hulu is reportedly looking to launch a live streaming service next year, and YouTube expects ESPN to be part of its live streaming service expected to launch at the beginning of next year as well.

It appears Disney is quickly following through on its efforts to get ESPN into additional lighter packages. It's unclear, though, if ESPN is maintaining its high affiliate fees in these deals.

ESPN has managed to grow its subscription revenue despite falling subscriber counts over the years thanks to pre-existing ramps in its contracts with distributors. With these new digital platforms targeting more price-conscious consumers, ESPN may have to make sacrifices in its affiliate fees in exchange for access to new subscribers.

If not skinny bundles, then sell direct

Offering a direct-to-consumer product is about reaching an audience that values high-quality programming but doesn't want to pay for a big bundle of channels they don't watch. In that sense, it's targeting the exact same audience as skinny bundles.

While ESPN's current plan isn't going to offer the same programming available to pay-TV subscribers, it will establish a couple of things. ESPN will put in place the necessary payment processing, customer service, and other support systems for a direct-to-consumer product. Additionally, ESPN will get a better understanding of how well its audience responds to a direct sales approach.

ESPN has sold content directly before. Last summer, it provided access to the Cricket World Cup for $100. Its new plans ought to reach a somewhat wider audience, and if successful, they could lead to an even more robust product down the road.

On the company's first quarter earnings call, Iger told analysts, "Many of our brands, including Disney, Marvel, Star Wars and ESPN, are tailor-made for over-the-top direct-to-consumer app-based video products."

Moreover, the company reportedly acquired a 33% stake in BAM Tech, the streaming technology company that provides the backend for its WatchESPN app. It has an option to take another 33% of the company in the next four years. On top of that, ESPN's latest deals with the NBA includes digital streaming rights that don't require a cable subscription. That indicates Disney is likely going to at least experiment with more direct-to-consumer options in the future.

While a popular over-the-top service could help ESPN offset its losses from traditional cable, it may be more valuable as a negotiation tool. As mentioned, a direct-to-consumer ESPN service targets a similar audience as skinny bundles. ESPN can point to its a la carte option as a way to maintain its pricing power with new digital distribution platforms for ESPN. Contracts with distributors ought to be more profitable and easier to increase pricing on compared to a direct-to-consumer product.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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