It's been a year since Walt Disney (DIS -1.83%) shelled out $1 billion for a minority stake in BAMtech, and now it's putting all of the pieces together. The media giant revealed on Tuesday afternoon that it's investing another $1.58 billion to bump its stake in BAMtech up to 75%. With that move, it will use the streaming platform to roll out ESPN and Disney services.
A dedicated ESPN streaming service should be up and running by early next year. A broader Disney-branded offering should launch in 2019, just as its distribution deal with Netflix (NFLX 2.50%) expires.
Shares of Netflix naturally opened lower on Wednesday following the news. Disney shares also opened lower, though perhaps more so because of its ho-hum quarterly report than the implications that its new approach will be too risky. However, history may still ultimately view this as a lose-lose deal. Let's go over the two big reasons why Disney may be biting off more than it can chew.
ESPN move will accelerate cord-cutting
It's not just millennials kissing their growing cable bills goodbye these days, and Disney's feeling the pain as it's shedding ESPN and Disney Channel subscribers with every passing quarter. Disney's response has been to make cable customers pay more, which explains why ESPN-affiliate revenue rose in its latest quarter despite lower viewership, ad revenue, and subscriber tallies.
Media-research firm SNL Kagan estimates that the average cable subscriber will pay $8.37 a month for ESPN by 2018, the priciest channel bundled in most standard cable plans. It's fair to say that a lot of people paying that much for ESPN don't even watch the leading sports network. It's packaged in with a lot of the cheaper channels that they do watch, but cable and satellite television providers have been hesitant to create cheaper bundles that will drive down revenue. However, what do you think will happen when ESPN rolls out as an over-the-top service in early 2018?
The diehard sports fan won't flinch at paying $10 or $15, or possibly even $19.99, a month for an ESPN platform, and Disney's already planning on bankrolling more sports programming -- and even movies -- to make it a sticky service. The problem is that the service will suck out sports fans from the pool of paying cable customers.
What's that? Disney is saying that the ESPN service will only be offered to folks already paying for ESPN on cable or satellite television? Well, maybe it's paying attention to what Time Warner (TWX) did with HBO.
Time Warner launched HBO Go in 2010 as a way to expand the stickiness of its premium-movie channel, but it realized that it couldn't charge extra for it beyond what folks are already paying their cable companies. It rolled out HBO Now two years ago as a stand-alone service, and the moment that Disney does this -- because, well, money -- sports fans will cut the cord in droves. This will leave a bunch of non-sports fans paying a ton of money for a pricey sports channel they don't watch. If you think the exodus is bad now, just you wait.
Pricing will be an issue
Let's move from ESPN to the more ambitious platform that Disney will roll out once its distribution deal with Netflix ends in 2019. Netflix can charge just $9.99 a month for a perpetually widening breadth of content -- $15.7 billion in streaming content obligations as of the end of June -- because it can divide the programming costs across its 104 million subscribers. Netflix's global audience will be a lot larger in two years.
It's a different story for channel-specific services. CBS All Access has been around for a couple of years now and it's just at roughly 2 million paying subscribers, with a goal of hitting 4 million by 2020. That's at a price point that's $3 a month less than Netflix for its commercial-saddled streaming service, and matches Netflix for the ad-free offering. Disney won't be able to charge more than Netflix for its significantly smaller content library, and it will also come at the expense of even more people flying off of cable and satellite services.
One can argue that Disney is making the right move here. It's trying to disrupt before it gets disrupted into obsolescence. However, cord-cutters are doing what they do because they want to spend less on video entertainment, and that trend won't change. Disney may be going from one basket to several, but it's still going to lose a lot of eggs along the way.