In a shrinking cable universe, Walt Disney (NYSE:DIS) has been losing millions of dollars in carriage fees for ESPN and its other cable networks. To combat the declining subscriber base, the company is preparing a stand-alone streaming service for the sports network as well as a second offering for Disney content.

In this Industry Focus: Consumer Goods video, the cast looks at some of the challenges Disney faces before breaking down the details behind its ESPN-branded service.

A full transcript follows the video.

This video was recorded on Sept. 26, 2017.

Vincent Shen: In my opinion, if there's any company out there that can lean on its content library to create a competitive, major streaming service, I do believe it's Walt Disney. They have so much content that they're actually planning on two services. One is pulling from ESPN sports content, the other is built around Disney's film and television properties. Dan, before we dive into the details of what we know about the services and maybe what's driving this evolution in terms of the company's strategy, can you give us an idea of some of the challenges the company has been facing that they're trying to address with this?

Kline: The big challenge facing Disney is that the cable universe is shrinking. ESPN is by far the channel that gets the most per subscriber. It's almost $8. They don't release the numbers, so there are different estimates, but it's around $8 per subscriber. So every time the cable universe loses a million households, that's a million times $8 that they've lost. And the cable universe itself has shrunk since 2012 by somewhere between 5 and 6 million subscribers, depending on how exactly you look at the data. Some of those people have the digital streaming skinny bundles. So for Disney, you're seeing a world where younger people aren't getting cable, and if they ever do get cable, they may not want to spend for channels they don't watch. So the big drain on this, any one little channel that gets a couple of cents or a nickel isn't going to feel it that bad. But ESPN feels it deeply, and they've lost about 12 or 13 million.

Shen: Yeah, from a peak of 100 million just a few years ago, now to below 80 million, so you're right on point there.

Kline: Then the challenge for ESPN is, they have huge fixed costs. If you are your typical MTV and you lose a million subscribers, maybe you just cancel a show and you run some old programs --

Shen: More reality TV. [laughs] 

Kline: MTV2 still runs Martin reruns, I don't know who's watching those. You repackage old stuff and call it classic. There's lots of ways to do cheap programming. ESPN is committed in rights deals, it's something like $11 billion a year in rights deals.

Shen: For all the various sports.

Kline: $2 billion alone for the NFL. So as those deals come up, it has the option of either not renewing them, bidding them lower, but maybe losing them to a rival, and then lowering its costs. But it can't lower its costs in the short term in any appreciable way. So it has to figure out how to cut costs, which, we've seen them cut staff, and we've seen them cut staff with five year contracts just so they could take the hit all in one quarter, even though they're still paying those people. And really, for them, they have to figure out a way to bring more revenue in.

Shen: If anything, we've seen the value of the price tags for some of these sports-related streaming rights only go up over time, phenomenally so, especially because you have non-traditional media companies also bidding for them. You have Facebook throwing in their hat, Twitter too, it only raises the prices.

Kline: You might see some peripheral sports. Maybe NASCAR will take a hit, maybe UFC won't get the deal their new buyers hope to get. But there will always be two bidders for the NFL. If ESPN lets that deal go, maybe the NFL will have to package it between Facebook and Twitter and a network, or do something, but they're going to get their $1.9 billion for that Monday night package.

Shen: If not more than that.

Kline: If not more than that.

Shen: So going to the services specifically, we have this context and background of what the company is facing off against and how they're trying to head that off. The ESPN service will make its debut in early 2018, spring is what I've heard.

Initially, it will be limited to sports content for baseball, hockey, soccer, tennis, and college sports. That's about 10,000 live events a year that are not currently available to pay-TV ESPN subscribers. I feel like management has been very sensitive to making it clear that it wouldn't be abandoning its traditional pay-TV partners, including the cable companies and the satellite providers. So the ESPN streaming service, there's been a big focus on the mobile side of things and the app. They say that the content will be accessible through the ESPN app, which already exists. It has news, scores, things like that. But then, it also expands so that ESPN content that traditional cable subscribers have, they'll be able to see all of that on the app as well once it's authenticated.

The most notable thing for me, looking out even further, is a quote I found from Bob Iger, it's something he said during his presentation at a Bank of America conference earlier this month. It's a decent length quote, but bear with me. He says

Over time, I think the way we have to look at this is, this will be a sports marketplace platform. Think what iTunes is, for instance, where you'll be able to go to the platform and actually buy almost on an à la carte basis a sport, a sporting event, a season, a league, maybe a conference, for instance. You'll be able to pick and choose over time what it is you want. It won't necessarily be a one-size-fits-all. We may launch it that way, but the goal eventually is to create something that the sports fan can essentially use to design what their sports media experience could be.

What he describes here is exactly what I hear people describe all the time when they talk about their ideal pay-TV package, because they want to pick what networks they pay for.

Kline: The problem is rights.

Shen: Exactly.

Kline: Let's just take the National Football League. The National Football League has an exclusive deal with DirecTV for over $1 billion, I don't know the exact amount, for Sunday Ticket. Every time that deal comes up to bid, DirecTV will bid whatever it takes to get it. So all of the sudden you're offering this everything sports package but it doesn't have NFL. And, oh, by the way, NBC and Comcast have the rights to the National Hockey League, a niche sport with a die-hard fan base that would absolutely pay for out of market games. So now, there's no NHL. ESPN only has part of the baseball package and part of the NBA package. So is it going to be able to get its partners -- Fox and the Turner channels and the various sports -- to agree to some sort of ESPN-led -- these are very difficult. Things like WWE already has a network. UFC already has a network. So creating this marketplace for a better than à la carte price, there's a lot of wrangling that has to happen.

Shen: It becomes an absolutely massive negotiation between a ton of different parties, competitors. It's definitely a goal that's way out of hand.

Kline: ABC, you said it right up the top, Disney, they are the only company that has the content to launch a Netflix or Hulu rival. The problem is, this plan of having a sports app and an entertainment app, if a family for $9.99 a month can get the equivalent of what ESPN has plus all the Disney kids programming, plus all the Disney Marvel programming with the possible exception of the Netflix shows, which I don't know what the rights are behind those, that's something I might pay for. You're going to hit all in the family, the sports fan, he might pay $12.99 a month. But you start splitting those up, even if they're only $6.99 or $7.99 or whatever the number is, it becomes less of a draw. As an adult, I think it's maybe harder for me to justify $10 a month for something only I watch, if it's sports, then it is to buy something that the whole family is going to use.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.