Walt Disney (DIS -0.32%), if you hadn't already heard, is upping the prices for its ESPN+ streaming service. Although the cost of the bundle that includes Hulu, Disney+, and ESPN+ won't change (for now), the monthly cost of ESPN+ alone will move from $6.99 to $9.99 as of Aug. 23, while a full-year subscription will swell from $69.99 to $99.99. It's the biggest single price increase the company has imposed for ESPN+, and management is justifying it as necessary to help cover the costs of the live sports coverage that has been added to the platform of late. These additions include PGA events, professional tennis, hockey, and perhaps most notably, select NFL games including Monday Night Football.
It still won't be as robust as the programming offered by cable's ESPN, to be clear. It could get there sooner than later, though, given that ESPN+ will now generate more revenue per user than conventional cable will. Although the estimates vary from one source to another, ESPN generates on the order of $7 to $8 per cable viewer per month for Disney.
The idea that the streaming service could overtake the cable channel was unthinkable as recently as just a few years ago. Back then, Disney needed cable systems to carry ESPN as much as cable providers needed ESPN to prevent customers from cutting the cord. Now though, the entertainment giant continues to ease away from these once-vital partnerships, inching ever-closer to a standalone streaming version of the popular sports channel. The recently announced price increase for ESPN+ is another step toward that end, and perhaps one of the biggest steps yet.
That's a working theory anyway -- because Disney management hasn't said that explicitly. However, it's certainly looking like the shape of things to come.
Where the viewers are
What's missing so far is scale. Despite years of cord-cutting, about 74 million U.S. households still pay for conventional cable TV service, according to numbers from Leichtman Research, and most of those still have ESPN as part of their lineups. This translates into roughly $6 billion worth of revenue per year. Conversely, with only 22.3 million ESPN+ subscribers paying an average of only $4.73 per month for access to the streaming platform, this ESPN-branded business only drives on the order of $1.3 billion worth of annual revenue.
The 40% price hike mathematically bolsters the figure, but bear in mind the price increase may also inspire at least some subscribers to cancel the streaming service. That's not exactly a foregone conclusion, though. Given how much more live sports programming ESPN+ has now than it launched with, the sports-streaming service could be better protected against subscriber cancellations than it's currently getting credit for.
Meanwhile, investors should keep an eye on the cable and streaming subscriber trends with respect to recent comments made by some of Disney's top brass.
When asked during May's earnings call about the possibility of Disney eventually launching a streaming version of the same ESPN that's currently only offered via cable, CEO Bob Chapek replied: "What we're doing is sort of putting one foot on the dock, if you will, and one foot on the boat right now. But we know that at some point when it's going to be good for our shareholders, we'll be able to fully go into an ESPN DTC [direct-to-consumer] offering." He also conceded that "the hesitancy to move too fast away from those [linear networks] is really a cash flow situation."
You don't have to read between the lines much here. It's not a matter of if. It's a matter of when. And, given that over 100 million U.S. households were cable subscribers as recently as 2014, while as of 2017, there were exactly zero ESPN+ subscribers, that time looks like it's coming soon ... very soon. Continued cord-cutting will only push the issue further down its inevitable path.
Sooner or later, and sooner than later
The current version of ESPN+ is not quite what will eventually become a standalone version of cable's ESPN. It's just an intermediary format that will train consumers to accept the idea without blindsiding cable companies that still rely on ESPN's draw -- cable providers that Disney still needs for at least a while longer. Don't be surprised to see a few more iterations that gradually make ESPN+ look more like ESPN before all is said and done.
Another 20 million ESPN+ subscribers paired with the loss of another 20 million or so cable subscribers should prompt Disney to reconsider the importance of its relationships with cable companies, since ESPN+ could be just as big as ESPN by then, and still growing while ESPN is still shrinking. At that point, it will be crystal clear where the company should invest for the future.
The best part of this dynamic for shareholders is that Chapek is at least considering them, looking for ways to protect the stock's value while he navigates the paradigm shift.
