Dan Loeb has changed his tune on ESPN. In August, the activist investor wrote a letter urging Walt Disney (DIS 0.18%) CEO Bob Chapek to spin off the sports media company. But after Chapek presented at Disney's annual D23 conference and talked to reporters about ESPN and the future of Disney, Loeb's now convinced ESPN is worth more within Disney.
I've always thought ESPN held a lot of value for Disney. Chapek quickly changed the mind of a highly vocal activist investor, and that makes me more excited about the prospects of Disney and its streaming strategy than ever.
Streaming is turning to sports
Disney is increasingly focused on streaming. And streaming's increasingly focused on sports. Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and others have all made big deals for sports rights recently.
In fact, Amazon says its Thursday Night Football deal is already paying off, after its first exclusive broadcast generated more U.S. Prime sign-ups than any other three-hour period in history. That's despite extremely high penetration among American households.
ESPN holds a trove of valuable sports rights, most of which come with some streaming aspect. The company's been including streaming rights in its contracts with sports leagues for years, but it made it an even bigger focus of its negotiations several years ago.
Importantly, ESPN is able to pay for all these sports rights and remain profitable and cash flow positive. Amazon and Apple are using sports as loss leaders to draw customers into their broader ecosystems. It's no wonder ESPN is seen as such a valuable asset by so many suitors.
On top of that, there are additional opportunities for ESPN and its strong brand. For example, sports betting is becoming legal in more and more states, and ESPN could go so far as to acquire or launch its own gambling business. With a built-in marketing channel and the ability to offer "prop" bets on different aspects of a game during broadcasts, it could generate additional revenue alongside increased viewership (and the ad revenue that comes with it).
A 100-year plan
After Loeb published his letter, Chapek said he received no fewer than 100 offers for ESPN. But it's one thing for some other company to see value in ESPN; it's another to unlock that value by improving the business or finding synergies with an existing business.
Chapek hinted at plans for both within Disney. In fact, he told Variety that Disney has a strategic plan for where ESPN fits into the company over the next 100 years. It's not clear that vision was shared with Loeb, but Chapek says Disney will have another investor day at some point where it will offer investors a look at that plan.
3 benefits of keeping ESPN at Disney
While ESPN would have tremendous value as a stand-alone company, it can play a significant role in helping Disney grow. Here are three benefits I see of keeping ESPN as part of Disney, and there are probably a lot more to discuss.
- Positive cash flow can help fund other investments at Disney. The media company is currently pouring cash into streaming content, but it requires cash flow from ESPN and its parks business to fund these early days as it builds its subscriber base. Disney doesn't expect Disney+ to be profitable until 2024, and positive free cash flow is likely to come well after that.
- ESPN's leadership in sports means it has some of the most valuable ad inventory in the world. As Disney moves toward more connected-TV advertising with ad-supported versions of Disney+ and the Disney bundle, it can make a better pitch and offer better guarantees to marketers with ESPN's valuable inventory on hand. That can enable higher ad prices across the board for Disney's streaming services.
- It's a small, but important piece of the streaming bundle. Ultimately, Chapek wants to integrate all three of Disney's streaming services into a more seamless experience. As mentioned, Amazon and Apple's experiments with sports indicate that it could be a major driver of sign-ups for Disney's streaming services.
These factors make me think ESPN is more valuable inside Disney than as a stand-alone company or as part of another media company. Chapek's comments and Loeb's change of heart make me think there can be a lot more to ESPN than what's on the surface. And that makes me even more excited to see what Disney plans to do with the sports juggernaut.
