Once the go-to spot for sports fans, ESPN may now be losing its lead. Big tech companies are minting big deals to scoop up sports rights and the fans that come along with them.
Disney's (DIS -0.10%) ESPN is facing new challengers from Amazon (AMZN -0.82%), Apple (AAPL 0.68%), and Alphabet (GOOG 0.01%) (GOOGL -0.03%). These big tech behemoths may not seem like your traditional sportscasters, but they're all jumping into the bidding game for sports rights, content, and talent. This heightened competition comes at a time when ESPN is facing pressure from increased cord-cutting and a weakening advertising market.
Former Disney CEO Bob Chapek fiercely defended the importance of ESPN as part of the overall Walt Disney business. Current CEO Bob Iger - the former helmsman who recently returned to again lead the company - was a strong defender of ESPN during his first term. But with the shifting environment, can Iger still make ESPN work?
Big names, big budgets
According to Variety, the value of U.S. TV and streaming sports rights will reach $26.6 billion in 2023, up 75% from $15.2 billion in 2015.
Two factors are driving those prices higher. First of all, live sports remain one of the few ways to get many people to watch the same thing simultaneously. That's important for drawing in big advertising dollars. Second, networks with long-term sports contracts are essential for distributors and subscribers. In the cord-cutting era, this has substantially increased the relative value of sports.
To capitalize on these trends, big tech has made a push for sports streaming rights. When Twitter originally purchased the rights to simulcast Thursday Night Football in 2016, it paid just $10 million. Six years later, Amazon is paying $1 billion per year for exclusive rights to weekly games.
Alphabet's YouTube is the new home of the NFL's Sunday Ticket package. For $2 billion per year, YouTube will be able to stream out-of-market NFL games, granting fans access to games not shown on local networks.
In mid-2022, Apple, which was also interested in Sunday Ticket, agreed to pay $2.5 billion for the rights to all Major League Soccer (MLS) regular season games and Leagues Cups for the next 10 years. The iPhone maker is also shelling out $85 million per year to Major League Baseball (MLB) to cast about 50 Friday Night Baseball games a season in the U.S. and eight other countries.
ESPN, though, continues to battle for rights. In October 2022, it secured the rights to Formula 1 racing for another three years, reportedly paying $85 million annually for a three-year contract. The rights were especially coveted after the sport's recent rise in popularity. In 2018, ESPN paid $5 million per year for Formula 1 rights.
There's a reason big tech companies are so interested in sports rights: They bring in subscribers. Amazon said it had its best three hours of Prime membership sign-ups for the debut Thursday Night Football match this season. While that means ESPN's competition is sure to continue, it also gives the company strong pricing power to mitigate the impact of cord-cutting on its business.
Can ESPN maintain its worldwide leadership?
As part of Disney, ESPN certainly has the resources to compete with its deep-pocketed competitors.
ESPN is, in and of itself, a profitable business. Disney's domestic linear networks generated more operating profits for the business than any other segment in fiscal year 2022, bringing in $8.5 billion. ESPN plays a substantial role in that segment, as it anchors the cable bundle and sells a lot of advertising. (ESPN+ falls under Disney's Direct-to-Consumer segment, along with all the company's other streaming services.)
Still, sports rights are pressuring profits. While the operating margin for linear networks remained stable in 2021 and 2022, hovering right around 30%, that metric has contracted over the past five years. In 2017, the operating margin for linear networks was nearly 34%. In that same time, sports rights commitments for the next year have climbed from about $6.6 billion to $10.8 billion.
As Amazon, Apple, Google, and others enter the bidding wars for sports rights, ESPN will face pressure to keep what's important and let some properties go. For example, it'll have to fend off Amazon when the NBA broadcasting rights come up for auction next year. The retailer is reportedly very interested in adding a set of games to its catalog, and the NBA is considering a streaming-only package.
ESPN also needs to be wary of letting less popular sports rights go to tech companies. ESPN got its start by buying up sports rights nobody wanted, growing into the behemoth it is today on the back of NASCAR and NCAA basketball, which it helped to popularize. Second-tier sports, like fighting or professional pickleball or alternative football leagues such as the XFL, could turn out to be valuable properties in the future. And, they won't cost very much to lock up long-term.
The good news for ESPN lovers and Disney shareholders is that the media mogul holds the brand, the personnel, and the profits to go after the sports rights that offer the best long-term value and opportunities. While competition from big tech is hurting its margins, it's not going to put the company out of business. Sports rights remain a strong business, and ESPN is in the catbird seat when it comes to making deals. It should remain a profit center for Disney for years to come.
