ESPN has dipped its toes into streaming with ESPN+, but one day it'll offer its entire flagship cable network directly to consumers without the need to subscribe to the big cable bundle.
"That's a 'when,' not an 'if'," ESPN Chairman Jimmy Pitaro told Bloomberg. His comments echo those made by Walt Disney (DIS +1.51%) CEO Bob Iger in February.
The crown jewel of Disney's linear networks division produces a significant amount of operating income and cash flow for the entire company. It's so important, in fact, that Iger has restructured the company and will split out the results of the sports media business in its earnings reports by the end of the year.
But moving the network from the cable business to the streaming business is a big step with lots of moving parts. And considering the importance of ESPN to Disney's overall health, it's important it gets things right. Here are three things that should happen before Disney makes the move.
1. Let cord-cutting run its course
One of the biggest reasons people still sign up for cable is sports. If a cable bundle doesn't have ESPN, a cable company is going to have a hard time selling that bundle. It's one of the reasons ESPN is able to charge so much for each subscriber and continuously increase its rates.
But when Disney negotiates distribution for ESPN, it also pushes cable companies to include lots of other channels. A bundle with ESPN also has Disney's most popular channels like the Disney Channel and FX. And Disney also manages to get about two-thirds of subscribers to take less popular networks like National Geographic Wild.
Despite the impact of cord-cutting, the economics of the cable bundle still benefit Disney. Keeping ESPN a cable-only product leads to better overall revenue and operating income results.
It's practically inevitable, however, that Disney won't continue to be able to increase affiliate fees charged to distributors and advertising rates to the point where it's able to grow overall revenue despite a loss in subscribers. And the opportunity to capture casual sports fans who've cut the cord with an ESPN streaming service could outweigh the benefits of the bundle at that point.
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Key Data Points
2. Grow ESPN+ subscribers
At its analyst day at the end of 2020, management said it expects ESPN+ to reach between 20 million and 30 million subscribers by the end of 2024. It already counts 24.9 million as of the first quarter of 2023.
That growth has come largely as a result of the success of the Disney streaming bundle, which includes Disney+, Hulu, and ESPN+. That's reflected in an average revenue per user of just $5.53 per month versus ESPN+'s stand-alone price of $9.99 per month.
But investors shouldn't concern themselves too much with ESPN+'s revenue or profits as much as the subscriber count. ESPN+ subscribers are some of the likeliest consumers to subscribe to an a la carte ESPN network streaming service. And Disney will have access to some of the best viewer data available on those potential customers, making them easy to convert.
Growing subscribers well past the high end of management's 2020 guidance could set ESPN up for immediate success when it launches its stand-alone streaming service.
3. Get the most important sports rights
The biggest negotiation for ESPN and Disney over the next couple years will be getting the NBA TV rights locked up.
The ballooning price of sports rights has forced ESPN to become more selective with what it looks to keep and what it can do without. New bidders, including big tech companies with deep pockets, have driven costs significantly higher than the already-expensive sports broadcast rights of the previous decade.
The NBA is looking to make the most of the opportunity when it comes to the negotiation table in early 2024. Disney will have an exclusive negotiation window for its existing rights. But the NBA may try to keep streaming rights separate from the broadcast rights, and that's something ESPN will have to fight for.
The number may be shocking to investors, but ESPN needs both the broadcast and streaming rights if it wants to manage the transition from a cable network to direct-to-consumer offering over the next decade. During the first-quarter earnings call Bob Iger said the NBA is valuable "because not only it's volume, but it's quality."
The future of ESPN
As Disney transitions from a cable network powerhouse to a streaming media company, the way it handles ESPN will be extremely important.
Management will begin breaking out ESPN's results later this year, but investors need to understand how ESPN supports other Disney networks. It also plays a role in selling the Disney bundle, and could play a bigger role in the future with a fully a la carte ESPN.
There will be some short-term pain as Disney manages cord-cutting and the growing expenses of streaming, but the long-term benefits of maintaining the cash cow that is ESPN will be worth it for long-term investors.
