Please ensure Javascript is enabled for purposes of website accessibility

Don't Expect ESPN To Cut The Cord Anytime Soon

By Jeremy Bowman - Jan 24, 2016 at 12:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The cable bundle continues to deliver bundles of profit for the sports network, but the company is experimenting with other ways to reach viewers.

Cord cutters need not apply. 

That's not quite the rule at Walt Disney Co's (DIS -0.90%) cable juggernaut ESPN, but network president John Skipper joked that prospective employees should have to show their cable bills before coming on to the campus in a recent Wall Street Journal interview.

Skipper's opinion on cord-cutting employees derives from his feelings on going over the top in general. Despite losing 7 million subscribers over the last two years, Skipper sees no need for his network, the most valuable one in the cable universe, to cut the cord, saying, "We are still engaged in the most successful business model in the history of media and see no reason to abandon it."

Disney's cash cow
Skipper isn't exaggerating when he calls cable the most successful media business model ever. Total revenue from the ESPN family, which includes eight networks and a website, magazine, and the international business, is estimated at $11 billion, contributing about half of all revenue from Disney's media networks business, which is by far the parent company's biggest segment. Operating margins are around 40%, good for a profit of $4.4 billion, or 30% of Disney's total operating profit. By comparison, Netflix Inc, the leader of the streaming world, generated just $6 billion in revenue this past year. 

Mexico City, MEX - December 4, 2015 - Studio A: Carolina Padron and Jorge Eduardo Sánchez on the set of SportsCenter Mexico at the new ESPN Mexico City Facility. .(Photo by Antonio Hernandez / ESPN Images)

Source: ESPN

Though ESPN has lost subscribers in recent years and affiliate fees along with them, Skipper is careful to note that ad revenue and ratings have not been affected by the exodus. Most of the losses owe to subscribers switching to smaller bundles, and Skipper characterized those who have left as older, less affluent, or those who didn't watch ESPN in the first place. 

Still the sports leader
While the rise of streaming services like Netflix has put the entire cable model under duress, ESPN is in a different situation from other programmers. Netflix and its ilk have avoided sports programming, meaning ESPN's primacy over sports programming is likely to remain with or without the cable bundle. The network has dismissed threats from Vs., Fox Sports, and other pretenders and reigned supreme over the sports world for the past generation.

Indeed, ESPN reaps the benefits of cable affiliate fees as its appeal enables it to charge much higher rates than any other network. Subscriber fees were $6.55/month in 2015, and are expected to top $7 this year, while ESPN's sister networks also contribute more than $1/month. 

Its brand has already spread past the reaches of cable with its app, website, and magazine, and the company is approaching $500 million in digital revenue. The key question for ESPN now is how to replace the affiliate fees should subscribers continue to flee the bundle.

Exploring other options
While ESPN has rejected going over the top thus far, the company has experimented with other options for reaching viewers. The network is available as part of DISH Network's (DISH -2.50%) Sling TV package, which includes a handful of cable channels like ESPN, TNT, and AMC for $20/month. Sling has only signed up 400,000 subscribers after three quarters of operating, however, signaling that most ESPN viewers may be content to pay for larger bundles.

The WatchESPN app, which has been downloaded more than 25 million times, has also helped the company build its own ecosystem outside of cable. The app requires a cable subscription at the moment, but if ESPN decided to cut the cord, the app would present an easy conduit into direct sales.

Finally, the company has experimented with direct-to-consumer offerings like with the Cricket World Cup, for which it was able to sell 100,000 subscriptions for $100 apiece at a handsome profit. 

A recent survey seemed to show why ESPN was in no rush to leave the bundle. According to BTIG Research, 56% of cable subscribers said they would ditch ESPN and ESPN2 to save $8/month, the equivalent of the affiliate fees for the two channels. If those responses are to be believed, ESPN could lose billions in affiliate fees by cutting the cords. But options from skinny bundles to Sling to streamers like Netflix have proliferated and should continue to grow. That means ESPN could continue to lose subscribers, but the threat isn't as urgent as that survey makes it seem.

Sports continue to be immensely popular, and ESPN's profits still grew this past fiscal year. The network may not be the growth engine it once was, but it will continue to dominate sports programming. When the economics warrant it, expect a move to over-the-top. When that happens will be determined by future subscriber losses.

Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$108.13 (-0.90%) $0.98
DISH Network Corporation Stock Quote
DISH Network Corporation
DISH
$18.71 (-2.50%) $0.48
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$229.94 (-1.52%) $-3.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
379%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.