Los Angeles - ESPN was once considered the crown jewel of
Walt Disney, the gem in a TV line-up that generated more than 70 percent of the
company’s annual operating profit.
Now the sports network is at an 11-year low in
subscribers and has almost single-handedly delivered the worst annual result
for Disney stock in five years. RBC Capital Markets analyst Steven Cahall,
cable billionaire John Malone and others are suggesting Disney consider
divesting ESPN.
“If I had to guess, what you will see is a split of
Disney with ESPN spun off,” Malone said on CNBC last month. “Probably, ESPN
could be owned and protected by a distributor in the US”
Problems at the world’s most-watched sports network
reflect the same forces driving the current spell of merger mania: falling
viewership and competition from low-cost internet services like Netflix Inc.
and Sling TV. Those pressures drove Time Warner into the arms of AT&T Inc.
for more than $85 billion and explain why Disney CEO Robert Iger is looking for
technology acquisitions and new ways to deliver ESPN to the public.
Interesting opportunities
“There’s some really interesting opportunities, given
what’s going on from a technological perspective, to both improve our
businesses and also improve the consumer experience by selling directly to
consumers,” Iger said on a November call, just days after AT&T
announced its Time Warner deal. “And we’re considering and exploring various
ways to accomplish this.”
Recent deals in media are blurring the lines between
content creators and distributors. In the current digital age, with phone
companies offering TV service and tech giants such as Amazon.com Inc. streaming
sitcoms around the world, the opportunity to poach customers has never been
greater.
With Time Warner, the parent of Warner Bros and HBO,
AT&T is gaining control of one of the world’s largest movie and TV studios,
as well as a top cable TV programmer. AT&T is the largest US pay-TV
provider through its ownership of DirecTV. Last week, Rupert Murdoch’s 21st
Century Fox Inc. said it’ll pay $14.6 billion for the rest of the UK’s Sky,
creating what the company called “a global creative and consumer powerhouse.”
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ESPN has a lot at risk in this environment. The network
takes in an industry-leading $7.21 a month for each of its 90 million or so
pay-TV subscribers. That’s four times what its nearest competitor, Time
Warner’s TNT, fetches at $1.82, according to data from SNL Kagan.
Iger knows he’s got to ensure his programming has a home
in this shifting landscape. He’s charting a course to put the sports network on
new distribution platforms and launch his own direct-to-consumer services.
“We just generally feel bullish about ESPN’s future,”
Iger said on the call.
Disney shares rose 1.3 percent to $105.30 at the close in
New York following the successful opening weekend for its latest “Star Wars”
film, “Rogue One.” The company’s movie studio division has been a bright spot
all year, leading the industry in market share and delivering record profit.
Even with Monday’s gain, the stock is up less than 1 percent for the year.
Acquisitions could be an integral part of Disney’s
strategy. The company has looked at Twitter Inc., people with knowledge of the
matter said in September, and in August agreed to plunk down $1 billion for
one-third of BAMTech, the streaming arm of Major League Baseball, which powers
Disney’s Watch ESPN app as well as online programming for HBO. The company has
also been mentioned as a possible suitor for Netflix.
Not everyone thinks Disney needs to do a big deal - or
needs to tie up with a major content distributor.
Who needs who?
“Netflix is doing great, but what’s altogether different
about them and say what Amazon might offer?” asked Tony Scherrer, director of
research at Seattle’s Smead Capital Management, which owns almost 728,000
Disney shares. “Disney doesn’t need a distributor as much as the distributors
need Disney’s assets.”
ESPN’s central problem is that costs are rising fast as
traditional pay-TV audiences shrink and viewer ratings for marquee sports like
football decline. ESPN’s revenue is expected to rise 4 percent to $12.5 billion
this fiscal year after showing no growth in 2016, according to RBC. Sports
costs will rise 17 percent to $6.7 billion, due largely to a $600 million
increase in ESPN’s contract with the National Basketball association.
Dallas Mavericks guard Seth Curry, right, drives past Denver Nuggets guard Emmanuel Mudiay in the second half of an NBA basketball game .AP Photo/David Zalubowski
In the past three years, ESPN’s US subscriber base has
shrunk to 90 million from 99 million, according to Nielsen, whose TV ratings
help set advertising rates. The number, the lowest since 2005, reflects
customers cancelling traditional pay-TV packages, older customers dying off and
younger ones not signing up like their parents.
Digital leader
To his credit, Iger was among the first to put his
channels on Dish Network Corp.’s Sling TV and he’s since gotten ESPN and other
networks on low-cost packages like AT&T’s DirectTV Now - even though those
audiences aren’t yet counted by Nielsen. Disney also owns 30 percent of Hulu,
the streaming service that’s poised to introduce an online package of cable
networks.
Yet the lower-cost pay-TV packages may not replace lost
cable revenue.
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So Iger is also looking for incremental growth. Next
year, Disney will launch a subscription-based online version of ESPN, with
content not available on TV. The service will let Disney charge viewers for a
specific sport, season or even one weekend, Iger said in September.
Analysts including Doug Mitchelson of UBS Group and RBC’s
Cahall predict Disney’s media networks will resume their profit growth in
fiscal 2018, which starts next fall. While profit at the cable networks fell in
the latest fiscal year, Iger said in November that, “ESPN grew in fiscal ’16
and we expect that growth to continue over the long term.”
But others, such as analyst Rich Greenfield of BTIG,
sense Iger wants to do a big deal, whether it’s with Twitter, Netflix or
someone else.
“Maybe Iger and Disney are simply trying to signal
confidence in ESPN in hopes of getting their stock up as they plan to make a
major acquisition,” Greenfield said in a report last month. “Hard to remember a
time in history when Disney has talked so openly about not being strategically
complete.”
The challenge for Iger will be to position Disney for the
future while protecting a model that has served shareholders well over the
years.
“Iger has a done a fantastic job, in distribution and
content in certain parts of the world,” said Mario Gabelli, a long-time media
investor and owner of Disney stock. “He’s got TV networks, amusement parks,
ships on the sea. He’s got ‘Moana’ traveling around the world.”
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