Between its effort to acquire Twenty-First Century Fox Inc (NASDAQ:FOXA) and competing bid from Comcast Corporation (NASDAQ:CMCSA), it would have been easy to forget that Walt Disney Co (NYSE:DIS) is about to launch a streaming-only sports channel. But, in that its deteriorating sports venue ESPN is still estimated to supply a little more than one-third of the Disney’s revenue, current and would-be owners of Walt Disney stock would be wise to take note.
It’s being called ESPN+, and will launch April 12. Cost? A very affordable $4.99 per month. For that small fee, viewers will have access a surprisingly deep and wide array of events they might not otherwise be able to enjoy.
PGA Tour events, regional sports programming, MLB and NHL matchups that in some cases would otherwise be “out of market” for some fans, Wimbledon, professional soccer and more.
Not bad for five bucks a month.
The question remains though: Will this be enough to make a meaningful dent in the headaches its sports channel is causing for Disney? Generally speaking, most of the professionals have their doubts.
It’s Complicated
For all of its woes described in the headlines, ESPN is still crushing it in terms of extracting revenue from cable television providers.
Though the figure hasn’t been updated in the past few months, SNL Kagan reckoned early last year that cable companies are forking over roughly $9 per month to Disney to offer ESPN’s four channels to their cable subscribers; the ESPN is still the big breadwinner.
For perspective, the next-most marketable sports channel is Fox Sports, but it’s pocketing less than $2 per month per cable subscriber. Clearly ESPN is doing something right.
On the other hand, acquiring rights to air sports is stunningly expensive. ESPN spends nearly $4 billion per year on its rights to air MLB, NFL and NBA games alone, and it only airs a small sampling of those league’s events.
The huge “per” numbers underscore just how different sports is, as an entertainment business, than other forms of entertainment. The math, however, is increasingly making less sense from a business standpoint as interest in watching sports falters while the cost of airing them continues to rise.
And yet, for the sports fans that are still faithfully watching, there’s a ton a massive opportunity.
Cowen analyst Doug Creutz explained the duality very well last month, saying “ESPN is facing a pretty direct problem of being dropped out of a lot of bundles that consumers want to buy.
They have to find a way to try to extract more value from the people who watch lots and lots and lots of sports because they know the value that they’ve been generating off people who don’t watch a lot of sports is going to go away.”
Yes, the ongoing cord-cutting movement is largely the result of TV bundles that include too many channels viewers simply never watch. They’re even willing for forego ESPN (when they weren’t before), making the sports channel uncomfortably expensive for cable providers to continue offering.
Something’s got to give.
Reality Check on Disney Stock
One of the proverbial tricks Disney will have to pull off, then, is prompting the casual watcher who might not be terribly interested in sports into committing to a nominal recurring revenue relationship.
It’s not an inconceivable possibility. Millions of people pay roughly twice that to access the service offered by Netflix, Inc. (NASDAQ:NFLX), which doesn’t offer any live programming. Even a so-called streaming “skinny bundle” like SlingTV from DISH Network Corp (NASDAQ:DISH) costs four times that figure.
Pricing isn’t an issue for consumers who subscribe to a lot of various services.
What is an issue is a sheer lack of interest. As TV[R]EV analyst Alan Wolk noted, “It doesn’t look like it’s going to be a huge thing. But at $4.99, someone who’s really into sports may go for it.” Wolk went on to say, though, “But I don’t know how many of those people there are any more, or how many of those people are tech savvy enough.”
Parks Associates analyst Brett Sappington has his doubts as well, asking “If you’re a sports fan, are you interesting in a generalized sports service with little pieces from everywhere?”
Sappington believes the super-fans that are willing to spend anything outside of a normal cable subscription would be more apt to sign up for a focused service like MLB.TV or NHL.TV.
To that end (and this is the part most Walt Disney stock will like) ESPN+ will offer an option of adding MLB.TV and NHL.TV subscriptions to the platform, offering the most profitable sports nuts a seamless solution to get all the sports programming they do want.
It’s an elegant solution to, or perhaps more a workaround of, the problem of cable companies increasingly struggling to justify the high cost of adding ESPN to the lineup, with most subscribers not tuning into ESPN’s channels.
The superfans can still get their fix for a price they were already paying, plus $4.99 per month for a little more programming, while a handful of casual sports watchers just might find a way of coming up with an extra five bucks a month.
A panacea for Disney stock? Not quite. But, it’s better than doing nothing and expecting the current meltdown to stop on its own.
Bottom Line for Walt Disney Stock
Don’t misread the message. Walt Disney will still need to shrink ESPN to viability. It’s going to offer more programming to consumers via ESPN+ than it does now through cable television, and it will be pocketing less per viewer.
It’s not clear how much it will earn for piping MLB’s and the NHL’s premium packages through its platform, but it certainly won’t be the lion’s share of the revenue those leagues enjoy for offering online access to games.
Still, the advent of ESPN+ lays the groundwork for Walt Disney being able to rise to the occasion for the day all television becomes an a la carte industry. It’ll be a smaller pie then, but at least Disney will be fully in charge of its destiny rather than relying on distribution partners that often regret the relationship.
That’s at least something for owners of Walt Disney stock as the company starts to enter a growing-pain (and learning) phase.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
