Sports network ESPN has been something of a double-edged sword for Walt Disney (NYSE:DIS), as well as the owners of Disney stock, for a long time. On a per-subscriber basis, it generates the most revenue in the sector. As a result however, cord cutting has taken the biggest toll on the media giant.
And there’s no sign that the cord-cutting movement is going to slow down anytime soon. In fact, it appears to be accelerating.
That’s a key part of the reason Disney has launched ESPN, a streaming app that delivers sports programming. It’s also part of the reason Disney now owns the bulk of Hulu, and is planning to launch the entertainment streaming channel dubbed Disney+ in November.
Of the three, though, it’s the ESPN+ piece of the company’s streaming offering that could prove the toughest for DIS, as it will eventually pit the company against the television providers who are also its de facto partners. It may boil down to a matter of who flinches first.
Fighting an Oversized Headwind
Disney doesn’t provide a detailed revenue breakdown of the components of its “Media Networks” division. (Accounting for about one-third of Disney’s revenue, Media Networks is its largest unit.) But some estimates suggest ESPN accounts for about 50% of the unit’s top line. A little math work leads to a rough assumption that ESPN makes up 15% of Disney’s total revenue.
Cord cutting has made that piece of Disney’s revenue pie tough to defend, though.
The majority of cable packages include most of Disney’s channels. Nearly all cable providers offer ESPN to their subscribers, though, even if some cable providers leave out a number of the company’s other channels.
As of 2017, cable providers were paying Disney an estimated $7.21 per subscriber per month for ESPN. With ESPN2 and ESPNU, the monthly total rose above $9.00. That’s pretty lucrative for DIS, and that revenue stream has been a key supporter of Disney stock.
That’s why cord-cutting mania has proven so problematic for Disney stock and so worrisome for the owners of DIS stock. As of late last year, ESPN had lost approximately 14 million subscribers in just seven years, and eMarketer anticipates that the number of customers canceling their cable package will grow by another 19.2% this year.
The solution, of course, is to offer those defectors an alternative. Even at a monthly price of $5.00, Disney can collect something from ESPN+ customers who are no longer cable subscribers. Even though $9 per month is way below $5 per month, something is better than nothing.
The matter isn’t nearly that simple, though.
At the Tipping Point
Contrary to the rhetoric, ESPN+ is not an alternative to cable-delivered ESPN. It’s an addendum to ESPN’s sports programming. No major event that’s broadcast on one is shown on the other, and only a few of the commentary shows appear to be available on both channels.
That leaves the all-important Monday Night Football out-of-reach for cord cutters. But MNF isn’t the only key program that’s not available on ESPN+.
That’s because Disney doesn’t want to further alienate the conventional TV providers it still relies on for a wide swath of its revenue.
But nonetheless, DIS is starting to clash with the cable companies. Case in point: Disney is currently warning customers of AT&T’s (NYSE:T) satellite TV provider, DirecTV, that they could soon be losing access to all of their Disney-driven content if the two companies don’t renew their deal soon.
Now that streaming platforms are being established and cord cutting is an increasingly viable option, DIS could take a harder line and start offering some content via ESPN+ that previously was only offered on older types of TV.
Disney likely knows that access to sports programming is one of the key reasons consumers have not yet canceled their cable and satellite service. Many of those relationships are hanging by a thread, though. Bolstering the amount of content available through ESPN+ could help greatly accelerate the exodus from conventional TV.
The Bottom Line on Disney Stock
The great irony, of course, is that Disney is helping to drive the very cord-cutting movement it’s also lamenting.
Granted, it’s got help from Netflix (NASDAQ:NFLX) and Amazon.com’s (NASDAQ:AMZN) Prime streaming service, which offers a fair amount of sports programming itself. For Disney and Disney stock, though, establishing an alternative sports venue outside of traditional TV is still a savvy option that makes the best of a tough situation.
At the very least, ESPN+ effectively monetizes the ESPN name and relationships with professional sports leagues. But ultimately, the company’s relationships with cable companies may become too strained to continue in its current form. If DIS adds stronger programming to ESPN+, the $12.99 per month bundle of ESPN+, Hulu and Disney would become more appealing. It may even become appealing enough to accelerate the already rapid cord-cutting movement.
However Disney decides to balance cable and streaming, ESPN’s content is sure to remain its most enticing asset.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.
