BRISTOL, Connecticut – ESPN has been Disney’s financial engine for nearly 30 years, powering the company through recessions, box office wipeouts and the pandemic.
It was ESPN money that helped Disney pay for acquisitions – Marvel, Lucasfilm, Pixar, 21st Century Fox – and build a streaming service, transforming itself into a colossus and perhaps traditional media’s best hope of surviving Silicon Valley’s incursion into entertainment.
Those days, ESPN’s best, are over.
With its dual revenue stream – fees from cable subscribers and advertising – the sports juggernaut continues to earn billions of dollars for Disney. In the first six months of the 2023 fiscal year, Disney’s cable networks division, which is anchored by ESPN and its spinoff channels, generated US$14 billion (S$19 billion) in revenue and US$3 billion in profit.
The problem: Wall Street is fixated on growth. Revenue for those six months was down 6 per cent from a year earlier, as profit plunged 29 per cent.
Disney is now exploring a once-unthinkable sale of a stake in ESPN. Not all of it, Mr Robert Iger, Disney’s CEO, has made clear. But he wants “strategic partners that could either help us with distribution or content”, he said during an interview with CNBC in July. Disney has held talks with the NFL, the NBA and MLB about taking a minority stake.
Underscoring the complexity – and urgency – Mr Iger has brought in two former senior Disney executives, Mr Kevin Mayer and Mr Thomas Staggs, to consult on ESPN strategy with Mr James Pitaro, the channel’s president, and help put together any deal.
Their return, earlier reported by a Puck newsletter, was confirmed by two Disney executives who spoke on the condition of anonymity to discuss internal matters.
“It is really tricky in this cord-cutting environment to see the real growth opportunities available to ESPN,” Mr Steve Bornstein, a former chief executive officer of ESPN, said in an interview.
Still, “they have a great hand”, he added, reeling off strengths like the numerous rights the network has to air live games, its digital assets and a popular website.
So much uncertainty
Mr Iger made clear during the interview with CNBC that things will change at ESPN, but his comments generated more questions than they answered.
Exactly what kind of strategic partner is ESPN seeking? Does ESPN need money, technological help or assistance with distribution?
“There is so much uncertainty in what Bob meant,” said Mr Michael Nathanson, a media analyst at MoffettNathanson.
Mr Iger declined to comment. Disney is scheduled to report quarterly earnings next week. Analysts expect per-share profit to have declined 11 per cent, as the company contends with disappointing box office results, softening attendance at Walt Disney World and two striking Hollywood unions.
Whatever might be in ESPN’s future, its problems are easy enough to understand.
The bulk of ESPN’s revenue comes from what are called affiliate fees. These are monthly fees that cable providers – like Comcast, Charter Communications and Cox – pay ESPN for the right to offer its television channels to households.
In 2022, around 71 million US households paid for a television package that included ESPN, and those cable providers, in turn, paid ESPN an average of US$8.81 per month for each home, according to S&P Global Market Intelligence.
S&P Global Market Intelligence estimates that ESPN has also taken in more than US$2 billion annually in advertising in recent years.
But cord cutting has been hurting both those revenue streams.
A decade ago, more than 100 million households received ESPN, meaning 30 million fewer households get ESPN today than in 2013.
ESPN has consistently raised its affiliate fee to offset this decline, but its ability to continue doing so will be limited in the coming years: By 2027, fewer than 50 million homes will pay for cable television, according to PwC, the accounting giant.
Costs are exploding
At the same time, ESPN’s costs are exploding. ESPN will pay an average of US$2.7 billion annually over the next decade for the right to show the NFL, a 42 per cent increase from what it used to pay. It will soon negotiate with the NBA on a potentially very expensive renewal of its rights agreement.
According to Disney’s financial filings, it will pay US$10.8 billion in 2023 for sports programming. It has future commitments totaling about US$57 billion, with some of its contracts running well into the 2030s. These contracts are a result of a spending spree the company has undertaken to head off deeper-pocketed tech companies, which are also hungry for sports programming, and to stock its nascent ESPN+ streaming service.
“The cord-cutting phenomenon is a response to the increasing cost of cable, and indeed the increasing cost of cable is due in part to the increasing cost of sports rights,” said Mr Roger Werner, a former ESPN CEO who helped create the dual revenue stream. “There is a causality there.” NYTIMES
