Disney shares are getting slammed on Wednesday and analysts seem to be worried about one thing at the company: ESPN.
But in a post over at Stratechery, Ben Thompson lays out one simple reason why ESPN will probably be fine: They own basically everything.
The idea underwriting concerns about ESPN’s future is that as the traditional TV bundle unravels, ESPN is going to lose subscribers and as a result, see declining subscription revenue. ESPN gets about $US6 per cable subscriber; it’s nearest competitors get about $US1.50 at most.
And with Disney’s cable networks group — led by ESPN — accounting for about half of its profit, its easy to see where the concern from analysts and industry watchers comes from.
Following Tuesday’s earnings report, Disney shares were down about 7%, and on Disney’s earnings conference call, CEO Bob Iger talked at length about ESPN.
Iger said that while Disney is, “mindful of potential trends among younger audiences” and that ESPN seen “modest” subscriber losses, the network was turned on by 83% of cable households at some point during the first quarter of 2015.
Additionally, Iger noted that 96% of ESPN content is seen live and argued that the company has, “embraced technology better than anyone in traditional media.”
Now, of course, you expect Iger is going to talk up the quality of the network.
In Thompson’s view, those offerings represent the company’s entire competitive advantage. An advantage that, as the media landscape changes, can be effectively leveraged.
In an interview on CNBC last week, Disney CEO Bob Iger hinted ESPN could eventually be offered “over the top,” meaning that subscribers could pay to stream ESPN online without needing to buy a complete cable package. The model here would be something like what HBO currently offers.
And as an example of this content Thompson thinks ESPN can leverage, Iger noted that ESPN has locked up the college football playoff for the next 11 years.
If you’re going to take the doom-and-gloom outlook on ESPN, then paying billions of dollars to show content while subscribers decline will be a disaster. But if you think that this is the kind of event a sports fan needs to see, ESPN has an advantage when looking to sell its content apart from a bundle.
And so to go back to Thompson’s argument, it is precisely
because ESPN owns seemingly everything,
because it has paid billions of dollars for these events, that it seems likely an ESPN over the top offering could succeed.
In July, The Wall Street Journal cited analysts that said ESPN would need to charge $US30 for an over the top offering to bring in the same amount of money it currently does inside a cable bundle.
Given that about 100 million cable subscribers pay about $US6 a month for ESPN, this assumes that 20 million people, or about 20% of current cable subscribers, sign up for a separate ESPN offering.
Which, if ESPN has effectively all sports you need to watch, seems like a fairly realistic target to Thompson. In this scenario you’re betting that 1 in 5 current cable subscribers really likes sports and will pay a premium for ESPN.
And as for the bigger-picture worries about the future of TV and the cable bundle, Thompson writes that, “to fixate on the fate of ESPN is akin to journalism observers only caring about how the New York Times is managing the transition away from print to first the Internet and now to mobile.”
Basically, there is a no question that the behaviour of people with respect to how they pay for and consume TV is changing, much like the way people pay for and consume media is changing.
But ESPN is an incumbent, leading brand that has a financial and reputational cushion to manage this change.
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