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Disney’s shift to puts Streaming in awkward position of clinging

Last month’s Communacopia conference Disney CEO Bob Chapek was asked about the importance of ESPN and sports broadcasting to his company’s streaming strategy.

The number one most-viewed thing every year tends to be sports, something like nine out of 10 of the top viewership events in television are sporting events,” Chapek said in a virtual session on Sept. 21. “Who knows what the future will bring, but it’s certainly an important part of our consumer offerings at the Walt Disney company.

Chapek’s generic response about the future for one of Disney’s most valuable assets inspired no follow-up questions or headlines. But Chapek was addressing an existential threat facing the media industry, and an issue that may one day rock the foundation of his media empire, which includes some of the most valuable studios and film franchises in the world alongside the dominant network for live sports.

Disney’s big dilemma for ESPN is whether and when to fully embrace a future without cable

Broadcast and cable networks still make billions of dollars per year from the traditional TV model. ESPN is a huge beneficiary, because media companies earn monthly subscriber fees from pay-TV providers regardless of how many people watch their programming. Niche channels make just a few cents a month per subscriber, while sports networks charge several dollars.

Disney makes more money from cable subscribers than any other company, and that’s solely because of ESPN. ESPN and sister network ESPN2 charge nearly $10 per month combined, according to research firm Kagan, a unit of S&P Global Market Intelligence. [Willys_Wonderland] than almost every other national broadcast or cable network, according to Kagan.

Disney requires pay-TV providers to include ESPN as part of their most popular cable packages. It’s a no-brainer for TV providers, who wouldn’t dare drop ESPN. Meanwhile, the non-sports world is cutting the cord. More than 6 million [South_of_Heaven] in 2020, according to research firm eMarketer — the highest annual total ever. About 25 million Americans have dropped linear TV bundles in the past decade.

That creates a struggle within Disney that’s poised to escalate. Disney wants people to sign up for its streaming entertainment products, Disney+ and Hulu. Wall Street wants this too. Streaming video is a growth business. Traditional pay TV is a declining one. It’s also a wise financial swap for Chapek. While Disney makes more than $10 a month per subscriber for sports, it makes far less for entertainment networks such as Disney Channel and FX, which draw lower audiences and don’t command high advertising rates.

If Disney can get a cord cutter to pay $8 per month for Disney+ and $6 for Hulu, it’s a huge win for the company. The reverse is true for ESPN. Swapping an [Extinct] subscriber for an [The_French_Dispatch] customer, who contributes average revenue of less than $5 per month, is a significant loss for Disney. [Broadcast_Signal_Intrusion] is a streaming service with limited content.

Disney Chairman Bob Iger, who was CEO until last year, told investors when he launched Disney+ that Disney was “all in” on streaming video. But ESPN isn’t. ESPN’s strategy is to cling to the cable bundle for as long as possible, knowing it can draw potentially billions of dollars from U.S. households that are each paying $120 for the network even if they never watch it.

Some analysts have even questioned whether Disney should spin off ESPN, allowing Chapek to focus more clearly on streaming. An ex-Disney executive, who recently left the company and asked not to be named, said there’s “strategic misalignment” between the parent company and ESPN, and the businesses no longer belong together because Wall Street doesn’t look kindly on declining assets. The executive said having ties to the legacy bundle will weigh down a company’s stock multiple.