How Can Bob Iger Fix His ESPN Problem?
After another tough quarter for the sports network, Wall Street thinks OTT might be a solution: "Disney is one of the few that should be able to thrive in a digital world, not be harmed by it."
Disney CEO Bob Iger can't seem to shake his ESPN problem. During a May 10 conference call to discuss financial results, analysts asked multiple questions about the sagging cable channel but never mentioned the blockbuster Lucasfilm or Marvel movie franchises. The oversight was so stark that at the end of the call, he scolded the Wall Street participants: "I'm actually kind of surprised that after almost 45 minutes of questioning, we didn't get one question about our studio," which he said is "firing on more than all cylinders."
But Disney's studio entertainment sector is dwarfed by its media networks segment, where growth in operating income was a far more modest 9 percent to $2.3 billion, while revenue was flat at $5.8 billion. Analysts are a careful lot nowadays, looking for potential pitfalls before recommending a stock, so it's no wonder their focus is on ESPN, wondering what Disney can do to get it growing again amid cord-cutting and digital competition.
"Disney needs to sustain moderate growth on its cable channels, specifically ESPN," says Steven Birenberg of Northlake Capital Management. "Wall Street is very skeptical, and 2017 sits badly for them with a big bump in rights fees due to the NBA."
Some analysts predict — or advise — Disney to right its TV ship by launching a standalone online service, like CBS All Access or HBO Now, given the popularity of its shows on cable as well as on its ABC broadcast network.
"They're leaving money on the table by licensing to Netflix," says Tony Wible of Drexel Hamilton. "Disney is one of the few that should be able to thrive in a digital world, not be harmed by it."
That said, Wible predicts as few as 7 million and as many as 20 million will cut the cord in the next eight years, but many will reattach after missing their service. If he's right, boosts in affiliate revenue can make up for lost subs.
Disney said ESPN lost an undisclosed number of its 92 million subscribers, adding to the 7 million lost in the past two years, a revelation that sunk Disney stock and all the other major entertainment conglomerates in sympathy. ESPN, though, still is growing its revenue as ad rates and affiliate revenue keep climbing. Cost-cutting can help, too, so defections (some voluntary, some not) from such talent as Skip Bayless, Bill Simmons, Curt Schilling, Ray Lewis, Cris Carter, Keith Olbermann and others actually can be a good thing.
ESPN chief John Skipper on Tuesday was asked during at the annual upfronts in New York about how he felt about the brand being the focus of investor frustrations on the earnings call. "The Walt Disney Company released their 11th straight quarter of double-digit earnings last week, so I'd be happy to be in the crosshairs of that," said the ESPN president and Disney Media Networks co-chair, calling out "real traction" in discussions with placement on distributors such as Sony, Roku and Sling. "We think we still have a little swagger. I don't think I'd characterize it as being in the crosshairs."
Any talk of an over-the-top ESPN service for nonsubscribers? Skipper offered only an emphatic and decisive "no."
The main pitch for this year's presentation, one that seemed to go over well with the crowd of media buyers, was ESPN's continued ability to draw live audiences — be it on a television set or the Watch ESPN app. The notion of the company's brand identity was not pushed too heavily, but it's something Skipper was clearly confident about when another reporter asked him about the ratings declines at SportsCenter.
"Anyone who says SportsCenter does not remain central to a sports fan's experience is not accurate," he said. "We understand that fans are going to get some of their scores and highlights from digital media — but they're going to get them from ESPN. … We're beginning to see some nice momentum from the changes we're making at SportsCenter. The numbers in April and May are starting to go up. We have quite a bit of momentum."
A version of this story first appeared in the May 27 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.