Is Disney Playing For Keeps With ESPN?

ESPN ‘Stuck’ Between TV and Streaming Illustration by Mark Matcho
Illustration by Mark Matcho

Once Disney’s cash cow, the cable giant is shedding linear subscribers while the high cost of live sports rights is hindering its transition to a direct-to-consumer future.

Even as The Walt Disney Co. chief Bob Chapek is pivoting the conglomerate to streaming, there remains one division tightly linked to the company’s past. ESPN, once the cash cow of Disney (S&P Global estimates its annual revenue is north of $10 billion), now finds itself caught between two business models: the direct-to-consumer future and the pay TV past.

“They have this really really expensive machine built around a certain model,” says Brett Sappington, vp at Interpret Research. “Its revenues are closely tied to the cable operators, and with the leagues, and will be for a while... and that is why they are really kind of stuck right now.”

While the company’s entertainment divisions are reorganizing to create content for whichever platform is the best fit, ESPN, run by Jimmy Pitaro, does not necessarily have that luxury, with most of its content spend locked up in long-term rights deals with sports leagues. The lucrative carriage fees (higher than $8 per customer per month, according to Guggenheim Securities) that keep rolling in from pay TV operators don’t make things easier.

But as the pay-TV landscape continues to shrink (ESPN had 100 million pay-TV subscribers in 2010, and 83 million in 2019), some analysts think the company must be thinking about what to do next.

“To date, Disney has declined to take its flagship ESPN network direct-to-consumer, we believe due to the high wholesale payment rate the company receives from distributors and concern that consumer demand may underwhelm at a necessary retail rate,” Guggenheim's Michael Morris says. “We expect Disney has put those concerns behind.”

Morris thinks that a DTC ESPN would cost in the ballpark of $15, significantly more than the $5 per month ESPN+ currently costs.

Chapek remains tight-lipped about specifics, though in a CNBC interview after the reorganization, he suggested that the company is trying to thread a needle with the sports network.

“We really like the direct-to-consumer model that we have got, but at the same time we have got relationships, we have tremendous cash flows generated from our traditional legacy media businesses, so we are not going to just walk away from those,” Chapek said.

Indeed, ESPN will still have quite a bit of autonomy, with the division still overseeing all sports content acquisition, creation and programming across Disney platforms, and ESPN’s marketing team continuing to advance ESPN’s brand. Pitaro will continue to report to Chapek under the new structure.

"There is more at stake in DTC going forward" says Moody's senior vp Neil Begley. "As the revenues transition away from traditional distribution such as media networks, theatrical and television licensing, and towards direct to consumer platforms such as Disney+, Hulu and ESPN+, the specific walls between how revenue is generated today and in the past break down and new ones are created that align with the new platforms."

And ESPN is clearly not sitting on its laurels. This week the company announced a significant expansion of ESPN+ in premium written content and audio content. The new content will include simulcasts and telecasts of daily ESPN Radio shows from Dan Le Batard and Max Kellerman, among others. In addition, more than 20 writers will see their work shift to ESPN+, with a heavy emphasis on analysis and insight-driven reporting.

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Still, ESPN’s core business remains live sports television, with multiple cable channels and some broadcast programming making up the bulk of its content budget.

On a podcast with Bill Simmons earlier this year (just a few weeks before he handed control over to Chapek), Disney’s executive chairman and former CEO Bob Iger said that he believes that over time ESPN as a brand "will be a far more direct-to-consumer product."

But if Disney decides that ESPN’s future isn’t in DTC, and it remains latched to the traditional pay-TV bundle, the company has another option:

“By segmenting the sports division, the business could be positioned to be separated from core Disney over time,” Morris says.

A version of this story first appeared in the Oct. 21 issue of The Hollywood Reporter magazine. Click here to subscribe.