Sunday, April 19, 2020

Disney Part 2: ESPN

Continuing with Disney, their largest segment is actually ESPN, which is in long term decline.

At Sep 2019, the largest contributor to Disneys' earnings is Media Networks (44% of profit):

Media Networks is domestic, mostly cable TV, with a little free-to-air broadcast.  It excludes OTT (Hulu, ESPN+, and Disney+).  Most of it is from ESPN, with a little from other channels such as Nat Geo and Sesame Street:

What is ESPN?  It is the dominant live sports channel, playing 24/7 sports rubbish.  Their main sports providers are NFL, NBA and MLB.  Their business model has been to aggregate all sports under one channel.  "When you think of sports, you should think of ESPN".

This business model has high fixed costs:

ESPN's domestic subscriber numbers have been in long term decline:

Source: Disney Annual Reports

A lot has been written about ESPN being squeezed.  The cost of rights is expected to increase, while subscriber numbers are dropping.  Viewership may also be dropping: sports results can be obtained online now, and people have more to do than watch TV (Fortnite, twitch, Youtube, Netflix, Periscope).  This hurts their advertising.  ESPN is a distributor in a world where distribution is becoming cheap.  Or free.

They have been managing the decline by raising prices slowly.  The average subscriber fee has risen from $7 in 2016 to $9 today.  I think they are slowly trying to segregate the market into those watch sports and those who don't.  And see how much those who watch it will pay.  They will switch ESPN to OTT sometime, but they don't know when ("There will be a time...when the pay TV numbers are low enough, and all you have are sports fans that are in that bundle...does it make sense at that point, rather than wholesaling a sports fan bundle, to be a retailer...I'm not sure where the precise crossover point would be").

The 3 big risks are:

  • Will the remaining sports fans be willing to pay enough to make it worthwhile?  Its been estimated ESPN would have to charge $30 a subscriber to maintain profitability.  And ESPN may pay more when the rights are renewed in 2021/2022.
  • How and when do they switch?  If they gradually switch the popular sports to ESPN+, this makes ESPN less valuable, reducing the money they can pay for rights.  If they don't switch, ESPN slowly becomes irrelevant to everyone.  Sports providers deal with ESPN now because they (still) have the largest broadcast exposure, and the most cash. They can't switch it fast, and you can't switch it slowly.
  • Other players (Google, Amazon, Apple, FB) may bid for the rights.  Or the providers go OTT themselves.

Valuation of ESPN

How do you value a business that is in decline and will undergo disruption?  Hopefully self-inflicted disruption.  Even the executives say they "don't know" when they will go OTT.  So we can't value it.  You can come up with many scenarios (N subscribers paying $X per month) - I'll do this later.  But no one really knows.

ESPN is the riskiest part of Disney's empire.  Theres a chance it will be unrecognisable in 5 years time.

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