Here's Why Disney Needs to Sell ESPN

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https://www.streamingobserver.com/he...eds-sell-espn/

The Walt Disney Company’s second quarter earnings report had plenty of positives. The corporation reported spectacular earnings of $13.3 billion in the quarter, and their adjusted earnings per share of $1.50 beat expectations by six percent.

Despite all the positives, Disney Chairman and CEO Bob Iger spent a lot of his time playing defense. By now, everyone who follows media even casually knows the reason. Disney has an albatross on its ledger. A single entity causes the company so many negative headlines that many analysts have suggested a shocking choice for what was once the crown jewel of cable television. Read on to learn why many analysts believe Disney should sell ESPN.

Faded Glory

The monopolistic sports programming network, ESPN, was once the darling of Disney holdings. The corporation bought the cable network as part of its overall acquisition of Capital Cities/ ABC Inc. in August of 1995. The transaction cost $19 billion, the equivalent of $30.3 billion today.

Suffice to say that Disney got a huge bargain in the deal. ESPN was already a major player in the cable industry at the time, but Disney corporate guidance elevated it into the most powerful cable network on the air. It had the highest cable fees in history, and cable carriers still happily paid. That was the television world before streaming services and cord cutters.

Fast forward to today.

ESPN is a lodestone. Its expenses are astronomical (programming costs are expected to exceed $7 billion in 2017), and it’s bleeding subscribers. The President of ESPN, Inc., John Skipper, negotiated several sports contract extensions, many of which looked terrible at the time. That’s because ESPN was literally competing against itself in these negotiations. Skipper failed to anticipate the changing dynamic of television consumption, instead performing business as usual in adding several years to existing deals.

Misunderstanding the Marketplace

As I previously chronicled, the NBA deal was Skipper’s gravest mistake. With no impetus to extend the current contract, ESPN foolishly agreed to a nine-year extension of NBA rights. That 2014 deal is quite possibly the worst sports contract of all-time. NBA contracts effectively tripled in a span of two off-seasons, and even fringe starters now earn eight figures. The Walt Disney Company accidentally foots the bill for these contracts.

Skipper convinced his bosses that the best play for ESPN was to have long-term contracts with various sports leagues. ESPN also has several such agreements with major conferences in several college sports. They even have specific networks for the most popular ones such as the SEC Network.

What Skipper and his team never anticipated was the erosion of cable programming. Disney currently charges carriers $7.21 for cable carriers to host ESPN programming. That’s far and away the most expensive amount for any network. It’s also problematic because ESPN’s viewing audience is in sharp decline.

During the latest earnings report, CFO Christine McCarthy fielded several questions from reporters. At a time when the Parks and Resorts division increased nine percent and the movies division spiked 21 percent, McCarthy still spent the majority of her interview playing defense. Journalists and shareholders alike wanted to know more about the recent round of layoffs that took place at ESPN. Let’s go behind the numbers to see why that’s a subject of such curiosity.

A Product in Decline

Disney’s earnings statement revealed that their cable network revenues fell three percent year over year. Disney went out of its way to place all the blame at the feet of ESPN. Their press release noted, “The decrease in operating income was due to a decrease at ESPN, partially offset by increases at the Disney Channels and Freeform.” In other words, Disney’s core programs, the ones that currently/formerly have Disney in the name, are weathering the storm of cord cutting just fine. It’s the most expensive one, ESPN, that’s the problem.

The corporation anticipated the negative headlines from their earnings report. The much ballyhooed layoffs of 100 ESPN employees in May, many of whom had name recognition like John Clayton, were a way of reducing payroll at an aggressive rate. While Disney did lay off some inexpensive workers, most of the staff had six or seven figure contracts, meaning that the company saved tens of millions of dollars with a single move.

Iger later noted (correctly), “It wasn’t a particularly significant reduction.” Sure, that sounds monstrous to fans of the reporters and anchors. What he meant is that Disney has 185,000 employees worldwide. A staff reduction of 100 people is insignificant to the bottom line in most instances. More than anything, what this move reflects is that ESPN has far too many highly paid staff members.

The ESPN layoffs are a corporate-level adjustment to payroll. It’s not even the biggest recent layoff for the company. They quietly laid off 250 digital staff members in October of 2016. These sorts of modifications are rarely important. The exception is when the average affected employee has more than a decade of experience and a disproportionately high salary. It shows that Disney looked at their bottom line carefully over the past few months.

High-level Disney execs recognized that ESPN salaries are out of whack due to decades of dominance. Internal contracted were renegotiated as haphazardly as sports licenses. Unfortunately, there’s only so much belt-tightening that Disney can do at ESPN. They can’t break those obscenely overpriced contracts. Instead, the company has no choice but to wait them out. In the specific case of the NBA, the deal doesn’t end until after the 2024-2025 season. That’s far too long to wait for such a terrible deal.

Disney Has to Cut Its Own Cord

The time has come for Disney to sell ESPN.

Before I explain why, I want to be clear about something. Disney’s original purchase of ABC and ESPN was a dynastic move to dominate the cable television marketplace. ESPN alone had a valuation of $50 billion in 2014, meaning that Disney more than doubled its total investment on that purchase alone. Over the past quarter century, the ABC acquisition was one of the most lucrative in the history of broadcast television. It was great for the time. Alas, times, they are a-changing.

In the buildup to the second quarter earnings report, Disney’s stock price was approaching a 52-week high. Investors were receptive to the idea of expensive salary cuts at ESPN, and DIS stock traded near $116. The instant the earnings report revealed ESPN’s flaws, DIS dropped two percent and has hovered under $110. That’s how worried investors are about the core business of sports television.

The reason for the fear is simple. Disney’s cable division generally brings 30 percent to the bottom line of The Walt Disney Company. ESPN is historically a larger part of that, but its dominance has slipped in recent years. In 2011, they topped 100 million subscribers. Today, that number is down to less than 88 million. While part of the decline is the fundamental shift in viewer habits, another key part is that Millennials don’t pay for television the way that their parents and grandparents do. As the costliest programming, ESPN is the least desirable to many of them.

Believe it or not, the problem is worse than it sounds. A couple of analysts have recently suggested that Apple should purchase The Walt Disney Company. Their belief is that content is king, and distribution is the second most important part of the equation. The ultimate content creator combined with the richest and most respected content distributor seems like a match made in internet heave.

Why is this deal unlikely to happen? Most evaluators agree that ESPN is the sticking point. Whereas Disney princesses, Captain Jack Sparrow, and The Force are popular around the world, most American sports don’t resonate abroad. Soccer is the sport of choice on the international scene, and that’s the product ESPN has failed to market effectively. So, their agreements for college football, college basketball, major league baseball, and the NBA don’t translate well overseas.

In other words, Disney has some of the most globally appealing content of any corporation. In fact, I would go so far as to say that it has THE best content. And it also has ESPN. The worldwide leader in sports has somehow become the thorn on the rose that is The Walt Disney Company.

Disney execs claim that their recent investment in MLB Media will soon pay dividends. Cord cutters and other streamers will have the ability to buy an ESPN subscription the same way that they can for Netflix, HBO, and Hulu. The problem is that they’ll still have the same issue overseas. And Disney has missed its window in selling ESPN to a corporation at maximum value. The belief is that its value has dropped 20 percent or more since its high point a few years ago. Even that opinion is overly optimistic to many analysts.

Simply stated, ESPN needs to be its own thing.

In its current form, ESPN is hurting the bottom line of its parent company, Disney. Since Iger and his team haven’t found anyone willing to buy the brand, the choices are simple. Disney can leave ESPN on its ledger for the next few years, playing out the string until the company can negotiate much better contracts with sports leagues.

Alternately, Disney can and should spin off ESPN. They should stop protecting it by throwing Mickey Mouse money at a flagging institution. Instead, ESPN should sink or swim on its own as a standalone entity. If their business model isn’t sustainable in post-cable world of streaming, then ESPN would eventually have to face the proposition of bankruptcy — but that’s still a huge if and a long way off. However, if it came to that, it might be the only way for the company to renegotiate these unaffordable contracts for the next several years. ESPN is no longer the 800-pound gorilla of television consumption. It’s time that people (especially Disney execs) stop treating it as such. Otherwise, it’ll face the same fate as newspapers. Disney needs to negate that potential drag on operating income now. It’ll only grow worse in future years.

Here are two reasons to read why it shouldn't:
ESPN is losing subscribers but it is still Disney’s cash machine - http://www.economist.com/news/busine...subscribers-it

ESPN has lost 12 million subscribers in 6 years, but it is not as bad as it sounds - http://www.businessinsider.com/espn-subscribers-2017-3

[visaman666]

I am a shareholder of both Disney and Apple, so I'm golden either way.

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Originally Posted by visaman666

I am a shareholder of both Disney and Apple, so I'm golden either way.

ESPN is losing money because they're out kicking their coverage as far as these rights deals are concerned. Throwing around figures like $7.3B just to broadcast three college football games per year for the next twelve years catches up to you, especially when you add on the NFL, the NBA, all of the college football/basketball conference deals, etc.