Perhaps no media brand has been beaten up by the press and by consumers in recent years more than ESPN. The poster child of the pay-TV model, ESPN has reaped massive carriage fees and delivered incredible profits to Disney in recent decades. Since, ESPN was the model for pay TV profit extraction, it also was a prime example of declining subscribers (and potentially revenues) as the cord-cutting trend went mainstream.
While Disney and ESPN execs were indeed caught flat footed by the acceleration in cord cutting, much of the criticism of the network is likely overblown. The politicization of everything – of which ESPN was a major part – made the ESPN story seem more dire than perhaps it was.
Perhaps more interesting, however, is that ESPN remains an incredibly interesting piece of the shifting media landscape for a number of reasons. First, ESPN remains a very profitable business for Disney (albeit one that isn’t really growing), and Disney wants to keep the cash flow contribution to the company while it funds major initiatives for the future (none bigger than Disney+ and Hulu).
As the LA Times notes:
But ESPN still remains a major profit center for Disney. Disney does not break out ESPN’s financials, but research firm S&P Global Market Intelligence says its revenue for 2018 totaled $10.2 billion, up 6% from the previous year, and it had cash flow of $3.23 billion, up nearly 8%. Even with cord-cutting, ESPN’s revenue from pay-TV subscriptions increased 6% to $7.3 billion.
During its recent first-quarter earnings call, Disney said ESPN’s rate increases from pay-TV providers were higher than a year ago and adjusted TV advertising revenue was up in the mid-single-digit range thanks to strong demand for commercial time — a positive sign as the network enters the advanced sales market for the 2019-20 TV season that began last week.
But additionally, ESPN represents the apex of live sports programming which, while facing declining subs as the overall cable bundle deteriorates, perhaps has the most staying power of any element of the cable bundle. In theory, as the cable bundle deteriorates and overall subs continue to decline, ESPN can charge even more to the remaining subs. After all, if you’re keeping some form of cable, it’s increasingly likely that live sports (live news being the other piece) is an important reason for keeping it. The cable bundle could indeed be not much more than the live sports bundle in the future. And ESPN is the most important part of that future bundle.
This doesn’t mean that Disney isn’t attempting to transition even ESPN to the future. Enter ESPN+. The streaming “complement” to ESPN proper is meant to appeal to different users with lesser known sports matchups. While I personally don’t know anyone who subscribes to ESPN+, it’s still an important piece of the puzzle for Disney. First, ESPN+ has helped Disney continue to ramp up and beef up its streaming capabilities. It’s been noted that Disney is consolidated the backend technology that powers ESPN+, Hulu and Disney+. This operational efficiency is huge and while ESPN+ might not have an enormous audience, Disney doesn’t have to build out unique infrastructure just for it. Instead, it can run of the same platform as the other streaming services.
Additionally, ESPN+ serves as a placeholder for live streaming sports. If and when the numbers show that Disney should consider moving more mainstream sports from pay TV to its streaming platform, the platform is already there with at least some audience.
Disney was caught flat footed as cord cutting and the Netflix revolution really picked up steam a few years ago. But the company has pivoted hard and effectively to right the course and prepare for the next era of media and entertainment better than any traditional media company.