ESPN subscriber counts and ESPN revenue numbers that are associated with ESPN subscribers are some of the most watched metrics in all of the media industry. Why are these numbers so dissected and discussed? There are several reasons. First, ESPN finds itself at the intersection of many very large and interesting trends in media. We’ll get to those in a minute. Second, ESPN has long been the most profitable cable TV network and ESPN revenue and operating profits have bolstered parent company Disney’s earnings and growth for years. Also, ESPN and its profitability has been the poster child of the cable TV industry for decades. Therefore, as cable TV declines, ESPN is also the most watched element within that ecosystem as the industry shifts. Lastly, ESPN has been the focal point of a sports vs. politics debate for some years which puts ESPN even further into mainstream conversation and debate.
ESPN is relevant to many important trends occurring in today’s landscape. First, ESPN is watched as a barometer of the decline of traditional cable television as consumers shift to more on-demand offerings such as Netflix, Disney+ and others.
Also, ESPN is quite relevant to the sports media world which is important for a few reasons. First, ESPN is a major player in the purchasing of live sports rights. Live sports is one of the few reasons consumers still pay for traditional cable TV and major sports rights are incredibly valuable to ESPN. Because ESPN is willing to pay billions to leagues such as the NFL, the NBA and various college football leagues, the money fuels the expansion and value of the sports leagues themselves. TV revenue (much of it from ESPN) fuels the growth of sports themselves.
Additionally, ESPN is important because it’s a major profit driver of its parent company, Disney. Disney is one of the most important media and entertainment companies in the world. Investors often watch ESPN subscriber counts and ESPN revenue numbers and analyze it in the context of Disney as a whole. For years, Disney was able to count on ESPN revenues and profits as it invested in other areas of the business whether that be theme park capital expenditures or the launching of the new, direct-to-consumer offering, Disney+. The following excerpt from the 2019 Disney Annual Report is a great articulation of the current challenge presented to Disney (emphasis mine):
The media entertainment and internet businesses in which we participate increasingly depend on our ability to successfully adapt to shifting patterns of content consumption through the adoption and exploitation of new technologies. New technologies affect the demand for our products, the manner in which our products are distributed to consumers, ways we charge for and receive revenue for our entertainment products and the stability of those revenue streams, the sources and nature of competing content offerings, the time and manner in which consumers acquire and view some of our entertainment products and the options available to advertisers for reaching their desired audiences. This trend has impacted the business model for certain traditional forms of distribution, as evidenced by the industry-wide decline in ratings for broadcast television, the reduction in demand for home entertainment sales of theatrical content, the development of alternative distribution channels for broadcast and cable programming and declines in subscriber levels for traditional cable channels, including for a number of our networks. In order to respond to these developments, we regularly consider and from time to time implement changes to our business models, most recently by developing DTC products for certain sports programming on ESPN+ (launched in 2018) and for filmed entertainment and other programming on Disney+ (launched in November 2019) and increasing our stake in Hulu (assumed full operational control in May 2019). There can be no assurance that our DTC offerings and other efforts will successfully respond to these changes, and we expect to forgo revenue from traditional sources. There can be no assurance that the DTC model and other business models we may develop will ultimately be as profitable as our existing business models.
For years, ESPN was the biggest chunk of any cable TV channel of your cable bill. While ESPN was getting $6-7 per month of your cable bill, the closest other channel was something like TNT which typically received something like $1.50 per month. So as cable subscribers grew in this country to over 100 million subscribers, ESPN drove the most revenue (and likely most profits) for years. Now that cable TV is on the decline, ESPN is still getting the largest share of the cable TV bill, but ESPN (and parent company Disney) is seeing the worst declines in revenue.
Let’s dig in deeper to the ESPN subscribers and revenue numbers and discuss more how this impacts the future of television and the future of Disney.
As you can see in the below chart, the decline of ESPN subscribers is not a new trend. Since peaking at just over 100 million subscribers in 2011, the trend of ESPN subscribers has been steadily down. In fact, the trend is getting worse.
The trend isn’t letting up either. Disney reported during the first quarter of 2020 that sub losses accelerated to a rate of -4.5% which is the fastest decline yet.
With the coronavirus scare of early 2020, we’re likely to see things get even worse. The coronavirus put a halt to most, if not all, American sports, and thus, the main thing holding up subscriber declines from being even worse has been taken away. Couple the lack of live sports with the recessionary forces that will likely cause consumers to cut costs where they can and the 2nd quarter of 2020 might be devastating from an ESPN subscriber perspective. We’ll know more when Disney reports its next quarterly release in May of 2020.
Why is ESPN losing subscribers?
While some ESPN skeptics are quick to point to various ESPN personalities that have embraced divisive political positions, the reality is that this likely only accounts for a small portion of lost ESPN subscribers. Rather, the major trend impacting subscriber counts is the shift away from traditional cable television towards more on-demand, streaming platforms. ESPN subscriber losses correlate with overall decline in cable TV subscribers as more and more consumers “cut the cord.”
Despite losing subscribers, Disney has managed the decline fairly well. Despite fewer ESPN subscribers, Disney has managed the revenue declines by raising prices on the remaining subscribers.
While Disney doesn’t break out ESPN revenue specifically, they do report financial results from its Media Networks business segment. However, some market analysis firms have estimated ESPN revenue to be roughly in the $10 billion a year range for Disney.
For the year ending September 28, 2019, revenues from the Media Networks segment were $24.8 billion up from just under $22 billion the year before (an increase of 13%). The revenue comes from affiliate fees (the portion of your cable bill that goes to Disney for ESPN and other Disney owned channels), advertising revenues and other TV/SVOD distribution revenues. Disney notes in its 2019 annual report that they were able to offset a 2.5% decline in subscribers with a 7% increase in affiliate fee rates.
Recent data from Disney’s 2020 1st quarter report shows a nice boost to Media Networks revenue, but this is mostly due to the acquisition of the Fox assets. Disney noted that the increase was due to the addition of FX and National Geographic and it was “partially offset by a decrease at ESPN.” In this quarter, Disney also specifically mentions again that affiliate revenue growth increased as a result of higher contractual rates, but was offset by a decrease in subscribers.
So, Disney is managing the decline as best as possible. While not a perfect analogy, I’ve seen others compare this situation to the tobacco industry. Smoking is in a major secular decline, but the tobacco firms are able to maintain revenues fairly well by just increasing prices on cigarettes every year.
What about ESPN+?
ESPN+ is Disney’s sports streaming service that, as of now, remains a very small part of the business both in terms of a subscriber count and in terms of revenue. According to the Disney 2019 annual report, as of September 2019, ESPN+ had about three million subscribers. The subscriber numbers are likely higher too as a result of the bundle offering with DIsney+ and Hulu, but ESPN+ is considered to still lose money and still be a relatively small part of the business.
Until Disney executives decide to put major live sports content on ESPN+ (rather than niche offerings), it will likely remain a small part of the business. Disney will have restraint in such a move because it will further cannibalize ESPN subscribers and ESPN profitability.
Should Disney sell ESPN?
As Disney has pivoted to its direct-to-consumer offerings (ESPN+, Hulu, Disney+), you can make the case that ESPN is no longer a central piece of the Disney strategy. Disney’s strategy is centered around incredible intellectual property and brands that carry consumers on a journey from movies and TV shows to theme parks, cruises and other experiences. Disney has mastered the strategy where it can leverage a hit movie like Frozen, and get families all over the world to spend thousand of dollars visiting resorts, theme parks and cruises in order to experience Frozen in person.
While ESPN drove massive profits for years that bolstered the bottom line and provided cash flow to invest in many areas of the business, as ESPN revenues and profits decline, you could see a world where Disney spins off the ESPN business and re-focuses on the flywheel effect described above that is the core element of the Disney business.