The fate of ESPN, Disney’s prize asset and a reliable generator of cash flow even in uncertain times, remains the subject of vigorous debate in industry and finance circles.
Wells Fargo media analyst Steven Cahall weighed in on the side of spinning off the sports property, going as far as predicting the move will start to take effect by this time next year.
The company “will begin the spin-off process for ESPN & ABC, including launching ESPN in streaming à la carte,” Cahall wrote in a note to clients. “Cost rationalization and balance sheet options are critical to reaching this outcome. The result is a better-off remaining” entity.
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Other analysts have taken the opposite view. Michael Nathanson of MoffettNathanson, a longtime Disney bull, issued a report about the outlook for the company earlier this month titled, almost plaintively, “What Now?” While he rates the return of CEO Bob Iger a net positive, he said Iger faces many vexing challenges, including how to manage ESPN through a period of ongoing linear decline. Spinning off sports, especially given the burdensome costs of rights fees, doesn’t pencil out in Nathanson’s view. “While the market might pine for an ESPN spin,” he wrote, “we don’t think the math is a slam dunk for the risks involved. Rather, the preferred path forward is to re-imagine all of Disney’s DTC assets starting with Disney+ Hotstar, Hulu Live and Disney+’s pivot to general entertainment.”
In an SEC filing last month, Disney said ESPN shed another 2 million subscribers to finish fiscal 2022 with about 74 million. That level is more than 25% below its peak just north of 100 million in 2011. As the lucrative pay-TV universe for ESPN has shrunk, costs have also risen, with big decisions looming on renewals for college football and the NBA in coming years. Streaming service ESPN+, meanwhile, has continued to make significant strides, ending 2022 with 24.3 million subscribers. While the programming keeps getting more robust on ESPN+, however, it remains a complement to the main linear feed, and no model yet exists in the marketplace for a successful, stand-alone sports offering at the price level ESPN would command. (In wholesale, ESPN commands about $8.15 per pay-TV subscriber from operators, according to estimates from SNL Kagan.)
Nathanson noted the comparatively modest revenue per subscriber on ESPN+, which he cited as evidence of the “continuing challenges of trying to monetize sports outside of the traditional linear
Activist investor Daniel Loeb agitated for a separation of ESPN several months back, issuing a direct appeal to former CEO Bob Chapek. He said initiatives like sports betting would be easier if ESPN were its own entity. He later backtracked, citing productive talks with Chapek, but the top exec was then ousted last month and replaced by his predecessor, Iger.
Disney execs have publicly maintained that they plan to continue with the current structure. “If you happen to have a vision for the future that the rest of the world’s not necessarily in tune with yet, then you keep ESPN,” Chapek told Deadline in September. “You keep ESPN, and you have a full complement of general entertainment, family news, sports that no other entertainment company can touch.”
He noted plenty of inbound interest from third parties wondering if ESPN was poised for a transaction and potentially available.
Nathanson said any spinoff of ESPN would need to include other assets, including Hulu. “Spinning out Hulu along with ESPN and the linear business would allow Disney to make a clean break away from general entertainment and focus on its core competency of premium branded I.P. – just what the Disney+ playbook was originally created to do!” he wrote. “Mr. Iger already initiated such a pivot once already focusing Disney Studio on franchise pictures and eliminating riskier general entertainment films, culminating in record profits in fiscal 2019 before the pandemic.”
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