The future of Disney is streaming, and the past is linear cable television. But the present is a weird mix of the two.
Disney's high-profile asset ESPN is awkwardly caught in the middle.
The Disney-owned sports network has been a profit engine for decades, earning billions of dollars each year from advertising and cable affiliate fees. At the same time, Disney is betting its future on Disney+, its $6.99-a-month family-oriented streaming service, which goes live on Nov. 12. It will include a nearly full library of old Disney and Pixar movies, "Star Wars" and Marvel films, original programming, library episodes of shows like "The Simpsons" and quite a bit more.
What consumers won't find in Disney+ is sports.
Disney has a separate sports streaming product, the nascent $4.99-per-month ESPN+, which has some live sports, including UFC, but airs zero NBA or NFL games. At the end of Q2, ESPN+ had only 2.4 million subscribers after launching in April 2018. By way of comparison, Disney+ will probably have about 2 million subscribers after just one day on the market, according to LightShed analyst Rich Greenfield (in part because Verizon wireless subscribers will get a year of Disney+ for free).
The result puts Disney in a bit of a dilemma when it comes to ESPN. The sports network is an economic juggernaut that generates about $10.3 billion in annual revenue, according to S&P Global Market Intelligence. But it's an non-factor for Disney+, the product by which investors will judge Bob Iger's company going forward.
Iger's plan seems to be to thread the needle, preparing for a day when ESPN+ is a stronger product with popular sports rights, while not rocking the boat on ESPN's value for the next few years. He's basically been forced into this strategy, as rights for nearly every major U.S. sports league are tied up until 2021 or 2022. It's also a good strategy: ESPN continues to be able to raise affiliate fees and advertising rates as it becomes more and more essential to the cable bundle with its event-driven live programming. Nevertheless, UBS estimates more than 12 million American households will ditch traditional pay-TV by the end of next year. And that means fewer ESPN subscribers.
One plan to boost ESPN+ while keeping ESPN steady may involve the NFL Sunday Ticket, which shows every out-of-market NFL game each Sunday. Several Disney executives covet Sunday Ticket and would like to own the rights to it, bundling it with ESPN+, according to people familiar with the matter. This could happen in 2022 if Sunday Ticket ends its deal with AT&T's DirecTV, which currently charges more than $300 for the annual product to help offset the cost -- about $1.5 billion per year for 8 years.
Meanwhile, Disney is juggling two opposing viewpoints internally about ESPN's future as a linear TV network, according to people familiar with the matter. The first camp, which includes longtime TV executive Norby Williamson, favors focusing on sports highlights -- a "back to the future" play centered around "SportsCenter." The second, which includes executive producer Erik Rydholm, believes riskier and edgier shows are necessary to draw younger and more diverse audiences.
Complicating the scene further, a slew of new entrants could bid for live sports rights in the coming years, including Amazon, Google and Apple. This would give the leagues more choice in terms of potential partners, which could heighten ESPN's aversion to say anything about controversial topics like China's relationship with the NBA, the NFL's problems addressing concussions or political issues such as Colin Kaepernick's kneeling during the National Anthem. "SportsCenter" may be ESPN's most non-controversial programming.
Disney reports its fourth-quarter earnings after Thursday's market close. Analysts estimate the company will generate revenue of about $19 billion for the quarter.
The NFL recently considered breaking its Sunday Ticket contract with DirecTV early but has decided to stick with its current deal, according to a person familiar with the matter. AT&T would consider partnering with ESPN before 2022 by sharing some out-of-market games with ESPN+, said the person, who asked not to be named because the discussions are private, but any deal would have to be approved by the league. While DirecTV paid $12 billion on Sunday Ticket in 2014, AT&T feels the overall value for the package of games has diminished after the NFL removed one game each week for Thursday Night Football, the person said. ESPN hasn't had any recent discussions on sharing Sunday Ticket with AT&T, said another person familiar with the matter.
DirecTV typically sells about 2 million Sunday Ticket subscriptions annually, according to people familiar with the matter, but customers have to be DirecTV subscribers to buy the product (with some exceptions, such as living in an apartment building that isn't allowed satellite TV). In a new deal after 2022, Disney could theoretically offer Sunday Ticket to all consumers. With Sunday Ticket, ESPN+ could become a stronger product to bundle with Disney+, boosting subscribers for both streaming services.
"On the Sunday Ticket, I am not going to elaborate much except [to say] that there has been some exploration as to whether there was an opportunity there," Disney CEO Bob Iger said in May during Disney's second-quarter earnings conference call. "We are very bullish about the relationship ESPN has with the NFL. I think we all believe that there are opportunities to strengthen our relationship with them."
While Iger has also hinted at moving other sports from ESPN to ESPN+ over time, any shifting of content devalues ESPN, which commands about $9 per month for every pay-TV subscriber -- whether a person watches ESPN or not.
Iger's in no hurry to move content from ESPN as long as there are still nearly 90 million U.S. households paying for some form of bundled subscription pay TV.
This reality has created a dilemma for Disney. ESPN's ratings almost by definition can't improve in the long term as fewer people will watch live TV. But ESPN isn't ready to fully embrace a streaming future as the network's revenue continues to rise.
In the near term, ESPN's ratings continue to perform well, with several shows, such as "Pardon The Interruption" and "First Take," consistently showing month-to-month ratings growth. ESPN is the top network, cable or broadcast, with males 18 to 34 during "First Take's" time slot, weekdays from 10 a.m. to noon E.T., which stars Molly Qerim, Stephen A. Smith and Max Kellerman. A handful of "SportsCenters," including "SportsCenter AM," have also shown consistent recent ratings growth.
The strong performances of "SportsCenter" led ESPN executive vice president Norby Williamson to recently replace the daily "Outside The Lines" half-hour show with an extended "SportsCenter." The network has also recently asked that another personality-driven show, "High Noon," hosted by Pablo Torre and Bomani Jones, be "focus grouped" -- industry lingo for learning more about who is watching and what people think of the show, according to people familiar with the matter.
But "SportsCenter" has also been undercut by technology, reviewing games whose results are readily available all over the Internet. ESPN.com, Twitter and other Internet sites often already have access to many of the highlights ESPN features by the time "SportsCenter" airs.
Keeping ESPN as more than simply a factory for games and highlights is important to many at the network, including almost everyone associated with executive producer Rydholm's trio of shows "Around the Horn," "Highly Questionable" and "High Noon," the people said. Jones, Torre and Dan Le Batard, host of "Highly Questionable," all come from the Rydholm tree and have helped ESPN reach different audiences over the past decade.
Pitaro, who took over as ESPN president last year, replacing John Skipper, will likely try to continue to appease both camps as he leads ESPN into the next decade. Le Batard remains close with Pitaro after breaking company policy and discussing politics on his radio show in July, according to people familiar with the matter. He has remained with the network and wasn't suspended.
But as ESPN's audience continues to decrease, or potentially skews older and wealthier, Pitaro may decide that linear programming that worked 20 years ago actually makes more sense returning to the airwaves.
An ESPN spokesperson declined to comment on the network's show choices or future strategy.
All of this is a prelude. The biggest shoe to drop in the transition from cable to streaming will probably be the de-bundling of ESPN completely, allowing anybody to subscribe to it on an a la carte basis.
While Disney may be years away from making that call, the company has two clear choices: protect the golden goose or prepare for what's to come. For now, Disney is trying to do both.