The Walt Disney Company (DIS) reported fiscal Q1 2020 earnings on Tuesday February 4th. During the call, Chairman & CEO Robert Iger disclosed that the company’s sports-centric DTC streaming service, ESPN+ (in addition to Disney+ and Hulu), had “exceeded [subscriber] expectations.” ESPN+ now counts 7.6 million paying customers, up from 3.5 million in November and 6.6 million in December. The news wasn’t nearly rosy for the ESPN cable network. Iger stated that the WWL’s subscriber base shrunk by -4.5% during the most recent quarter, the fastest rate in company history.
Howie Long-Short: ESPN+ is growing rapidly (no surprise, considering the number of DIS owned platforms that can serve as promotional outlets), but the revenues being generated on the digital side of the the ESPN business are not nearly enough to offset the losses being suffered on the cable side (14 million subs over the last 7 years). Remember, the value of an ESPN and ESPN+ subscriber is different. While every person subscribed to a cable bundle is paying the company +/- $9/mo., ESPN+ subs only count for $4.44/mo (the service is sold ala carte at $4.99 or for $12.99 with Disney+ and Hulu). Linear television also has a second mature revenue stream in advertising and with the network drawing “lower average viewership”, that aspect of the business is down too.
With programming and production costs on the rise and subscriber totals headed in the opposite direction some believe that ESPN is in trouble, but Columbia University professor Tom Richardson insists that the WWL remains well positioned for at least the next dozen years. “[Pro sports] leagues still need to make distribution decisions that ensure their sport remains culturally relevant” and despite the steadily declining audience numbers, linear television will continue to offer rights holders the greatest reach “for the foreseeable future.” It must be noted that despite an acceleration in cord cutting and the “continued decline of the traditional cable business”, Disney’s cable networks (including ESPN) grew revenues by +20% in Q120.
Richardson is equally confident that the value of broadcast rights will continue to rise. “WWE and UFC both got big increases [from FOX, USA and ESPN] and those networks had access to the same data [reflecting declines] in linear television subscribers [that we’re talking about]. Television networks will continue to pay up for rights because despite the foundational challenges that the industry is facing, live sports content remain king.” The pro sports leagues could potentially decide during the next round of rights negotiations to forego cable broadcasters in favor of potentially less lucrative deals from ‘over-the-air’ television networks (which are losing subs at a lower rate), but rights holders aren’t going to be looking to take a haircut; not when live sports programming still commands an audience larger than just about anything else on TV.
Fan Marino: It’s fair to wonder how many of the 7.6 million ESPN+ subscribers are actually watching sports content. More than 50% of the subs added since November have picked up the streaming service as part of a bundle (with Disney+ and Hulu) and as Richardson said “for just $6 more it’s almost too good of a deal to turn down.”
Even if every one of the 7.6 million subscribers were active on the platform, Richardson doesn’t believe the audience is large enough for a major sports property to consider it as an exclusive rights holder; no matter how large the potential check may be (think: reach over revenue). “Television still has an audience close to 120 million and platforms like YouTube, Amazon and Facebook have the potential to reach hundreds of millions more.” Richardson also reminds that the Gen-Z fan isn’t the target demo for SVOD products.“With concerns about declining interest in traditional sports among Gen-Zs, [rights holders] must consider longer-term fan development. Reaching and influencing younger fan prospects requires a more strategic approach across a variety of digital platforms and environments.”
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