Bob Iger’s return to the helm of the Walt Disney Co. will have far-reaching implications across all segments of the media and entertainment colossus, but perhaps no division will face greater scrutiny during his relief outing than ESPN.
Among the areas Iger must address in his second turn as Disney CEO are a money-hemorrhaging direct-to-consumer initiative, a clarification of ESPN’s objectives in the sports-gambling space and a potential spinoff of the cable network assets. As he labors to un-do many of the decisions made by his hand-picked successor, Bob Chapek, the un-retired Iger will face an ongoing erosion in ESPN’s legacy linear-TV business while dealing with a vocal clutch of activist investors.
As much as analysts tend to obsess about the DTC business, the traditional pay-TV model remains in the driver’s seat, as Disney’s linear networks generated $8.52 billion in operating income during the fiscal year that just ended. By comparison, the DTC segment lost $4.02 billion over the same 12-month period.
That said, the outlook for the cable bundle is far from rosy. As Iger himself said at a tech conference earlier this fall, legacy TV “is marching to a distinct precipice, and it’s going to be pushed off.” Having lost some 2 million video subscribers in the third quarter, cable/satellite/telco operators are down to around 62 million paying subs, which means that overall pay-TV penetration is down to just 50% of all U.S. TV households. Five years ago, when 94.9 million Americans subscribed to the bundle, penetration was at 80%.
As cable subscriptions continue to melt away, ratings and ad revenue are following suit. Excluding the year-over-year impact of last year’s Summer Olympics, the cable networks saw overall ad sales dollars fall 11%, with Disney properties sustaining a 20% loss. (While virtual MVPDs are making progress, those gains are only enough to somewhat offset what amounts to an annual 9% loss in traditional pay-TV customers.)
On a positive note, Disney remains unmatched in its ability to command outsized carriage fees, raking in an industry-high $3.23 billion in affiliate revenue during the last quarter, on an even footing with the year-ago period. Runner-up Warner Bros. Discovery, which booked $2.28 billion in affiliate revenue, was down 3%.
ESPN’s monocle-popping sub fee enables the flagship channel to rake in some $8.7 billion per year before a single ad unit gets sold, and while it’s understandable that investors are a bit uneasy about the linear future, the Chicken Little routine is a bit overstated. This summer, after taking a stake of nearly $1 billion in Disney, the hedge fund Third Point LLC began agitating for sweeping changes at the Mouse House, including demands that ESPN be spun off. Third Point owner Daniel Loeb later reversed course, saying that he’d arrived at a “better understanding” of ESPN’s inherent value and that he looked forward to seeing ESPN chief Jimmy Pitaro make the most of the brand’s potential.
Shortly after the Third Point kerfuffle, Chapek revealed that he’d been approached earlier in the year by a number of firms that were interested in taking ESPN off his hands. Chapek apparently took the overtures seriously enough to convene a series of in-house meetings to hash out the pros and cons of a spinoff, but those confabs never got past the speculative stage.
Although analysts say it’s far too early to guess how Iger will handle ESPN’s linear business, most don’t see the company going the spinoff route. That said, Citigroup managing director Jason Bazinet owned the day’s hottest take when he characterized the idea as “the dumbest thing ever.” In Bazinet’s estimation, such a move would be excessively myopic, as the billions in revenue ESPN generates will go a long way toward funding the transition to the DTC future.
Many Wall Street forecasters were all but ecstatic over the news, and the markets responded with a similar show of enthusiasm. Disney shares on Monday closed up $5.78, or 6.3%, at $97.58. Prior to today’s gains, the company’s stock this year had lost approximately 36% of its value—a performance that weighed heavily on the decision to part ways with Chapek.
Among the day’s biggest Iger boosters was MoffettNathanson’s Michael Nathanson, who upgraded Disney to Outperform with a $120 target, up from the most recent assessment of $100. While Nathanson did not speculate on the long-term fate of Disney’s linear TV model, he said Iger’s re-ascension was likely to usher in an era of “deep cost-cutting at ESPN,” one which “should include a review of all the upcoming sports rights.”
If it’s safe to assume that Iger will be less interested in spending money on low-impact sports, rights are unquestionably the lifeblood of the entire ESPN operation. Which is to say, it’s hard to imagine that austerity measures will impact the extension of ESPN/ABC’s NBA deal, which costs it $1.4 billion per year and is due for renewal at the end of the 2024-25 campaign.
On the DTC front, Iger returns to a media world that no longer derives an asset’s value wholly from the number of subscribers added during a given quarter. Disney’s streaming losses are mounting, and in Iger’s first memo to employees in the media and entertainment division, he intimates that the first step toward getting the segment back on track will be to dismantle the structure that had been put in place by Chapek, whose oversight effectively weakened the company’s mission.
Iger said he’s asked Pitaro and the other division heads to “work together on the design of a new structure that puts decision-making back in the hands of our creative teams and rationalizes costs.” The rallying cry to restore Disney’s historic emphasis on creativity can be seen as a rebuke to Chapek’s management philosophy, which, in Iger’s view, prized distribution over the creation of world-class content.
As for ESPN’s long-deferred search for a brand-licensing deal with a sportsbook, there’s no telling how Iger’s views on gambling may have evolved over the last couple of years. ESPN has existing content partnerships in place with DraftKings, in which it holds a minority stake, and Caesars Sportsbook. Chapek was said to have been kicking the tires on such a venture since the summer of 2021, in what was billed as a hunt for a $3 billion deal to lease the rights to the ESPN brand to a sports-betting operation.
Those talks did not bear fruit, and the proposition may never see the light of day under Iger, who during his earlier turn at the top seemed less-than-enthusiastic about the prospect of aligning the greater Disney brand with gambling. Of course, many things have changed since Iger took his short-lived leave from Disney, and at present, betting on sports is legal in 36 states. But if the Iger of 2020 is anything to go by, he’s less likely to embrace a gambling craze that Chapek seemed eager to go all-in on.