Disney is plotting a course to take its linear ESPN channel to streaming in the years ahead, with a direct-to-consumer effort underway that comes with an internal code name “Flagship,” according to a report this week by the Wall Street Journal.
The WSJ, citing people familiar with the matter, said ESPN would still be offered as a traditional TV channel even after a streaming launch. The report said no firm timeline has been set.
Sources familiar with the matter told the WSJ that ESPN has started gaining “flexibility” in its agreements with cable operators so it can offer the channel DTC, but didn’t disclose terms or further detail about what those entail. The report said ESPN is also having talks with professional sports leagues as rights arise. According to the WSJ, it has secured “the same flexibility from at least two major leagues.”
It’s certainly not the first move into streaming for ESPN, having launched ESPN+ in 2018, which is now priced at $9.99 per month. As of April 1, ESPN+ counted 25.3 million subscribers. While that app offers a variety of content, it doesn’t provide a feed of ESPN’s main linear channel, which has remained within the pay TV ecosystem. And while Disney clearly is focused heavily on its streaming businesses (including Disney+ and Hulu), making the key sports network available on streaming would reflect a significant shift, particularly as sports has been viewed as one remaining stalwart of cable TV subscriptions as the industry continues to decline (collectively losing 2.3 million in Q1, including vMVPDs, according to the latest MoffettNathanson Cord Cutting Monitor).
Speaking on CNBC’s Last Call, LightShed Partners analyst Rich Greenfield discussed implications for the wider TV ecosystem of Disney potentially pulling ESPN out of the pay TV bundle.
“It’s a grenade. It is a massive grenade. It’s like pulling the trigger and setting the grenade off, there is no doubt about it,” Greenfield said, while also noting that Disney has been open about plotting such a move and indicating that timing is getting closer, though the analyst doesn’t think it’s likely near-term.
“Do I think it’s a 2025 event? Sure I think that’s very possible,” Greenfield said. “Especially as they redo deals both with UFC, the NBA, they’ve obviously talked to WWE, there’s a lot of contracts still in play. I don’t think Disney is taking ESPN direct in 2023 or 2024, that would be a misread of the situation.
Aside from Disney, there are implications for traditional TV distributors, which pay carriage fees to offer the ESPN linear channel in their TV packages but would also have to compete with a subscription service if the channel moves to streaming. (Charter’s CEO Chris Winfrey this week bemoaned programmers’ role in diluting the value of content as they’ve continued to raise rates while making the same content available on cheaper and free avenues with streaming).
That said, as Greenfield noted, from Disney’s perspective, the move would be far from out of left field. The company has been eying a shift to streaming and on Disney’s May 10 earnings call CEO Robert Iger explicitly said such a move would be coming.
“We haven’t really changed our position regarding basically migrating ESPN’s flagship service as a direct-to-consumer streaming platform. We think there’s an inevitability to that,” Iger said.
He pointed to ESPN connected to long-term efforts including health of the bundle and “the need to grow streaming as a reaction to the deterioration of linear businesses.”
Iger commented that moving ESPN’s flagship channel to streaming is “a huge decision for us to make,” adding “we know that we’ve got to get it right, both in terms of pricing and timing.”
He also acknowledged that it would have a direct impact on the linear channel, but pointed to market conditions including pay TV sub declines and weakness in the ad market. The CEO said that has “created a worrisome circumstance for us, because it’s obviously having such a negative impact on the economics of that business. And that’s forcing us to take a look at the cost structure of those channels, which ultimately comes down, probably more than anything, to spending on programming.”
In its fiscal 2023 second quarter revenue for Disney’s linear networks declined 7% year over year to $6.6 billion, while operating income fell 35% to $1.8 billion. Domestically Disney’s linear channels saw a 4% slide in revenue to $5.6 billion, alongside a 33% drop in operating income to $1.6 billion. Disney blamed decreases in cable to higher sports programming and production costs – including for College Football Playoffs, NFL programming and NBA rate increases – alongside lower affiliate and ad revenue.
Meanwhile, DTC revenue grew 12% to $5.5 billion. Streaming operating losses were also curbed in the quarter to $659 million, a 26% improvement over the prior year quarter.
Still as Disney focuses on a streaming future, as TVREV’ analyst Alan Wolk has stressed, it will be hard for companies to replicate money generated from traditional carriage and retrans fees. In an April 14 column separately discussing Warner Bros. Discovery’s new Max product and keeping the CNN news network off of streaming, Wolk said that it sometimes seems WBD is the only one that realizes “once those billions of dollars worth of carriage and retrans fees go away, they’re gone forever.”
He added that “no amount of high-CPM targeted and addressable ads will ever come close to replacing them. Which will mean a completely different economic reality for the US TV business.”
But of course, ESPN isn’t just any cable network, and its key sports programming garners particularly high fees.
According to the WSJ, citing S&P Global Intelligence data, ESPN generates $9.42 from the average cable bill, based on carriage fees it collects from MVPDs per customer, compared to just 49 cents on average per subscriber for other U.S. cable networks. How much Disney will opt to charge for ESPN in a streaming environment is yet to be seen.