Ben Swinburne of Morgan Stanley wrote in a note to clients Wednesday that Disney, thanks to the scale of ABC and ESPN, its early streaming success with Disney+ and its control of Hulu, “may be uniquely positioned to take the leap.” He reaffirmed his “overweight” rating on Disney’s stock, raising his 12-month price target to $135. Shares were trading Wednesday at around $115.
The pay-TV bundle is continuing to unravel, Swinburne argues, and general entertainment viewership is increasingly moving to streaming, a trend accelerated by COVID-19. “Disney’s scale and ability to vertically integrate in general entertainment has positioned it as a long-term winner in streaming,” the analyst wrote. “Using ESPN’s still significant scale to better align sports fans with sports content is a logical next step.”
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There has been significant friction of late in the sports distribution sector, apart from the disruption of the coronavirus, which has shut down most of the sports world for three-plus months. In one of many signs of the times, the regional sports networks now led by Sinclair Broadcast Group have been dark for months on Dish Network, and the satellite operator just hit an impasse with the NFL Network. “The math was clear,” Dish chairman Charlie Ergen has said about the decision to let sports go.
Concerns are mounting among investors and media executives that the primacy of live sports may not be enough to save the linear bundle in a world of consumer choice. Swinburne argues the financial model of sports broadcasting “looks unsustainable” and there could be dire consequences in coming years by stakeholders preserving the status quo.
“Sports rights on TV are rising at a high-single-digit annual growth rate, while cord-cutting is driving down pay-TV revenues,” he wrote. “If these trends continue, by the end of 2030 there will be little earnings left in the business of broadcasting sports. This would be a bad outcome for all involved, even team owners and players. The majority of revenues for all major leagues stems from TV rights.”
The notion that a major tech player will swoop in and take a chunk of sports rights and compel a shift to streaming has been bruited about for years. But Amazon, Facebook and YouTube have only nibbled at the edges, ultimately, and the jury is out as to whether they would have the appetite to hire crews and operate a traditional broadcast operation when their margins are far better in other sectors.
For Disney, making a strategic pivot would address a looming issue on the balance sheet: eroding subscriber numbers at ESPN. After peaking several years ago, subscriber levels have been steadily declining, and income along with it. Famously, former CEO Bob Iger’s candid disclosure about the trajectory of ESPN on an earnings call in 2015 sent investors into a panic and put Disney on a strategic path toward streaming. In the ensuing years, the company bought control of BAMTech, engineered the $71.3 billion Fox deal and launched ESPN+ and Disney+. The moves spearheaded an unprecedented push into streaming by WarnerMedia, NBCUniversal and even Apple after years on the sidelines.
Swinburne estimates ESPN operating income will decline 10% to 15% a year through 2024. That downturn “has brought the network and the entire ecosystem to this point: The risk of unbundling ESPN may finally be worth the potential reward.”
An “all-Disney bundle” would offer “a greater chance at success,” Swinburne believes, rolling together Hulu, Disney+ and the full ESPN. “But it gets more challenging over time,” the analyst cautioned. “Sports distribution offers challenges that do not exist in general entertainment. In contrast to Disney+ and Hulu, Disney cannot vertically integrate in sports, nor can it scale its business over a global footprint.”
ESPN+, the subscription streaming service launched in spring 2018, had 7.9 million subscribers as of the end of March. Because of longstanding rights deals between linear ESPN and its pay-TV partners, ESPN+ has offered a limited selection of live games, instead emphasizing programming like 30 for 30 documentaries. It has benefited from being bundled with Hulu’s basic service and Disney+.
Hulu’s live TV bundle, meanwhile, leads the internet-delivered bundle pack at 3.3 million subscribers. Since taking over Hulu, which was a multi-owner consortium since its founding in 2007, Disney has steered its live TV service in interesting directions. It specifically has addressed a pain point for sports fans, recommending that they cancel the service when they’re favorite sport is not being played and then activate for the season. That kind of churn has been anathema for decades in the traditional TV ecosystem, which is largely financed by the exorbitant carriage fees operators are willing to pay for sports programming.
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