Goldman Sachs held the Communacopia conference last month. DisneyBob Chapek, CEO of ESPN was asked how important ESPN and sports broadcasting are to the company’s streaming strategy. He answered with a question that sounded almost like an answer.

Chapek stated that sports tends to be the most viewed item every year. In fact, nine of the 10 top-rated events on television are all sporting. said in a virtual session on Sept. 21 It’s hard to predict the future, but this is an essential part of the Walt Disney Company’s consumer offerings.

Chapek’s unoriginal response to the question of what is next for Disney’s most important assets prompted no headlines or follow-up questions. Chapek was speaking about an imminent threat to the media industry. It is an issue that could eventually shake his media empire which also includes many of the top studios and film franchises worldwide and an omnipresent network for live sporting events.

Disney is facing a dilemma with ESPN: When and how to accept a future without television.

From the old TV model, broadcast and cable networks continue to make billions every year. ESPN is an important beneficiary because media companies receive monthly subscription fees from pay TV providers, regardless of how many viewers they have. Sports networks are charged several times the amount of sports channels, while niche channels only make a few dollars per month.

Disney earns more than any other company from subscribers to cable, and it’s all because of ESPN. ESPN and sister network ESPN2 charge nearly $10 per month combined, according to research firm Kagan, a unit of S&P Global Market Intelligence. That’s at least four times moreKagan claims that this network is superior to almost all other broadcast networks or cable networks.

Disney has made it mandatory for pay-TV service providers that ESPN be included in the most popular packages. This is a simple requirement for TV companies, as they wouldn’t want to drop ESPN.

The non-sports community is also cutting the cord. There are more than 6 million people ditched pay TV in 2020, according to research firm eMarketer — the highest annual total ever. In the last decade, 25 million Americans dropped linear TV packages.

It creates a conflict within Disney which is poised for growth. Disney is encouraging people to sign-up for Hulu and Disney+, its streaming entertainment platforms. Wall Street is also interested in this. Streaming video can be a business that is growing. The traditional pay-TV model is declining.

Chapek also finds it a good financial move. Disney earns more than $10 per month for sports subscribers, but it is much less for entertainment networks, such as Disney Channel, FX and FX. These channels draw lower numbers and are not subject to high advertising rates.

It’s huge for Disney if a cord cutter will pay $8 per month to Disney+, and $6 for Hulu.

ESPN is the opposite. Disney would be very disappointed if they had to swap an ESPN subscriber in exchange for an ESPN+ member, who has an average monthly revenue of $5. ESPN+ has limited content.

When Disney+ was launched, Bob Iger (Disney Chairman) told shareholders that Disney+ would be the best thing since sliced bread. was “all in” on streaming video.

ESPN, however, is not. ESPN is determined to keep the cable bundle alive as long as possible. It knows that it could bring in billions from households across the United States, who each pay $120 per month for it.

Some analysts have even questionedChapek can now focus on streaming and Disney could spin-off ESPN. Ex-Disney executive who left recently and requested anonymity, claimed that the companies are in “strategic disalignment”. Wall Street does not like declining assets. According to an executive, having legacy bundle ties will reduce a company’s stock multiple.

ESPN can continue its virtuous cycle of spending large amounts on sports rights with this cash. Disney agreed to spend $2.7 billionFor “Monday Night Football”, a deal that lasts until 2033. ESPN pays $1.4 billion annuallyFor NBA games will likely pay moreWhen those rights must be renewed following the 2024-25 season. The network owns media rightsEvery major U.S. sports team in one capacity.

This allows Disney to make original streaming content and boosts the quality of Disney+ as well Hulu, which is a company that competes with. Netflix Amazon

Chairman of ESPN and majority-owned by Disney, Jimmy Pitaro said, “We are successfully navigating this evolution of consumer choice.” in an interview with CNBC in AprilIt is possible to be multiple things at once. We believe that we are capable of being multiple things simultaneously. “We have the freedom that we require as direct-to consumer continues to be the preferred choice for consumers.”

The role of ESPN as a cash machine is working well for now. If 25 million U.S. homes decide to ditch cable over the next four- or five years, as some predictRich Greenfield, LightShed media analyst said that math won’t add up anymore.

“If the goal is to spend 40 to 50 millions, it begs the question, Is there an economic model that would justify spending at the rate we are currently spending?” Greenfield agreed.

According to sources familiar with the matter, ESPN must figure out how to replace $3 billion annually lost subscription revenue. This decline is expected to continue, which Disney executives anticipate, said people who are familiar.

The plan of Disney is to increase the cost of ESPN+ incrementally as it provides more value content, while still fulfilling contractual obligations to pay-TV distributors for exclusive programming. One example of this is Eli Manning and Peyton Manning’s alternative broadcast, “Monday Night Football”, which was shown in an early stage. will air 10 times this seasonESPN+, ESPN2

Two people familiar with Disney’s plans said that if the pay-TV bundle subscriber base drops to less than 50 million households in the United States, Disney will likely offer ESPN streaming to customers. The economics will change at that time, since most people who pay for linear TV are sports enthusiasts. A full-service streaming sports service could make Disney more than a wholesale model of pay-TV.

Selling ESPN separately from the linear bundle in the short term is not possible. Disney has achieved digital rights flexibility with almost every major renewal of rights in recent years. However, Disney is restricted currently by linear pay TV obligations that require premium programming to be exclusive to its cable bundle.

Levy, now chair of the data company Genius SportsHe said that he believed Disney could convince 30 million subscribers to subscribe for just $30 per month. This is nearly twice what it would cost to get a Netflix standard subscription. That would bring in $10.8 billion annually — more than Disney makes today from pay-TV affiliate revenue.

Levy stated that sports have a built-in audience. This is a different kind of entertainment. It’s not easy to make a show successful. And you have to always market your content. It’s impossible to predict what content will be successful and which won’t. Sports is the most profitable content, no matter the distribution model.

Levy might be optimistic about Levy’s estimation. CNBC was told by a top American executive from one of America’s largest pay-TV companies that 15% of subscribers to video are avid sports fans. This would mean that just under 11 million households in the United States could watch sports. ESPN would still make $9 billion today if it could offer a streaming service at $30.

The uncertainty of how many subscribers will pay for sports in an à la carte streaming world isn’t lost on the leagues. According to sources familiar with the matter the NFL included early out clauses in its 11-year contracts with networks. This allowed the league to cancel if it ceases to be profitable. According to people familiar with the matter, the NFL could end the agreement with CBS, NBC, Fox, and ESPN after seven years. The NFL also has the option of ending its agreements with Fox, NBC, and Fox after eight years, according to the sources.

This is why Disney and the other live-sport networks want to continue to offer this linear bundle until it’s no longer needed. It is hard to recover the revenue lost in a consistent manner.

We believe that the pay-TV bundle of traditional TV will be preserved for many years,” he said.
Sean McManus, Chairman of ViacomCBSCBS Sports. “I don’t believe it will ever drop to zero. It’s possible that subscribers will decline over time, but I doubt it will ever reach a level that doesn’t allow for the rights agreements we currently have in place, including those that cover NFL Football.

Whether younger audiences even want live sportsDisney faces another problem. There are other entertainment options available, like social media and mobile gaming. These entertainment options may have a greater cultural impact than televised sports. The likelihood of Americans 13-24 watching live sports is half that of millennials, and they are two times more likely to skip them altogether. According to an aforementioned study. 2020 Morning Consult survey

Kosner stated that “the overall relevance of sport is an open question to the younger generation.”

A new streaming package that replicates the pay-TV experience but offers more choices is one model that might save Disney some heartburn. Media companies could be in the same position if this becomes the preferred distribution method. They will make money even though not everyone is viewing their services.

Dexter Goei (CEO of Altice USA cable TV provider) stated in May that such an offering would be beneficial for the industry’s sustainability.

Goei stated that it would allow them to “focus primarily on their broadband product” as well as “be a partnership for content on direct-to-consumer rather than a linear basis.” at JPMorgan’s Technology, Media & CommunicationsConference. It will “significantly increase the economic trends in our business from an cash-flow perspective,” he stated.

This could be due to the growing popularity of betting on sports. Mobile betting is now possible. slowly being legalized around the country,Levy stated that a wager on a sporting event increases viewership.

Kosner stated that Augmented Reality devices can create new viewing experiences. He also mentioned that innovative products, such as NFTs and non-fungible tokens (NFTs), could be used to attract younger viewers to the games.

All of it combined, media executives will find many reasons to feel optimistic in spite of the uncertain future for live sport.

McManus, CBS News’s CBS Sports Editor said that “the value of sports continues be more important each year.” Advertising will not stop trying to reach as many people as possible. That can be done with sports. A cliff isn’t coming to my mind. All roads are safe.

(Disclosure – Comcast’s NBCUniversal, the parent company to CNBC.

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