Does Disney Need ESPN? For That Matter, Does ESPN Need Disney?

Let’s face it, Mickey Mouse isn’t exactly a poster child for athletic ability.  He’s not tall, wears shoes far too big for him and doesn’t exactly appear ripped.  Frankly, Goofy’s more of an athlete, though he is more the lanky type than imposing.

So the connection of a generation that has seen ESPN and Disney joined at the hip isn’t necessarily supported by their respective histories.  Disney swallowed them as part of the acquisition of ABC in 1996, 12 years after Cap Cities, the prior owners of ABC, made a strategic decision to expand the footprint and market of the ABC Sports brand that owned the top talent and many major events, including Monday Night Football and the World Series.  That marriage was beneficial to each other–ABC gained access to top-notch talent, ESPN increased subscriptions and revenue dramatically.

The Disney partnership unquestionably added overall value during its first two decades, but for most of it the ESPN businesses were siloed from the balance of the company when it came to leveraging talent and sponsors.  ESPN maintained separate sales and marketing staffs with no corporate ties to other Disney units, and while sports coverage seamlessly migrated and aggregated it was clear the ESPN brand was emerging as the new definition of quality.  The phrase “worldwide leader” supplanted the Roone Arledge-era spiel of being “recognized around the world as the leader in sports television”.  These days, even the NBA Finals, which air exclusively on ABC broadcast TV, have ESPN graphics and on-air look, with the ABC bug faintly burned into a tiny corner of the screen.

Today it was announced that maverick investor Daniel Loeb, chairman of Third Point, sent a letter to Disney chairman Bob Chapek of his hedge fund’s intent to take a larger stake in Disney, and in his typical take-no-prisoners style, per CNBC, it “suggested” that the entertainment giant spin off its sports network ESPN, according to a letter obtained by CNBC’s David Faber.  Per CNBC:

The shares jumped as much as 2% on the news. Loeb’s stake is worth roughly $1 billion, Reuters reported Monday.

In a letter to Disney CEO Bob Chapek, Loeb said there is a strong case that the ESPN business should be spun off, saying the segment generates significant free cash flow for Disney.

“ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting,” Loeb said. “We believe that most arrangements between the two companies can be replicated contractually, in the way eBay spun PayPal while continuing to utilize the product to process payments.”

Disney announced subscriber totals which in aggregate are superior to Netflix, but the unique subscriptions were heavily skewed toward the company’s entertainment offerings, the family-appeal Disney+ and the generalist Hulu–a service Loeb recommends doubling down on, given the potential it has to go in any direction and, of course, grow as a VMVPD as DirecTV and cable shed legacy subsciptions.   That, of course, would depress ESPN’s greatest business benefit to Disney, the significant subscriber fees that sports networks have historically delivered from carriers.  And as the number of suitors for content of consequence emerge, such as Apple, Amazon and Warner Discovery, the price Disney would have to pay to stay competitive will undoubtedly escalate.

Even before Loeb’s proclamation, Disney has been more prudent about blindly committing capital and resources to the ESPN businesses.  It allowed its once-essential cricket deal in India to lapse, and also passed on renewing a long-standing midweek baseball package that allowed Apple to enter a live sports market they clearly have their eye on growing.  They are also allowing a 40-year relationship with the Big Ten to sunset; while they have a new deal with the SEC to replace it handsomely, they are clearly not hoarding every league and/or tour as they once did.

Loeb’s take on the impact of sports betting into the equation cannot be underestimated.  FOX Sports has substantially increased the presence and connection to its FOX Bet service, and its one-time owned-and-operated regional sports networks have been renamed Bally’s Sports Net by new majority owner Sinclair.  Draft Kings and FanDuel have even deeper partnerships and ties to leagues.  And while ESPN embraces those betting apps warmly, their leveraging of them for content has been muted.  A Daily Wager broadcast appears on ESPN2, and its sports ticker across its networks now openly includes pointspreads and over/unders.    But under both the economic and moral pressure of Disney ownership, their current level of participation is dwarfed by its competitors.  A tech-based company seeking to expand its sports presence, as well as provide mechanisms such as devices and websites to take bets, would clearly see upside in a purchase of what Disney may see as a somewhat distressed asset under the current umbrella.

Playing this hand a bit further, it is likely that at least for the foreseeable future a league or two might want to insist upon any streamer looking for rights not completely ignore broadcast and/or cable.  So could Disney’s deal with any potential ESPN buyer include an option to have right of first negotiation on any and all content that would have such desired breadth of reach?

As our noted baseball star Goofy would offer, “uh….yup!  yup!  yup!!!”

You can bet on it.  Just not on an ESPN-branded platform.  Yet.

Until next time…

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