Disney’s big bet on BAMTech: what could it mean for ESPN?

Disney has announced a further US$1.58 billion in streaming specialist BAMTech, a withdrawal from Netflix, and a new entertainment service to complement its planned ESPN OTT offering. It all adds up to an aggressive digital strategy, but will that be enough to arrest the fall of the 'worldwide leader in sports'?

Disney’s big bet on BAMTech: what could it mean for ESPN?

For some time now, the characterisation of ESPN - the self-styled ‘worldwide leader in sports’, no less - has been one of a sinking ship. Once an untouchable titan of sports media, critics have taken to portraying ESPN as a modern-day Titanic: unsinkable and yet taking on water at an alarming rate.

It is no secret that America’s most-watched and most expensive cable network has been battling subscriber losses and declining affiliate revenues as cord-cutting, so-called ‘skinny bundles’ and rival streaming services have taken hold. ESPN, a veritable cash cow for its parent company, Disney, for some time, lost hundreds of thousands of subscribers a month last year, ending 2016 some 11 million below its 2011 peak of 100 million.

Higher programming costs - driven up by sizeable contractual increases for domestic basketball and football programming, among other properties - and lower advertising income have seen ESPN’s profits trend downward. Revenues at Disney’s cable division, to which ESPN is the number one contributor, have slowed to an increase of less than two per cent per year, leading the company to cut costs by laying off staff, including long-serving writers and on-air talent.

Those trends have continued in 2017. As revealed by the company on Tuesday, Q3 revenues at Disney’s media networks segment, which includes its cable and broadcasting businesses, decreased one per cent to US$5.9 billion. Cable saw a three per cent drop to US$4.1 billion, with operating income falling by some 23 per cent to US$1.5 billion.

It is true that ESPN not only pays top dollar for its rights - around US$8 billion a year plus change - it also charges an arm and a leg for its cable programming. That’s a difficult juggling act to maintain, with or without ongoing shifts in media consumption.

But ESPN is still the highest-grossing, most established product of the modern sports media landscape it did more than anyone to shape. Those who criticise the network must surely know that wherever media goes in years to come, ESPN will be there, front and centre, drawing untold dollars from the millions of sports fans at home and abroad who can’t help but watch what it has to offer.

It was in that spirit that Disney bosses used their Q3 earnings call on Tuesday not to lament ESPN’s ongoing travails, but to bullishly announce that they would be doubling down on an investment that will see the pay-TV pioneer undergo a major strategic shift into the increasingly competitive digital space - in line with a more ambitious strategy in that sector at the House of Mouse.

Having splashed US$1 billion on a 33 per cent stake in BAMTech, the live streaming specialist spun off from Major League Baseball Advanced Media (MLBAM), last August, Disney chairman and chief executive Bob Iger revealed this week that Disney has agreed to pay US$1.58 billion for another 42 per cent in the company, taking its total stake to 75 per cent.

The planned move comes four years ahead of schedule and if Disney’s initial investment in BAMTech was made primarily to turbo-charge the development of a new ESPN-branded, BAMTech-powered over-the-top (OTT) offering, there can be no mistaking where the future of ESPN now lies.

“An offensive move"

Originally slated to launch later this year, the new ESPN OTT service will now go live in early 2018 ahead of the launch of a Disney-branded film and TV offering in 2019. According to Iger, it is estimated that it will include around 10,000 additional live sporting events each year that aren’t offered on ESPN’s linear channels, including content from partners such as MLB, NHL, and Major League Soccer (MLS).

It has also been confirmed that Grand Slam tennis and college sports will be available on the service, as well as existing sports-specific OTT offerings such as MLB.tv, NHL.tv and MLS Live. As previously announced, some content will be licensed through BAMTech, which will continue to be led by former Amazon Video executive Michael Paull, who joined the company in February.

Upon launch, the ESPN OTT service - which has yet to be named - will carry sports and events that aren't provided by the network’s linear TV channels. As Disney sees it, more niche sports should help draw hardcore fans in sizeable numbers, thereby helping to plug gaps in ESPN’s traditional subscriber base.

Iger revealed that the new OTT service will initially be available through the existing ESPN app, which he hopes will become the “premier digital destination for sports” in future. “It looks pretty similar to the app that you’ve got now, except it can do a lot more,” he said. “It’s basically one-stop shopping for the consumer and it’s one-stop shopping for us in terms of our ability to manage the consumer that wants to consume sports through ESPN.”

Iger added that bringing forward the investment in BAMTech enables Disney to take “more control of our own destiny”, while pushing back the launch of the new ESPN digital offering will facilitate an “even more robust” OTT service that can help “scale and monetise” the company's streaming capabilities more efficiently.

"It's not just a defensive move, it's an offensive move," said Iger, echoing the comments he made on Disney’s Q1 earnings call in February, when he said established media companies like ESPN “have to be willing to either create or experience some disruption” as they “migrate from what has been a more traditionally distributed world to a more modern, non-traditional distribution world".

Disney's Bob Iger has confirmed a more aggressive move into the digital space to combat falling revenues in the group's cable TV unit, including at ESPN

BAMTech is the future of ESPN

As much as the launch of the new ESPN-branded OTT service is about what ESPN can do for Disney, it is also every bit about what BAMTech can do for ESPN. Iger himself has previously talked up the capabilities of BAMTech, its proprietary live streaming technology, and outlined why the company is the key to ESPN’s digital-first future.

On Tuesday, he waxed lyrical once again.

“Today we announced a strategic shift in the way we distribute our content,” Iger said in a statement issued alongside Tuesday’s earnings call. “The media landscape is increasingly defined by direct relationships between content creators and consumers, and our control of BAMTech’s full array of innovative technology will give us the power to forge those connections, along with the flexibility to quickly adapt to shifts in the market.

“This acquisition and the launch of our direct-to-consumer services mark an entirely new growth strategy for the company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands.”

Following Disney’s increased investment, BAMTech will become far more integrated into the business. Iger himself will become chairman of the company while Paull will remain chief executive, reporting to Kevin Mayer, Disney’s senior executive vice president and chief strategy officer. MLB and the NHL will continue on the BAMTech board, while ESPN president John Skipper will oversee the new OTT service.

“This is an exciting validation of our team, its achievements and the customer-centric platform it’s built,” Paull said in a statement. “Yet, we’ve merely scratched the surface of what can be accomplished in a future where we combine Disney and ESPN’s world class [intellectual property] and our proprietary direct-to-consumer ecosystem.”

There can be no denying that BAMTech will be the key to ESPN’s success in digital, just as its new European offshoot, BAMTech Europe, is set to be a central driver in the future growth of Discovery Networks’ digital products across the Atlantic.

We’ve merely scratched the surface of what can be accomplished.

The company is already a budding player in the business of sports media rights - earlier in August, for example, it reached an agreement with the English Football League (EFL) for coverage of the EFL Championship in the US, and swiftly offloaded those rights to ESPN. BAMTech was also said to have made an offer earlier this year for the US rights to the Uefa Champions League, but ultimately lost out to a surprise bid from Time Warner Inc’s Turner Sports.

BAMTech’s content will feed into ESPN’s new product offering, but its influence runs deeper than sports rights. As well as facilitating streams of multiple sports across multiple devices via a single platform and delivering a best-in-class user interface, BAMTech’s back-end technology has the added benefits of boasting industry-leading ad servicing and customer data management systems, something Iger was personally noted.

“One of the things that impressed me a lot from the BAMTech meeting that I had is what the potential is for them to use data to increase or to generate great revenue from advertising,” he said back in February. “It’s something that we don’t have today in part because a lot of our distribution comes through third parties so we don’t get access to that information.”

This acquisition and the launch of our direct-to-consumer services mark an entirely new growth strategy for the company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands.

Disney refocused

Iger extended his contract at Disney in March, a deal that will keep him at the company until at least July 2019. As expected, his continuation has had a stabilising effect on the business, but if his job is to steady the ESPN ship, he is also intent on setting the company on a new course altogether.

That refocusing effort starts with distribution. Iger has cited the extent to which ‘virtual MVPD’ services like Hulu and YouTube TV present ESPN with an opportunity to offset some its cable subscriber losses. Both services have already signed up to carry ESPN, as have other services like Sling TV, and their performance in the coming months will be closely monitored by Disney investors keen to gauge what the future might hold for the broadcaster.

Interestingly, this shift in strategy is not limited to sport. Disney has also announced that it is ending its distribution agreement for new movie releases with Netflix - a company it has previously been linked with buying - in favour of launching its own Disney-branded OTT service, powered by BAMTech, in 2019.

As Disney transitions to a more digital-focused model, then, it is inevitable that the company will see a concurrent lag in revenues. Not only must it work out how best to optimise its programming across each of its platforms, it must also identify the best way of monetising its new OTT services alongside its existing - and still very lucrative - cable distribution model.

As it is, digital distribution remains a bolt-on to a pay-TV model that has served ESPN so well for so long. The question, however, is how long that will continue to be the case.

Right now, accessing ESPN’s content via a digital offering such as ESPN3 or WatchESPN requires viewers to be authenticated by way of a subscription with the company. Yet the growing trend of cord-cutting suggests the broadcaster will have to pivot by altering its pricing model to attract those viewers who no longer want a cable subscription.

Iger has said the new ESPN OTT service will employ a typical advertising-based model initially, although Disney has yet to provide details on what the service is expected to cost.

All roads lead to digital

The challenges ESPN faces are by no means unique to the company. Confronted by all of the same trends in traditional broadcasting and the growing threat of digital rivals like Amazon and Netflix, the other major US networks are investing greater resources in OTT sport as they roll to the contours of an ever-more fragmented media landscape.

This week, for example, CBS announced plans to launch its own 24/7 sports streaming channel later this year and confirmed a deal that will see AT&T’s DirecTV Now carry CBS programming, including the broadcaster’s flagship sports properties like the NFL, for the first time. The network also plans to expand CBS All Access, its existing US$6 per month digital streaming service, into the international marketplace in the first half of 2018, spurred by promising growth in domestic subscriber numbers.

Fox Sports is also experimenting with new forms of distribution as part of its revamped video-centric digital strategy. In June, around the time the company started laying off writers in favour of hiring more video staff, it confirmed a Uefa Champions League streaming deal with Facebook, and is now reported to be weighing up bids from several social media companies for online highlight rights to next year’s Fifa World Cup.

In January, meanwhile, NBC and Turner formed a new streaming partnership in a bid to challenge the market supremacy of BAMTech. The two companies will pool the resources of NBC's Playmaker Media and Turner's iStreamPlanet, creating a new offering that will help league and network clients build out their OTT and video-on-demand services.

NBC Sports Network has also announced the launch of Premier League Pass, a new OTT service for US fans of English soccer that will form part of the existing NBC Sports Gold digital platform, and is investing heavily in its new Olympic channel.

It is clear, then, that the certainties of old are being challenged all the time, but even if the currents sweeping across media remain strong and uncertain, it is fair to assume ESPN will be a digital player to be reckoned with going forward. What that means for Disney’s bottom line remains to be seen.