The Walt Disney Company reported its fiscal first quarter earnings on Tuesday, and once again it was the performance of ESPN, the company’s flagship cable sports network, that garnered much of the attention.
It is no secret that America’s most-watched and most expensive cable network has been battling subscriber losses and declining affiliate revenue, under threat from cord-cutting and a proliferation in rival streaming services. For so long a reliable cash cow for Disney, ESPN lost hundreds of thousands of subscribers a month last year, ending 2016 some 11 million from its 2011 peak.
That trend has continued into 2017. ESPN continues to see its profits trend downward due to higher programming costs and lower advertising revenue, company bosses said on Tuesday’s earnings call. Disney executives blamed ESPN’s higher programming costs on contractual rate increases for NBA and NFL programming, while they also said fewer college football bowl games during the quarter - ESPN aired three in the period this year, compared to six in 2016 - contributed to a seven per cent year-on-year decline in ad revenue.
In fact, the broadcaster's dip contributed to a wider fall in revenues at Disney’s cable networks division, which saw first quarter income decline two per cent to US$4.4 billon and operating income slide 11 per cent to US$0.9 million. Overall, revenues across the entire Disney business dropped three per cent on its record first quarter of 2016, with total income of US$14.8 billion some way below analysts’ estimates of US$15 billion-plus.
But it is not all doom and gloom for the self-styled ‘Worldwide Leader in Sports’. Speaking on Tuesday’s call, Disney chief executive Bob Iger remained bullish about ESPN’s future, particularly as the pay-TV pioneer plots a major move into the digital space.
Last August, Disney 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). The investment was made primarily to accelerate the development of a new over-the-top (OTT) sports offering, and Iger insisted on Tuesday that Disney is committed to launching an ESPN-branded subscription streaming service sometime later this year.
“I was at BAMTech a couple of weeks ago and the quality of that technology has just blown us away, and the potential that we believe that has for us is enormous,” Iger said. “As you know, we have invested so that we own a third. We have a path to control. We are extremely excited about the prospects of what BAM is going to be doing near-term.
“But we’re also very excited about what the potential for this long-term, both for the company and for third parties who can use the product because the technological side of it is so strong in ways that are value-enhancing for them as well.”
"I was at BAMTech a couple of weeks ago and the quality of that technology has just blown us away, and the potential that we believe that has for us is enormous."
For some time, Iger has used the promise of greater digital revenues as a way to temper shareholder concerns over ESPN’s worrying subscriber losses. On Tuesday, he did so once again, reiterating his belief that Disney’s investment in BAMTech will open up new advertising opportunities. “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. “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.”
Asked whether Disney could look to make further acquisitions in the digital space in order to bolster its offering - a potentially game-changing takeover of Netflix has been rumoured - Iger said he remains confident that the combination of BAMTech’s existing sports rights and those already licensed by ESPN is enough to build out a compelling OTT product. “In reality,” he said, “we believe that the best approach to doing well in a world that is disrupted, in a world that has far more digital distribution, is to have great content and tell great stories. And that includes ESPN, by the way.
“If anything, I think the most important thing for ESPN is to continue to support and nurture their programme offerings,” he continued. “Second to that, you have to be willing to either create or experience some disruption as we migrate from what has been a more traditionally distributed world to a more modern, non-traditional distribution world.
“Some of that we’re going to end up doing to ourselves. We understand that there’s disruption but we believe we have to be a disruptor, too. The investment in BAM, which is significant from a variety of different perspectives, is aimed at doing just that.”
At the time of its BAMTech investment, a Disney statement said its proposed OTT service would feature ‘content provided by both BAMTech and ESPN, and include live regional, national and international sporting events’. The new service will not, however, include content currently provided by ESPN’s linear networks. Those channels remain a key revenue driver for Disney thanks to lucrative agreements with cable affiliates and satellite distributors.
“We have to be careful because we have existing agreements and existing relationships,” Iger said, “and a lot of value still being reaped from the traditional distribution relationships. But I can tell you that it is our full intent to go out there aggressively with digital offerings direct to the consumer, for ESPN and other Disney-branded properties.
“We’re a minority shareholder right now so I want to be careful but our strong sense as partners and as part-owners is that we’re going to continue to go out, on behalf of the entity, and license more content to that entity. But they’re going to start off with a wide array of pretty attractive sports. When you see it all together, some of the early concepts, you realise that there’s a lot there and a lot more than anyone else has. And I think that there’ll be continued opportunities.”
Iger refused to say whether a distribution deal with a third party such as a major internet company would be sought to ensure the widest possible distribution of the new OTT service, which will complement ESPN’s existing streaming service, WatchESPN, which launched in 2010. He chose instead to “leave that to BAM to address, maybe at the time they are ready to launch the product”, adding: “I don’t think it would be appropriate for me to speak on their behalf.”
"In reality, we believe that the best approach to doing well in a world that is disrupted is to have great content and tell great stories."
Nevertheless, obtaining adequate distribution for the new ESPN-branded OTT service will be a key priority for Disney and BAMTech over the course of the coming months. Iger said a deal with Hulu, the video streaming service in which Disney has a stake, has already been struck, while he also revealed that an agreement with “another entity” has been signed but not yet announced. Discussions with other companies, he said, are ongoing.
“It seems like we’re on the cusp of some significant growth for new entrants in the multi-channel marketplace,” he added. “What we like about them is they are mobile-friendly or mobile-first, their user interfaces tend to be very strong, and their pricing is priced substantially lower than the expanded basic bundle that most of the MVPDs are offering. And that obviously, we think, gives us the chance to both that may not sign up for a multi-channel service, or hold consumers into multi-channel subscriptions.
“And then, lastly, what’s really important is the deals that we’ve negotiated for distribution, particularly for ESPN, are to be in all subs or all households launched. These are light packages that offer us 100 per cent penetration from those packages, so we think that this wave that we’re seeing is really a signal of what is to come and what the future will be.”
Interestingly, Iger does not see the rising trend of consumers opting for so-called skinny bundles - cheaper cable packages stripped of costly sports channels like ESPN - as a major concern. Rather, he foresees a time when any savings on the part of the consumer are used to buy other video services, some of which Disney may own. That might simply be another ploy to appease Disney shareholders, but the prospect of lost cord-cutter money finding its way back to the company via other means would naturally prove fruitful.
He said: “The other thing that we think is really good about this is that if we end up with a world where the US$40 to US$50 a month package becomes more and more popular, that means that some consumers may obviously take the savings that they may have and spend it on other things. It also means they could spend it on other video services, and some of those services are services that we might offer.
“When we talk about going with our own direct-to-consumer product, its possible that the first product that goes into the marketplace will be, in effect, add-on or adjunct product that consumers can by on top of what is their normal multichannel package.”
Whatever transpires, it is fair to say many will be monitoring Disney’s digital moves closely. With the broadcast landscape evolving, the direction in which the company goes next is likely to have profound implications for the wider sports broadcasting industry - and indeed for Iger himself.
During Tuesday’s call the American, 65, was also asked to address mounting speculation over his future at Disney, including a recent Wall Street Journal report that suggested he could extend his contract for a third time. Having spearheaded the company’s growth since 2005, Iger has previously said he plans to step down when his current contract expires in June 2018, yet a worthy successor has yet to be found and time is running out to ensure a smooth transition.
“I’m going to do what is in the best interests of this company, which is clearly something that the board is going to help to determine,” Iger said. “While I’m confident that my successor is going to be chosen on a timely basis and chosen well, if it’s in the best interests of the company to extend my term, I’m open to that.”