Wednesday 10 May 2017

How long can Disney keep an ailing ESPN?

Image: J. Phillip/AP/REX/Shutterstock

Disney owns so, so much: Theme parks, “Star Wars,” Pixar, and a deep, wonderful catalogue of classic animated movies.

With so much in the vault, it’s easy to forget about ESPN. The cable sports network has, for years, been a crown jewel in Disney’s vast empire. It generated a ton of cash, helping to push Disney to record profits.

These days, though? ESPN’s an anchor weighing down the rest of Disney.

About two weeks after ESPN laid off about 100 staffersincluding on-air personalities and reportersDisney reported second quarter earnings that highlighted just how much of a drag the sports channel has become.

In short, a big one. Every other part of Disney became more profitable compared to the same time last year except for ESPN. Disney blamed ESPN’s struggles on higher programming costsin particular its very expensive deal for NBA games.

Disney has thus far struck an optimistic tone with ESPN. CEO Bob Iger continued that on Tuesday, telling CNBC:

Concern over ESPN goes back years. The channel in some ways was a victim of its own success. ESPN commanded sky-high fees from cable providers for its channel, and there was no shortage of viewers. The channel grew so popular and rich that it even competed with broadcast channel for big-time sports rights like Monday Night Football and the NBA. It was so successful that some dubbed ESPN a “tax” on every cable subscriber.

Then things started to change. The cable industry peaked in terms of subscribers and then began to contract. ESPN followed them online, but anyone with a website can tell you the economics aren’t anywhere near as rich as TV. That didn’t stop ESPN from continuing to invest in pricey sports rights deals, hence its rising costs.

Things aren’t about to suddenly start getting better. ESPN may have slashed some of its expenses by laying off a chunk of its staff, but its costs are projected to continue rising. And subscriber losses, something the channel used to deny, are now just a fact of life.

This is not a new issue. It’s something analysts and journalists have been writing about for more than three years. The question now is how long Disney can keep ESPN as part of its company.

Almost exactly a year ago, Bloomberg’s Tara Lachapelle broke down the case for Disney selling off ESPN. In some ways, the disparate parts of Disney don’t make a ton of sense together. Breaking the company up makes financial sense, especially with a variety of content-hungry companies looking for the kind of high-end pieces that Disney holds.

Add in Disney’s leadership situationCEO Bob Iger was supposed to retire in 2018 but had his contract extended to 2019and it would appear that Disney’s future is full of doubt. That’s a problem, but one that is entirely secondary to ESPN.

On Tuesday’s earnings call, Iger had to answer a barrage of ESPN questions from analysts. Maybe soon, he won’t have to.

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