Disney's all-sports cable television network not long ago served as the company's cash cow, the largest channel in a division that contributed nearly half of Disney's operating profit and a third of its income last year. But ESPN is losing subscribers at what appears to be an accelerating rate, as more and more cable TV customers "cut the cord" in favor of online streaming.
What does this mean for the theme parks? If Disney starts losing gobs of money at ESPN, that means less cash in the corporate bank account for things such as new attractions at the parks. An ailing ESPN is already holding back Disney's stock price, according to many analysts' reports. If the channel tanks, so will Disney's stock price — further crippling Disney's ability to expand the parks or even maintain them at their current operational levels.
In short, an ailing ESPN is a disease that threatens the health of the entire Walt Disney Company.
According to Nielsen, ESPN lost 621,000 subscribers this month — the worst one-month loss in company history. Outkick the Coverage did the math, and based on a conservative estimate of ESPN's customer loss, determined that "within five years ESPN will be bringing in less subscriber revenue than they've committed for sports rights."
That's bad. And it gets worse, according to the writer's analysis: "The simple fact is this -- I don't see how ESPN's business model makes sense at all by 2021. The 'Worldwide Leader in Sports' is a dead channel walking."
The TL;DR is this: ESPN is losing customers but faces high fixed costs due to the billions of dollars it is paying in long-term deals for the rights to major sports leagues, including to the NFL for Monday Night Football. No amount of layoffs and cost-cutting can help ESPN maintain profitability given the cost of these contracts. And without rights to show pro sports, ESPN likely will lose even more customers.
Is there a way out for Disney?
The ideal solution would be for Disney to reverse the slide and start adding customers for ESPN. But that would mean finding a way to get more people to start subscribing to cable and satellite television packages again. As the Outkick the Coverage writer details, Disney's can't simply pad its subscriber base by selling access directly to consumers via online streaming, as that would jeopardize its ability to keep earning lucrative subscription fees from cable and satellite providers — ESPN's big source of income. Disney's hands are pretty well tied.
What's left? Sell ESPN, while Disney still can. But everyone in the business knows what's up with the channel. Who would want to buy a channel that's on course for financial disaster?
The businesses whose future is tied together with ESPN's, that who.
A cable or satellite provider could save itself a ton of money by owning ESPN, while also extracting subscription fees from its competitors, giving itself a major financial advantage over its rivals. Because Disney does not own a cable or satellite television provider, ESPN suffers as the market for cable television shrinks. But for the companies providing cable TV, it's all about their share of that market. A company can survive in a shrinking market if it is increasing its share of that market by enough. Owning ESPN might help a cable or satellite provide to do that.
Who are the potential buyers, then? Let's start with Disney's great rival Comcast, which owns NBCUniversal. Also, the newly merging AT&/Time Warner conglomerate. Those companies already have substantial sports programming networks, however. Does that make ESPN a better or worse fit? Your guess is as good as mine. Two other options would be Verizon and the newly combined Spectrum, formed by the merger of Charter, Bright House, and Time Warner's old cable business.
One way or another, Disney's theme parks needs to be freed from an ailing ESPN if they are to have a chance to thrive in the 2020s and beyond. Whether Disney accomplishes that by reversing the slide at ESPN or selling the channel is perhaps the most important challenge facing Disney's management at this moment. But if Disney fails to meet this challenge, fans of the company's theme parks can forget about seeing any big new additions for a long time after the Avatar, Toy Story, and Star Wars lands debut in the next few years.
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But Disneyland Paris is still there.
I wouldn't be so quick to point to ESPN as a sort of "canary" about the future of the theme park division.
Assuming Avatar and Toy Story, and the CA version of Star Wars Land all do well, Disney can just be more careful and conservative in their television rights deals after the current deals expire, and wait it out.
Then in 2021 or so, they can start looking at the parks again, without being weighed down by the insane fees they're paying for a sport (NFL) with a declining viewership.
But when bubbles pop, things get ugly in business. No amount of lightsaber sales in Star Wars Land will make up for what Disney will lose if ESPN's subscriber loss continues. All parts of the company will feel the pain of that, including the parks.
Tough.
I've never been a sports person and would have never subscribed to it, but because I didn't have a choice I've been paying for something I didn't want for almost 25 years. The fact that their business model isn't sustainable is something they should have been dealing with long before now.
The problem is that Disney/ESPN and other sports media bid the price of events up so high. Price became their defensive weapon to keep others out of the high visibility markets. But Disney has priced the audience out of the market. It took years and the Internet encouraged the beginning of the exodus. In other words, quality costs and you can work against yourself to make it cost even more ending by pricing yourself out. The bigger the investment, the more vulnerable you are.
What will be the similar trigger in the theme parks? Disney has been playing the same game with theme parks. The investment is huge, prices are at the extreme max, and they are vulnerable. The next economic downturn could be that trigger, especially if it's a 2001 or 2008 type event.
I've heard people argue that the next CEO needs to understand media, but I think the biggest Disney fans love the theme parks, witness the massive overcrowding at Disneyland. To me, Matt Ouimet, who understands the Disney fan and righted the deteriorating ship of Disneyland in the 90s is the best man to be the next Disney CEO.
Home media, even video games or VR cannot replace being in an actual environment. Universal has upped the game with innovative screen based attractions, but even they may soon reach the point of fatigue. I've heard the Jimmy Fallon may also be screen based. Add that to Fast and Furious, Kong, Transformers, Gringotts, Forbidden Journey and Spiderman, and that's a lot of screen based attractions. They're cool, but not the same as being totally in a real environment.
Also, screen based attractions tend to have a storyline, which is the same every time, whereas rides like Pirates and Haunted Mansion draw their strength on just being cool environments in which to lose yourself in. Walt Disney rightly decided to emphasize environment over story.
Amazon may take away business from brick and mortar stores, but IMO home media can never replace the theme park.
Not saying that ESPN has made some bonehead decisions, but Comcast didn't have a strong start along with many other sport networks. ESPN is still the barometer and the standard. I think Disney should look into revitalizing it. This is Disney's franchise for the male demographic.
I'm sure people would jump at the chance to stream current matches, with advertisements, and have the option of streaming the last 5-10 years of matches at their fingertips (like Netflix, but with sport).
I don't buy that the current generation is more active, just check how many people binge watch whole TV series and the skyrocketing obesity rates.
What's puzzling about ESPN is that the writing has been on the wall for years. Cord cutting is not a brand new phenomenon. ESPN/ABC is supposed to be Iger's core competency. Why didn't Iger spin off ESPN/ABC years ago when it could have earned top dollar? Was Iger more concerned with protecting the perks of his empire than doing right by shareholders?
It's time for large Disney shareholders to take an activist role in Disney. Spin off ESPN/ABC. Fire Iger. Fire Chapek. Replace Iger with someone like Matt Ouimet who understands hospitality and customer service.
ESPN has been smartly trimming their talent costs, understanding that an overabundance can actually be a hindrance. As such, the talent that ESPN has wisely let go (Skip Bayless, Bill Simmons, and Mike Tirico) has not moved the needle for their competitors, and in some cases, the competition is taking heavy losses.
I think they'll always be a place for live sports, and ESPN will continue to be the "Worldwide Leader", but the network does need to be a little smarter with their rights fees (especially when no one is bidding against them as was the case with the recent NFL extension) as the landscape of television changes. However, I don't think selling ESPN is a necessary move, nor will looses from the network bleed over to the theme parks.
I do find the concept of Disney purchasing a content distributor very interesting, but based on some of the negative buzz around the AT&T/Time Warner merger discussion, the idea of a content provider also owning a distributor (as currently exists under the Comcast/Universal merger) may not be allowed to happen again.
I'd argue that ESPN is not "a disease" to the rest of Disney's businesses but a Business Unit that is appropriately expanding it's content delivery medium. Cord Cutters represents a huge opportunity for Disney as they outrace their competitors to this space.
I'd also argue that the Theme Parks monetizes the different Disney brands which are derived from outside ESPN and more in their Studios divisions. Studios has posted records years and continues to release successful film after successful film with more and more stories and characters. You can be sure Disney will invest in Parks to monetize these brands regardless of ESPN's performance.
*I am not a Disney employee, simply an avid fan of their business.
That addition might double the cost of the transaction, I'm afraid. ;^)
Err, the first two of those are... Media.
I say, it serves them right if ESPN crashes, the parks take a hit and their movie franchises burn out with time.
Sorry folks I don't see it happening due to how I assume Disney's board thinks.
Eisner, Walls, Iger and even I dare to say Ovitz are all Hollywood guys and Disney's board seems to want a CEO with a "Hollywood" background.
Disney was a movie studio first theme park second.
It's biggest unit still is it's media division followed by it's theme parks and resort so the prerequisite for Disney's next CEO according to it's board of directors os a candidate with a media background and unfortunately Ouimet does not fulfill that requirement.
Plus Cedar Fair just renewed his contract allowing him to stay as long aa his likes.
I'm talking about media distributors, not media producers.
Yeoswer said: "It's biggest unit still is it's media division followed by it's theme parks and resort so the prerequisite for Disney's next CEO according to it's board of directors os a candidate with a media background and unfortunately Ouimet does not fulfill that requirement."
Matt Ouimet may not have a media background, but what has happened to Disney under Iger, former head of ABC? Yes ESPN made lots of profits for years, but as we see now, the market is changing, and Disney is left holding the bag. If Iger was so media savvy, shouldn't he have seen this situation coming?
Matt Ouimet has the most important quality, he understands the customer. He was a finance guy and became President of Disneyland. At first the Disney fans were wary of a finance guy heading Disneyland, but he made a concerted effort to learn all he could about Disney, Disney's customer and the market. And he revitalized Disneyland after years of neglect under Paul Pressler and Cynthia Harriss. That, to me is gold, worth far more than experience in any particular area. Ouimet's approach can work in any area.
I do not dispute that Matt Ouimet is a great CEO, he has done a great job as President and CEO of Cedar Fair. In fact he will down as President of Cedar Fair but will retain the title of CEO, as Cedar Fair has just promoted their COO to replace him as president. Looks like succession plans are in play there as I assume he will follow in the footsteps of Andersen at Six Flags and move into a chairmanship role at Cedar Fair eventually.
I was just saying that he does not possess the qualities that DISNEY'S BOARD OF DIRECTORS is looking for in a CEO to replace IGER.
With regards to "why Disney couldn't just draw money from the studio and other divisions that were doing gangbusters."
I assume each division of any fortune 500 company is expected to keep a separate Profit/Loss Statement for the sake of the Board, shareholders and Wall Street.
Ever since the Enron/MCI WorldCom accounting debacle, it is expected that all accounting statements are as open and transparent as possible.
The movie studios maybe doing gangbusters but for every Marvel/Avengers Blockbuster, there is a John Carter/Tomorrowland Bomb to write off.
ESPN has fixed long term programming costs which cant be cut, cutting staff there would negatively affect programming quality which would make the situation even worst.
Disney is a media conglomerate, when its performance disappoints, all divisions suffer. Plus its easier to cut at the theme parks since it staff are more expendable/replaceable and its expenses and costs can be amortized over a longer period of time than at the other divisions
Also, I'm tired of the domestic parks getting the short shrift. The theme parks are the most tangible connection between the Disney company and it's customers, when people have a great experience in the parks, it fuels passion for all things Disney. Growing up, I loved the animated movies, but it's Disneyland that really made me excited. But when the parks are over crowded, prices keep going up, and things are cut back, Disney is just hurting it's relationship with it's most loyal customers.
A REAL company would've long ago split the theme parks from the media portion of the company. But Disney doesn't care about the parks, apart from their usefulness in stockholder reports. "We're building a new park!" "We're building another new park!" "We're coming up with this new system that will make people spend more time shopping and eating in the parks!" "We're not building ANYTHING in the parks!!!" "We raised prices AGAIN!!!"
Now that the parks are all suffering from those price hikes, it'll be interesting to see how they solve their media-side issues in the future.
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