Trying to forecast when ESPN will go entirely online is one of the great guessing games of the media industry
(Bloomberg) — Ever since Bob Iger returned to lead the Walt Disney Co. in November, he’s spoken almost every day with one of his key deputies, ESPN Chairman Jimmy Pitaro. Iger is an avid sports fan with a deep knowledge of history. “He has forgotten more about sports than I’ll ever know,” Pitaro said.
But these days, the two executives don’t focus much on the past. Many of their conversations, Pitaro said in a recent interview, concern ESPN’s future — specifically, its streaming service, ESPN+, and deciding the right moment to someday offer the full channel to the growing legions of cable cord-cutters.
“We’re going to get to a point where we take our entire network, our flagship programming, and make it available direct to consumer,” Pitaro said. “That’s a ‘when,’ not an ‘if’….We’re only going to do it when it makes sense for our business and for our bottom line.”
For now, ESPN operates two largely distinct businesses. It shows the biggest sports matchups almost exclusively on traditional TV channels — and for good reason. Last year, TV viewers generated $28 billion in revenue for Disney, the most of any big media company. At the same time, it’s airing more live sports on ESPN+, a $10-a-month streaming service that launched five years ago.
The network’s streaming ambitions keep growing. As part of ongoing negotiations with the NBA over a new contract that will take effect in 2025, ESPN executives want to acquire the rights to put pro basketball games on ESPN+. “I’m confident we’re going to see eye-to-eye on how to prioritize streaming,” Pitaro said of talks with the league.
With ESPN’s streaming subscribers growing and its cable subscribers shrinking, the two businesses are starting to converge. Trying to forecast exactly when ESPN’s TV slate will go online has become one of the great guessing games of the media industry. Inside ESPN, executives have long wrestled with the math, studying data and graphs, and calculating how many subscribers they’d need to attract and at what price for a streaming version of ESPN to replace the money they now get from pay-TV distributors.
At a recent investor conference, Iger called the move “inevitable,” but didn’t offer a timeline. The eventual repercussions would be widespread. Many industry executives see ESPN as vital to maintaining the already dwindling number of cable TV subscribers and fear that when Disney starts selling the network’s whole lineup online, the change could further accelerate cord cutting and the demise of other channels.
“It’s not a small decision,” Wells Fargo analyst Steven Cahall said. “Disney is constantly weighing the risk of not doing it versus the risk of doing it too early.”
The pressure on ESPN to shake up its business model is mounting. The network currently has 74 million subscribers, down 25 million from about a decade ago. During the last fiscal year, ESPN+ lost about $400 million, according to an estimate by Cahall.
In the coming year, Disney will begin reporting separate financials for ESPN for the first time, casting a brighter spotlight on the sports media giant under the intent gaze of investors. Many Disney watchers see the move as a prelude to a potential spinoff of the business, though Iger has said that’s not immediately in his plans. Meanwhile, the company will continue tinkering with how to best divvy up its programming between traditional TV and streaming.
“We’re proud of the fact that we’ve been able to create this must-have product that is still very much complementary to what we have on linear television,” Pitaro said.
When ESPN+ launched on April 12, 2018, it did so with a modest programming lineup, offering portions of a PGA Tour tournament, a hockey-focused studio show called In the Crease and a series featuring NBA analysis from Kobe Bryant. An early breakthrough came in January 2019 with the airing of an Ultimate Fighting Championship (UFC) event that pulled in 568,000 new subscribers.
Since then, the amount of sports on ESPN+ has grown dramatically. Last year, it aired 27,000 live events, including soccer, football, hockey, baseball, college sports, golf and tennis. It also airs UFC pay-per-view events, the full library of 30 for 30 documentaries and alternate telecasts, such as a recent animated NHL game in the style of a popular Disney cartoon series.
At the same time, ESPN is wrestling to control costs, a dynamic playing out across much of the media landscape. In late April, ESPN laid off dozens of employees, mostly those who worked behind the scenes, and the network plans to make cuts to its roster of on-air talent by the middle of this year. The layoffs — which included Russell Wolff who served as general manager of ESPN+ for over four years — are part of Iger’s overall push to reduce spending at Disney by $5.5 billion. ESPN also plans to be more selective about acquiring sports rights.
“In this environment where we’re identifying savings and efficiencies and very much focused on our bottom line, of course there are deals that are going to get a heightened amount of scrutiny,” Pitaro said.
Viewership on ESPN+ has been growing. Total ESPN+ viewing last year was up 53% from the year before. Viewing of women’s sports has more than doubled. Through March, the PGA Tour audience is up 75%. College football viewership last season rose 40%. ESPN+ has also benefited from cross-promotions with other Disney properties. ESPN+ has aired episodes of Welcome to Wrexham, a show on Hulu about a Welsh soccer club narrated by the team’s celebrity owners, Ryan Reynolds and Rob McElhenney.
“When ESPN+ launched, the focus out of the gate was on niche content,” Pitaro said. “Fast forward to today, it’s well beyond that.”
In five years, ESPN+ has signed up about 25 million subscribers. So far, however, the business of streaming sports has proven to be far less lucrative than the traditional model it is rapidly replacing. Within the legacy cable and satellite TV bundle, ESPN is able to charge pay-TV providers more than $9 a month per subscriber. ESPN+ costs $10 a month. But that retail figure can be misleading. In reality, ESPN+ generates an average monthly revenue per subscriber of $5.53, according to Disney’s most recent earnings report, in part, because many subscribers get a discount by bundling the service with Disney+ and Hulu.
About 61% of ESPN+ subscribers get it through the Disney bundle, while 39% subscribe to ESPN+ on a standalone basis, according to estimates from Antenna, which measures sign-ups online and on streaming platforms. In theory, the packaging of ESPN+ with the other services makes it less likely that a consumer will cancel all three. Last year, when ESPN+ raised its price 43%, the bundle price remained the same — making it a comparatively attractive option. The strategy of having three separate apps “gives fans and viewers flexibility and choice, with the bundle being the best value,” said Wolff, who will remain in his role until July.
For now, as Disney executives weigh the pros and cons of selling ESPN outside the cable bundle, ESPN+ has become a training ground for developing streaming technology and business expertise for when that day finally arrives. Already, the staff behind ESPN+ is deeply integrated with the rest of the company. Disney employees in Connecticut, New York, California, North Carolina and Texas all work on ESPN+.
“There’s not a corner office somewhere with a bunch of folks who are just working on ESPN+,” said John Lasker, ESPN’s vice president of digital media programming and acquisitions. “ESPN+ is part of everybody’s job.”
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