Disney Reportedly Exploring Rationale for Spinning Off ESPN
During his tenure as CEO of The Walt Disney Company, Bob Iger assured his colleagues that Disney would never spin off ESPN. But now, under Bob Chapek, who took over for Iger in early 2020, the idea is back on the table.
Two sources with knowledge of the matter told Puck's Dylan Byers that "there are now conversations happening regularly at Disney about whether or not to spin off ESPN."
The case for Disney to move ESPN goes like this:
Disney's market capitalization is around $317 billion, which experts say doesn't capture the extent of Disney's library and intellectual property. Meanwhile, Disney's stock sits at $174 per share, well behind Netflix's at $633 per share. Why is that? Because, according to Byers, Wall Street views Disney as a behemoth with "legacy assets," not simply a pure-play streamer. That's where ESPN comes in and holds Disney back.
"This, in large part, is thanks to ESPN, which fuels a 'media networks' segment that makes $7 to $8 billion in profit annually, but keeps the company tethered to a linear television business that is in structural decline," Byers writes.
Furthermore, ESPN is not a growing business. Business analysts project ESPN will continue to lose subscribers as linear television declines, subsequently leading to drops in advertiser revenue. Not a single linear TV network can withstand global habit changes, thanks to streaming and on-demand offerings. Most linear networks hope to move their programming to their complementary streaming platforms to offset the change. For Disney, its other linear channels -- ABC, FX, and NatGeo -- are tailor-made for a move to streaming. However, ESPN is not suited for a smooth transition -- or any transition at all -- to streaming-only because of its ties to live sporting packages.
Chapek recently said that moving sports to a streaming service is "a much more complicated equation" because networks like ESPN have agreed to expensive rights deals with sports leagues. These deals do not allow Disney to move games off of ESPN and to ESPN+. ESPN is locked into long-term deals with the NFL, NBA, NCAA, NHL, UFC, and SEC.
Thus, Disney can't go all-in on streaming unless it parts with ESPN.
"Presumably the windfall from some form of exit or spin could be reinvested in streaming to achieve a Netflix-like stock price," Byers adds. "The fate of ESPN is very much to be determined, but what once seemed implausible is now quite possible."
Then there is ESPN's case. Leaving Disney's shadows behind could benefit ESPN, as well.
Interestingly, Clay Travis discussed that idea in August. Here is part of Clay's thought process:
Disney could spin off ESPN to a sports gambling company. If Disney doesn't want to align itself aggressively with sports gambling, what sense does ESPN's sports gambling licensing deal really make long term? Do you want to own the business or do you want to lease the business? Shouldn't a sports gambling company buy all of ESPN, including ESPN+?
Imagine if Draft Kings, which ESPN already owns a stake in, could allow early access to Adam Schefter and Adrian Wojnarowski's sports scoops inside its gambling app. What if ESPN.com effectively became DraftKings.com. That is, you went to check your favorite teams' sports stats inside of a sportsbook app, which then allowed you to place bets on games without ever leaving the existing site you're already visiting?
ESPN doesn't really make sense to Disney from a streaming perspective either. Think about it, Disney+ and Hulu are predicated on Disney creating and owning all the original content forever. The Mandalorian and WandaVision, two recent Disney+ shows, have lasting value for generations, and Disney owns them in perpetuity. Right now, ESPN just leases its sports content, which is disposable news a day later. Sports and news are great live content, but they have almost no long term value.
You could even see a future in which a company like Draft Kings buys the UFC or WWE and makes it a wholly-owned subsidiary of the company, streaming under the ESPN+ app, where you can conveniently live wager on fights. Everything is elegantly connected in one company.
If Draft Kings isn't interested in buying ESPN, what about Caesars or Wynn? Right now, they are afterthoughts in the sports gambling marketplace. If they want to be players in the space, could ESPNBet be their pathway to relevance in a market they might otherwise have missed?
I'd explore that if I were them.
Hmm.
Disney communications declined to comment on the Puck News report.