Bob, It’s Time to Sell ESPN

When I started writing this post, I had a different Bob in mind.  But even though Bob Chapek is out and Bob Iger is in, the sentiment remains.  Disney should sell ESPN.

Like many others I’m not buying the company line that Bob Iger returned to stabilize investors and the creative community before resetting the succession process.  That would be like asking Tom Brady to come out of retirement to run a wishbone offense.  Brady and Iger are the best at what they do.  But just as Brady isn’t known for his running and scrambling abilities, for all Iger’s considerable strengths, succession planning isn’t his thing.

Iger was brought back to do something transformational.  And I think that should be divesting Disney from its very expensive and very challenged sports television business. Doing so would provide Disney the resources to reinvigorate its core businesses and give ESPN, still the best brand in sports, the opportunity to reinvent itself under new ownership. Based on Iger’s recent comments it’s clear he’s considering it.

Selling ESPN obviously would be a monumental and incredibly difficult decision.  For almost thirty years Disney and ESPN have been the ultimate power couple in media. A legendary one-two knockout punch that left industry competitors looking like Michael Spinks stepping into the ring with Mike Tyson – more than terrified, resigned to inevitable defeat.

The decision would be especially difficult for Iger, who was a senior executive at Capital Cities/ABC in 1996 when Disney bought the company.  For my money it is the most successful media acquisition in the past 30 years, if not longer.  It did what every acquisition should do (but most don’t) – create exponential value for all stakeholders.  Shareholders and investors were richly rewarded with stock growth.  Tens of thousands of new jobs were created around the world.  And consumers benefited from the creation of amazing films, sports programming, television content and travel experiences.

ESPN was the cash flow juggernaut that gave Iger the financial muscle to reinvent Disney, most notably the incredibly shrewd acquisitions of Pixar, Marvel and LucasFilms.  These transactions set the stage for the company’s move to streaming and the rapid emergence of Disney+ as a global force on par with Netflix.

Yet as Disney’s most recent quarterly report demonstrates, times have changed.  Cord cutting in the traditional linear television ecosystem, long the source of ESPN’s financial dominance, is now in free fall. 

The industry has talked about cord cutting for a decade and during that time ESPN’s fee increases allowed Disney to continue to grow revenue while the ecosystem slowly shrank.  But no more.  The trends in cord cutting today mirror Hemingway’s description of bankruptcy – first it happens gradually and then suddenly.  What once was a trickle is now a waterfall.  For the first time, Disney reported a decline in cable networks operating profit.

The streaming story for ESPN is only marginally better.  24.3 million total subs for ESPN+ is impressive but it’s clear from its recent report that the bulk of the subs come from the Disney+/Hulu bundle.  And more importantly there’s no evidence to suggest that ESPN+, or any streaming version of ESPN, will ever be as remotely profitable as the original. 

One can argue fairly that Disney and ESPN, like every other media company investing in streaming, needs more time to build the business.  No one has figured out a business model in streaming to match the riches generated from the traditional cable ecosystem.

Yet the situation in sports is particularly complex because the programming costs are astronomical.  In the traditional cable model those costs could be spread across 90 to 100 million households, effectively giving every consumer a discounted wholesale price for access to sports.  But in a streaming world there is no broadly adopted bundle, at least not yet.  Consumers are purchasing content a la carte and are only paying for things they watch.  This has a huge impact on the economics of sports. 

The sad reality is the disintegration of the cable bundle and the move to streaming means that ESPN likely will never deliver the same level of profitability in the future as it did in the past. 

None of this is to say that the executives at Disney and ESPN are incapable of addressing this challenge.  The company boasts some of the smartest, most experienced talent in the business and is clearly stronger with Bob Iger running the show.  (Full disclosure – years ago, I worked at ESPN and consider myself a proud alum and former castmember.  I still know and hold in very high regard a number of people at the company.)

My issue is more fundamental.  It’s not that Iger isn’t up to the challenge facing sports, but whether he should even bother at this stage.  The future of Disney is continuing to be the undisputed leader in family friendly content, growing Disney+ globally, and expanding profits in its theme parks.  Sports, at least to me, always felt tangential to the company’s primary purpose, even in the best of times.

The future for ESPN lies in securing new sources of revenue, like gambling.  It’s a natural extension for ESPN and any sports media company.  I don’t know whether it can generate the kind of returns needed to replace what’s being lost in the linear business, but it’s worth exploring. And like I said, I wouldn’t bet against the team at ESPN if given the time and space to figure it out.

From a Disney perspective however, a company fully vested in safe, family entertainment and experiences, venturing into gambling is highly problematic.  Gambling is certainly more mainstream than it was 20 years ago, but it still feels like a disconnect with the core Disney brand.  Iger has said as much himself. And let’s be honest it’s only a matter of time before we see a major gambling scandal that calls into question the integrity of a major competition, league or gambling platform. Disney wants no part of that.

Moreover establishing Disney+ as a global force in streaming, and one that can eventually deliver sizable profits, will take an enormous amount of money, effort, and focus.  Even for a best-in-class company like Disney, trying to build a successful streaming business and solve ESPN’s challenges seems like a lot to take on.

Despite ESPN’s obvious and apparent challenges, it remains one of the most coveted and valuable media brands in the world.  If Disney were to put ESPN up for sale right now there would be no shortage of bidders.  Someone desperate to make a splash and confident in their ability to reinvent sports television will overpay. But that window won’t be open long given current trends.

The massive influx of cash from a sale of ESPN, not to mention the elimination of billions in expense tied to long term sports programming rights deals, would make Disney an even more formidable competitor in its core businesses.  With all those newfound billions Iger would be free to invest aggressively in more content, theme parks, the metaverse, or another acquisition. He’s already proven that he knows what do when he has the financial muscle to be aggressive.

Many are speculating that Iger has an even bigger transaction in mind – selling the entire company to Apple.  It’s the kind of big, sexy deal that people love to think about.  But I have a hard time seeing Apple embracing the theme park and cruise businesses.  However it’s easy to imagine Apple, or another deep pocketed tech player like Amazon or Google, bidding aggressively for ESPN.

What’s clear is that neither Bob Chapek nor anyone other potential CEO can match Bob Iger’s history, credibility and respect among investors, employees and all the other stakeholders required to pull off a move like selling ESPN.  He is the perfect person, perhaps the only person, to get this done.   Bob even said during his short-lived retirement that Disney has relied on the linear television business for too long.  Now he has a rare second chance to do what he’s done better than anyone in his generation – act boldly and reinvent the business one last time.  Let’s hope he takes it.

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