Nikola Jokic of the NBA’s Denver Nuggets prepares to be interviewed by ESPN’s Lisa Salters following the fourth quarter of Game 4 of the Nuggets’ 113-111 Western Conference Finals win over the Los Angeles Lakers at Crypto. com Arena in Los Angeles, May 22, 2023 .
Aaron Ontiveros | Denver Post | Getty Images
It is clear to the four major US professional sports leagues that DisneyESPN is potentially interested in them taking a stake in the network.
What is not yet clear is why the leagues would do it.
The National Basketball Association and Major League Baseball have questioned a partnership with ESPN if Disney’s goal is to mitigate or replace payments to the leagues for sports broadcasting rights with equity in ESPN, according to people familiar with the discussions.
Disney executives and league officials agree that the strategic partnership talks are in the pure “idea” phase and could amount to nothing, said the people, who asked not to be named because the talks are private. The talks have had few details, the people said, but may heat up as ESPN tries to reach a rights renewal deal with the NBA. Disney’s exclusive negotiating window with the NBA ends in April 2024.
Disney is considering ways to save money as it tries to shore up its balance sheet. The media giant’s streaming division continues to lose money — with $512 million lost in the most recent quarter — and the company wants to pay down $44.5 billion in debt. Disney also owes at least $9.2 billion to Comcast for its minority stake in Hulu.
Agreeing to a deal in which ESPN trades stock for sports rights could save Disney billions of dollars that it can then use for other strategic ventures. ESPN struck a deal earlier this week with Penn Entertainment that will give it $1.5 billion in cash over the next 10 years.
But the leagues also need cash, especially as regional sports networks are under threat. The teams pay the players mostly from sports rights fees. ESPN deals play a critical role in how leagues make money. Organizations can generate competitive offers for game packages because ESPN is almost always a potential buyer.
Disney CEO Bob Iger said during Disney’s earnings conference call Wednesday that the company is “not necessarily looking for cash infusions” if partners could offer other assets — such as content — as the company transitions ESPN to a direct-to-consumer business. Sources say Disney is targeting 2025 as a potential launch date for an ESPN streaming service untethered from cable. Although ESPN+ exists today, it does not include ESPN’s most valuable live sports, such as Monday Night Football and most NBA playoff games.
Disney has told the leagues it is also in separate talks with strategic investors who may offer distribution benefits, according to people familiar with the matter.
“We are looking for partners to help ESPN successfully transition to a (direct-to-consumer) model,” Iger said Wednesday. “And that, as I said, can either come in the form of content or distribution and marketing support or both.”
An MLB spokesman declined to comment. An NBA spokesman said: “We have a long-standing relationship with Disney and look forward to continuing discussions about the future of our partnership.”
ESPN spin-off possibilities
Iger reiterated Wednesday that he wants to keep a majority stake in ESPN. Iger told CNBC’s David Faber last month that Disney is “not necessarily” looking to spin off ESPN.
Still, it’s possible that Disney will retain a majority ownership in ESPN while spinning it off. That option is “on the table,” according to a person with direct knowledge of Disney’s plans.
An ESPN spin-off would give potential partners clarity about the value of their minority stakes if they trade publicly and separately from Disney. Within Disney, ESPN’s value would be dwarfed by its larger parent company.
Next quarter, Disney will begin reporting ESPN’s finances separately from the rest of the company — another potential precursor to a split. Former Disney chief strategy officer Kevin Mayer, who is now advising Iger on the future of ESPN along with former Disney chief operating officer Tom Staggs, previously advocated separating ESPN so that the linear business would not hurt Disney’s growth prospects, a reported CNBC. last week.
For decades, ESPN has been the jewel in Disney’s crown, generating billions in profit from lucrative pay-TV subscription fees. ESPN is by far the most valuable cable network, charging nearly $10 per month per household for every cable subscriber in the US, regardless of whether they watch the network or not.
Even as U.S. cable subscribers began cutting the cord, ESPN was able to counter the loss of subscriber revenue by increasing the amount of money it receives from pay TV distributors such as DirecTV, Plate, Comcast, Charter swears Cox.
In the past 12 months, that trend has reversed, according to people familiar with the matter.
Still, ratings are up this year on ESPN’s linear channel, even as cord-cutting has accelerated. Advertising revenue rose 10 percent from last year in the most recent quarter “adjusted for comparability,” Iger said Wednesday, as brands look to live events where ads can’t be skipped.
“The package is deteriorating and they have to come up with a new revenue model,” former ESPN CEO Steve Bornstein told CNBC on Wednesday. “It’s an evolutionary process and I think (ESPN) will be incredibly well positioned. The people involved at ESPN today are probably the best executives I’ve ever met. (ESPN President) Jimmy Pitaro, Kevin Mayer, Bob Iger and Tom Staggs? They will find this problem.”
Disney will have to decide if it’s more strategic to keep ESPN’s positive free cash flow to reinvest in streaming entertainment, or if spinning off an asset with a declining growth trajectory makes more sense.
Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.
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