Disney (DIS) CEO Bob Iger made it clear last week that live sports streaming will play a big role in the entertainment giant’s future. The shift comes with serious risks.
On Wednesday, Disney announced it would launch ESPN as a fully over-the-top (OTT) streaming service sometime in fall 2025. It also said ESPN will team up with Warner Bros. Discovery (WBD) and Fox (FOXA) to launch a new sports streaming service, which is expected to debut later this fall.
The moves come at a critical time for Disney, which like other media companies has been struggling to navigate consumers’ pivot away from traditional pay-TV packages to streaming platforms.
The shift has hurt an industry historically reliant on the affiliate fees it collects from cable companies and other pay-TV providers for its programming, as well as advertising revenue — both of which are dependent on audiences tuning in.
That’s why Disney’s moves could be a double-edged sword.
“If these services are priced too low, they will likely expedite the demise of the pay-TV bundle, and if they’re priced too high — so that they look more similar to a pay-TV bundle — we question how much demand they’ll generate,” Morningstar senior analyst Matthew Dolgin, who has a four star (or Buy) rating and $115 price target on shares, wrote in a new note to clients on Thursday.
Basically, if the new streaming services are too cheap, more subscribers would be incentivized to axe their pay-TV package rather than pay a cable company for access to ESPN’s traditional channels.
“We don’t expect a huge incremental revenue stream [from sports], as we expect much of the streaming revenue gains to be offset by accelerating linear losses,” wrote Dolgin.
Moreover, new streaming platforms that effectively speed up cord-cutting could hit not only Disney’s sports segment, but also its linear business, which includes ABC, FX, and the company’s namesake Disney channels, to name a few.
KeyBanc analyst Brandon Nispel, who has a Sector Weight rating on Disney’s stock, noted “while we believe the new joint venture with WBD and FOXA could help drive viewers toward sports, we believe it is likely at the detriment of general entertainment content at linear.”
That’s problematic because unlike the linear business, streaming isn’t profitable for Disney. While losses narrowed in the latest quarter, the segment is still losing money.
Disney on Wednesday tried to ease Wall Street’s concerns. Newly minted CFO Hugh Johnston told investors on the earnings call that the joint venture sports bundle will combat subscriber churn and, in turn, help boost profits.
“Just know that we feel a sense of urgency in getting [to streaming profitability],” Johnston said.
Another risk is that if Disney’s new streaming services are priced too high, they won’t gain traction at all. Disney hasn’t disclosed any details regarding pricing for either service. CNBC reported this week that the joint venture with WBD and Fox would be priced at upwards of $40 per month.
Meanwhile, analysts have estimated that ESPN’s over-the-top service would need to cost a minimum of $30 a month in order to break even.
That’s far more expensive than what many streamers charge currently — and it may be a tall ask.
According to a survey conducted by KeyBanc in September, 30% of respondents said they would not pay for a pure sports streaming service. That’s up from the prior 25%. Meanwhile, more than half (51%) said they are unwilling to pay over $10 a month and only 20% would pay above $20 a month.
“ESPN moving to streaming is materially harder than initially thought, as our survey work shows low willingness to pay,” KeyBanc’s Nispel said in his note. “Given the high programming costs, we believe services dedicated purely to sports would not have the demand needed for the service to be priced profitably.”
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