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Why ESPN Is Betting on College Sports With SEC Network

Stocks in this article: DIS FOXA CMCSA DTV

NEW YORK (TheStreet) -- Walt Disney (DIS) is upping its bet on live sports with the launch of SEC Network, as the answer to traditional broadcasters’ modern quandary -- the challenge of convincing the on-demand crowd to watch set-time programming.

The ESPN-powered SEC Network, slated to launch tonight, is being seen as a salve to counter general ratings malaise appealing to an audience none so passionate as college sports fans.

The channel, which will broadcast 1,000 live events this season as well as dozens of digital airings, has aligned itself with a powerful collegiate sports union for a 20-year partnership. The Southeastern Conference (SEC) is home to some of the most popular and profitable college football teams, including schools like the University of Alabama, the University of Florida and the rest of the SEC.

Read More: ESPN Makes Disney Very Happy One Lebron James Story at a Time

University of Alabama’s Crimson Tide, for example, generated $143.7 million in revenue throughout 2013 ($38.9 million from ticket sales and $46 million from licensing), according to NCAA data pulled by USA Today. The team plays in a stadium with a capacity nearly one-third larger certain professional stadiums, like the AT&T Stadium in Arlington, Texas, home to the Dallas Cowboys.

"The SEC Network is designed to essentially be a ‘must-have’ [regional sports network] for a section of the country which, in general, eschews professional sports in favor of SEC athletics," Topeka Capital analyst David Miller wrote in a research note.

This isn’t the first exclusive regional college sports station to trade on the subculture’s fanaticism. Of the top-five major collegiate sports conferences, two already have a dedicated network: 21st Century Fox-run (FOXA) Big Ten Network (BTN) and the independently-owned Pac-12 Network.

Early developments for the SEC Network are looking promising, despite the past concerns seen with the other networks. By overcoming the distribution difficulties that besieged the BTN upon its launch in 2007, ESPN has shown its muscle in not only getting major distributors to sign on to broadcast, but also agree to pay inflated programming costs.

The SEC Network’s average carrier fee of approximately $1.40 per subscriber comes at a 40% higher premium to BTN’s fees, noted Barclays analyst Kannan Venkateshwar. Still, that pales in comparison to ESPN's $5.54 carriage fee in 2013, according to media research firm SNL Kagan

"This network is a part of [Disney's] outlook for high single-digit growth in affiliate fees through fiscal 2016," S&P Capital IQ analyst Tuna Amobi told TheStreet

Read More: World Cup Proves ESPN Can't Juggle Sports

Already, the SEC Network has major cable providers signed up, including Comcast (CMCSA) and DirecTV (DTV), relationships BTN struggled with upon its launch. After two years, Pac-12 Networks has still been unable to secure broadcast with DirecTV.

“Upon launch, SECN will be available in 90.5 million homes, on par with the Big 10 Network,” Miller estimated.

Projections already indicate SEC Network will meet its goal of 75 million subscribers upon launch, higher even than the NFL Network’s 72 million subscribers, which has been on the air for more than a decade. Its reach, subscriber base could make it one of the most valuable, and largest, sports network in the United States with ESPN holding the top spot.

S&P Capital IQ's Amobi estimates ESPN generates as much as two-thirds to Disney Cable Networks' $3.9 billion in quarterly revenue, a contribution set to expand if SEC Network adds $384 million to the topline, as Barclays forecasts. 

"SEC Network [could] contribute approximately ~$268m in EBITDA to the ESPN family of networks (or ~12% of the roughly $2.2bn in EBITDA that the flagship ESPN network generated in 2013)," Barclays' Venkateshwar forecast in a report Thursday. 

An ESPN spokesperson has yet to respond to requests for confirmation of revenue and EBITDA projections.

If the financials are in that ballpark, the addition of the SEC Network to Disney’s Media Networks segment will proffer even more growth to a division already giving the conglomerate a boost. In its most recent quarter, media networks revenue increased 3%, its fifteenth consecutive three-month period of growth, and accounted for 44.2% of gross sales and 59% of operating income. 

For a network already larger than the NFL Network before it launches, Disney has a touchdown on its hands even before kickoff.

--Written by Keris Alison Lahiff in New York.

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