ESPN is launching a streaming service early next year aimed at attracting new and younger subscribers while affording Walt Disney Co. (DIS) - Get Walt Disney Company Report another means to sell additional sports content to fans who currently get its flagship network through pay-TV.
But any new direct-to-consumer service is unlikely to offset the industrywide decline in pay-TV subscribers that is pressuring nearly all cable network owners. A subscription-based ESPN app also may do little to bolster TV advertising sales that have fallen this year as ratings for most networks have softened.
A new ESPN streaming service, which CEO Bob Iger announced on Tuesday, Aug. 8, also could have the adverse effect of accelerating the decline in pay-TV subscriptions. And when Disney launches a TV/movie platform to rival Netflix in early 2019 -- presumably at a similar, consumer-friendly price -- pay-TV subscribers will have yet another reason to cut the cord.
"The more content that consumers can obtain without a multichannel video subscription, not to mention more and more content without advertising, the less interest they will have in subscribing to the big multichannel video bundle," wrote Rich Greenfield, the Disney skeptic at BTIG Research, in an investor note on Wednesday. "That actually hurts ESPN more than any other cable network group, implying that Disney's [standalone TV/movie service] success could be ESPN's loss."
Concern that costs related to building and marketing the new ESPN service and the new Disney-branded streaming platform will weigh on operating income over the next year or more was a major reason the stock was down 4.7% on Wednesday afternoon to $101.92.
Iger said the new ESPN streaming service will be packed with 10,000 sporting events per year, including games from Major League Soccer, Grand Slam tennis matches and college games. Programming may include Major League Baseball, which remains a part owner of BAMTech LLC, the streaming-technology company in which Disney will boost its stake to 75%, as well as the National Hockey League, also a part owner of BAMTech.
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It won't, however, include marquee games from the National Basketball Association, which are tied up past 2020 on the flagship network and only available through a pay-TV contract.
But prognosticating aside, the new service may do little over the next two to three quarters to stem the tide in ESPN subscriber losses. During the quarter ended June 30, the pace of ESPN subscriber losses appeared to reach as high as 3%, according to Bernstein Research. The sports network has lost more than 5 million subscribers since 2013, its total falling under 89 million, according to research firm MoffettNathanson LLC.
Nonetheless, Disney is betting that the new ESPN streaming service can offset some of the revenue being lost on the pay-TV side, especially if it can attract younger viewers, said Shahid Khan, founder of Mediamorph Inc., a digital content supply-chain software company backed by Liberty Global plc (LBTYA) - Get Liberty Global Plc Class A Report and Advance/Newhouse Partnership.
"It's going to get them access to new audiences, the millennials, the Gen-Z who are not subscribing to cable television," Khan said. "Over time, they'll get the audiences they haven't gotten, and importantly, they'll get the consumer data they haven't had by owning their own direct-to-consumer service."
The biggest reason Disney is launching ESPN as a direct-to-consumer service is to prepare for a future driven by apps rather than pay-TV bundles. By 2020, Disney will have begun renegotiating sports-rights contracts with the NBA, MLB and college athletic leagues.
A standalone ESPN service will give Disney more distribution options than simply relying on Comcast Corp. (CMCSA) - Get Comcast Corporation Class A Report , Charter Communications Inc. (CHTR) - Get Charter Communications, Inc. Class A Report or AT&T Inc. (T) - Get AT&T Inc. Report . Without such "optionality," to quote Iger, Apple Inc. (AAPL) - Get Apple Inc. (AAPL) Report , Amazon.com Inc. (AMZN) - Get Amazon.com, Inc. Report , Facebook Inc. (FB) - Get Facebook, Inc. Class A Report or Alphabet Inc. (GOOGL) - Get Alphabet Inc. Class A Report will have a much better chance of wrestling those contracts away from Disney.
And that would just about kill ESPN.
"The subsequent launching of the service gives us another way to reach consumers," Iger said on Tuesday's Disney investor conference call. "It gives us the flexibility, really, to move our product to the consumer in many new ways, ways that we've not been able to do before."
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