Nikola Jokic of the NBA’s Denver Nuggets prepares to be interviewed by ESPN’s Lisa Salters after the fourth quarter of the Nuggets’ 113-111 Western Conference finals game 4 win over the Los Angeles Lakers at Crypto.com Arena in Los Angeles, May 22, 2023.
Aaron Ontiveroz | Denver Post | Getty Images
It’s clear to the 4 major U.S. skilled sports leagues that Disney‘s ESPN is potentially fascinated by them taking an equity stake within the network.
What is not yet clear is why the leagues would do it.
The National Basketball Association and Major League Baseball have each questioned a partnership with ESPN if Disney’s goal is to mitigate or replace payments to leagues for sports broadcast rights with equity in ESPN, in accordance with people accustomed to the talks.
Disney executives and league officials agree that strategic partnership discussions are within the pure “idea” phase and should not amount to anything, said the people, who asked to not be named since the talks are private. Talks have had few specifics, said the people, but may heat up as ESPN attempts to achieve a rights renewal take care of the NBA. Disney’s exclusive negotiating window with the NBA ends April 2024.
Disney is considering ways to avoid wasting 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 its most up-to-date quarter — and the corporate would love to pay down its $44.5 billion in debt. Disney also likely owes no less than $9.2 billion to Comcast for its minority stake in Hulu.
Agreeing to a deal where ESPN trades equity for sports rights could potentially save Disney billions of dollars that it might then use for other strategic ventures. ESPN struck a deal earlier this week with Penn Entertainment, which can provide it with $1.5 billion in money over the following 10 years.
However the leagues also need money, especially as the regional sports network business is under threat. Teams pay players largely from the sports rights fees. ESPN’s bids serve a necessary role in how the leagues earn money. The organizations can generate competitive bids for packages of games because ESPN is sort of all the time a possible buyer.
Disney CEO Bob Iger said during Disney’s earnings conference call Wednesday that the corporate is “not necessarily searching for money infusion” if partners could provide other assets — such as content — as the corporate transitions ESPN to a direct-to-consumer business. Sources say Disney is targeting 2025 as a possible launch date for an unbundled-from-cable ESPN streaming service. While ESPN+ exists today, it doesn’t include ESPN’s Most worthy live sports such as Monday Night Football and most NBA playoff games.
Disney has informed the leagues that it is also holding separate talks with strategic investors who can provide distribution advantages, in accordance with people accustomed to the matter.
“We’re searching for partners which might be going to assist ESPN successfully transition to a [direct-to-consumer] model,” Iger said Wednesday. “And that, as I’ve said, can are available in the shape of either content or distribution and marketing support or each.”
An MLB spokesperson declined to comment. An NBA spokesperson said, “we have now a longstanding relationship with Disney and look ahead to continuing the discussions around the longer term of our partnership.”
ESPN spinoff possibilities
Iger reiterated Wednesday that he wants to maintain a majority ownership stake in ESPN. Iger told CNBC’s David Faber last month that Disney is “not necessarily” taking a look at spinning off ESPN.
Still, it’s possible Disney could maintain a majority ownership in ESPN while also spinning it off. That option is “on the table,” in accordance with an individual with direct knowledge of Disney’s plans.
A spin off of ESPN would give potential partners clarity on the worth of their minority stakes if it trades publicly and individually from Disney. Inside Disney, ESPN’s value could be clouded by the larger parent company.
Next quarter, Disney will begin to report ESPN’s funds individually from the remainder of the corporate — one other potential precursor to a separation. Former Disney head of strategy Kevin Mayer, who’s now advising Iger on the longer term of ESPN together with former Disney Chief Operating Officer Tom Staggs, has previously championed spinning off ESPN in order that the linear business won’t drag down Disney’s growth prospects, CNBC reported last week.
For many years, ESPN has been Disney’s crown jewel, generating billions in benefit from lucrative pay-TV subscription fees. ESPN is by far the Most worthy cable network, charging nearly $10 monthly per household for each U.S. cable subscriber, whether or not they watch the network or not.
Even as U.S. cable subscribers began cutting the cord, ESPN was capable of counteract subscriber revenue losses by boosting the sum of money it receives from the pay TV distributors, such as DirecTV, Dish, Comcast, Charter and Cox.
Inside the past 12 months, that trend reversed itself, in accordance with people accustomed to the matter.
Still, rankings having increased this 12 months on ESPN’s linear channel even as cord cutting has accelerated. Promoting revenue increased 10% over last 12 months in essentially the most recent quarter “adjusted for comparability,” Iger said Wednesday, as brands search for live events where commercials cannot be skipped.
“The bundle is decaying they usually must provide you with a recent revenue model,” former ESPN CEO Steve Bornstein said on CNBC on Wednesday. “It’s an evolutionary process, and I feel [ESPN] goes to be incredibly well-positioned. The people involved at ESPN today are probably one of the best executives I’ve ever come across. [ESPN President] Jimmy Pitaro, Kevin Mayer, Bob Iger and Tom Staggs? They are going to work out this problem.”
Disney could have to choose if it’s more strategic to maintain ESPN’s positive free money flow to reinvest in streaming entertainment or if spinning off an asset with declining growth trajectory makes more sense.
Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.
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