Disney (DIS) – Sports and Parks – December 22, 2023
Sports (Includes Amazon)
I talk a lot about this: Live sports content rights are wildly expensive. Most of the top-watched content in North America is live sporting events, which illustrates the strong passion fans have for their teams. As a result, live sports as a category is the only remaining healthy part of linear TV. It is the last domino to fall in the cord-cutting revolution. The rest of linear is in obvious terminal decline. This will be too, eventually.
This situation puts Disney and its market-leading ESPN brand in a perfect position to control the remaining decay of linear television and transition to streaming. ESPN owns 30%-40% (depending on the source) of major sports rights in the USA and it will decide when to move those rights off of linear. That direct-to-consumer shift will likely come in 2024. This all sounds nice. It depicts Disney as being in a strong position, perhaps even the driver’s seat, to enjoy strong streaming market share as it pairs this asset with Hulu and Disney+. But there are two major issues standing in the way of this attractive scenario coming to fruition: money and distribution.
Again… Live sports rights are very, very expensive. For example, Disney will pay $700 million per year just for exclusive SEC college football rights. Disney’s balance sheet is clearly strong enough to outbid the Paramount’s and Fox Sports networks of the world. Today however, it needs to outbid wildly deep-pocketed mega-cap tech as well. Apple is bidding for more rights and Google secured NFL Sunday Ticket this year. The search giant has an appetite to invest more. Amazon is reportedly looking to accelerate investments across sports too. It would do so through an investment in Diamond Sports Group following that firm’s bankruptcy declaration. Diamond owns TV rights to 40 professional sports teams in the USA.
All three of these newer entrants can use live sports as a loss leader to reel in fans and cross-sell them other products and services. They don’t need to make money on these contracts; they can easily profit elsewhere and literally have tens of billions to spend. Disney needs to make money on these contracts and has less firepower to win them. That’s far from ideal. Yes, Disney has the omni-channel flywheel with its parks business to drive some cross-selling. Still, that flywheel pulls from its scripted entertainment and the beloved brands within that bucket – not from ESPN.
So? Disney needs to get ahead of this developing sports bidding war and partner up. And that needs to happen soon. I candidly find it annoying that the Diamond Sports news is coming before the ESPN news I want and expect to come. ESPN is still considered the defacto brand in sports and mega-caps still want their hands on it. That will not last forever as fans get accustomed to watching events on other streaming services. It is the reality today and a reality that Disney needs to urgently leverage before the value dissipates. The brand still has a temporary edge, which will not be an edge forever. They must partner with and sell a minority stake in ESPN to Amazon, Google or Apple to preserve any piece of that edge over the next several years. This will make winning content bids easier and less competitive for what is clearly the David and not the Goliath in this situation.
Mega-cap tech will also help mightily with the second issue of distribution. Disney loses consolidated distribution outlets as Xfinity and Spectrum become less popular. It loses that aggregated ecosystem of reliable traffic. How does it mimic that traffic? By partnering with mega-cap tech and their ubiquitous distribution networks. This will make nurturing an ESPN streaming brand far less costly, far less risky and likely more successful. I am impatiently waiting for news of a partial ESPN sale to come. Chop, chop.
Parks & IP
Disney got a lot of blowback from others for its plans to raise annual CapEx from $3 billion to $6 billion to support its parks and experiences segment. We already worked through why I think this is the correct decision. In summary, it pulls from a mere portion of the savings being generated in its film, administrative and general entertainment cost buckets. It shifts low-return investment dollars to this higher-return area. Simple enough. You can find more detail on the decision here.
This week, Disney announced a new Zootopia attraction in its Shanghai Park. For context, Zootopia is one of the top grossing animated films ever in China. Why do I bring this up? It points to all of the expansion opportunities Disney has within this sky-high return investment category. It shows exactly how this segment cannot just be a stable cash cow, but a reliably growing cash cow. Disney has about 1,000 acres of vacant land to develop (or 2 Disneylands) solely at its Shanghai park. It has significant brand power and pent-up demand for brands such as Zootopia in important markets like China. That’s why it’s opening and expanding Frozen, Avengers, Star Wars and Little Mermaid exhibits globally.
Much attention is paid to its media business, and for good reason. Linear is a dying business and streaming needs more time to help profitably supplant it. This other segment is a sleeping giant cloaked in the negative sentiment surrounding The Walt Disney Company. An expected explosion in FCF, streaming profitability and a needed asset reshuffling will all go a long way toward mending this sentiment. It should allow the Parks & Experiences segment to get the credit it deserves.
