Disney Chair & CEO Bob Iger this morning on CNBC's "Squawk on the Street" gave some of his most detailed comments on ESPN’s financial and subscriber performance, the threat to the bundle and emerging distribution platforms, one day after the company’s financial results were announced. Among highlights from his interview:
TRANSPARENCY: With early shares trading down, CNBC's Jim Cramer said the Disney results were “self-inflicted” because the company had projected a high single-digit projection for its cable business that it will miss “and they're getting punished for that.” Iger replied, “Our businesses performed extremely well and we have a very, very strong outlook going forward. But we felt given the importance of ESPN to the company, and cable networks in general, that it was important for us to be candid about what we see in the environment. It’s as simple as that. We are very bullish about our cable business and we’re very bullish about ESPN. We did want to note the sub losses that we had seen. We also have an NBA deal that kicks in in 2017. But after 2017, we believe ESPN is going to deliver very compelling growth for this company because it's a great product, it’s a great brand and it is in an industry that we actually feel bullish about.”
WHAT ABOUT TALENT? Cramer brought up the several recent high-profile on-air talent losses -- Bill Simmons, Keith Olbermann and Colin Cowherd -- and asked if those moves meant ESPN “paid too much for programming and therefore have to cut back on staff of very high-profile people that we all do love because ESPN's costs are going up and viewership going down?" Cramer: "Is that an accurate assessment of what's going on with ESPN?” Iger: “On the cost management front, we expect every one of our businesses to operate at peak efficiency ... and that means each one of our businesses are going to go through periods where they take a harder look at their expense side and essentially make cuts to run more efficiently. It's as simple as that." He added, "We did go out and we bought the most valuable sports packages that were out there, the NFL and Major League Baseball and the NBA and a number of different college sports, including basketball and football and the college football championships. That was all designed to enable ESPN to continue to be, not just for this decade but into the next decade, not only a leader in sports television but a leader in media. That's one of the most valuable brands in media. It is a must-have brand. It is vital to current distributors and it is vital to any new distributor that comes into the marketplace. Not only is it not going away, but it's going to continue to grow. ... We feel extremely bullish about ESPN's future.”
THE FUTURE OF THE BUNDLE: CNBC’s David Faber asked about growth in the face of the decline of the traditional bundle and more alternative distribution models. Iger: “The bundle is not going away. The bundle is actually still relatively strong when you look at it, given all the competition that's in the marketplace and when you look at what percentage the bundle represents, not just in terms of revenue, but in terms of how people watch television. It's still the dominant form of television viewing in the home. ESPN is fortunate that it is a brand that we believe ports well to any new platform, whether that's a smaller bundle, whether that's an over-the-top package of programming or whether it's a direct to consumer business because we have invested over the years in the strength of its brand. That gives ESPN the ability to essentially manage through whatever disruption is going on with the bundle or in television. It is one of the strongest brands out there, and if you want to have one brand during a time of such change, I would argue it is ESPN.”
TIMING OF OTT? Iger said of alternative forms of distribution, “Every new platform ... that comes forward comes to us as a first stop because they want ABC, they want Disney, they want ESPN. ... We actually believe we're in an enviable position in a market, so that if there is disruption of what I'll call the ‘traditional businesses,’ the opportunities that the disrupters are creating for us are very exciting as far as we see it and we're going to participate." He said the timing is "really for us to determine.” He also reiterated an “opportunity to sell ESPN direct to consumer." Iger: "Obviously, we feel we have the ability with that brand to do that. We could do it today and that if we took ESPN out to consumers, I guarantee there would be enough of them out there that would be willing to pay a healthy enough price to make that extremely good business for us, and create some other forms of growth. ... (But) I don’t believe it’s the time to do that.” When Faber noted HBO “seems to be” selling direct to consumer, Iger said, “It may work for them, but we don't believe it's the time to do that. ESPN is a far more mass consumed product than HBO is. ... We don't feel it's the time to do it. When we see that time, we believe we'll be able to flip a switch and deliver that but it's not in the very near future” (“Squawk on the Street,” CNBC, 8/5).
THE DAY AFTER: After Disney's FY Q3 results were announced, the N.Y. POST's Claire Atkinson reports ESPN "is starting to show some wear and tear," as it "is losing subscribers, and its operating profit gains this fiscal year will slow to mid-single digits from an earlier forecast of high-single digits." Iger yesterday "declined to say how many subscribers ESPN lost in recent months because of cord-cutting -- he called the decline 'modest' -- but denied it was as many as 3.2 million." Ad revenue at ESPN "was off" 3% in the three months ended June 27, in part because there was no FIFA men's World Cup this summer like there was last summer (N.Y. POST, 8/5). Iger said ESPN has experienced “some subscriber losses," but that he "doesn’t foresee 'dramatic declines' in basic cable subscriptions over the next five years that would necessitate launching" an OTT product (WALL STREET JOURNAL, 8/5).
PROS & CONS: In N.Y., Brooks Barnes reports Disney’s cable networks division "posted operating income" of $2.1B, a 7% increase. ESPN "benefited from contractual increases in payments from affiliates, but had lower advertising revenue." Iger said that ESPN "was better poised than perhaps any network to take advantage of new ways of delivering programming to viewers." But he also "seemed to acknowledge that cable television may become less of a driver for Disney in the near term" (N.Y. TIMES, 8/5). In L.A., Miller & James report Disney "warned that dramatic changes in the television landscape could eat into earnings." An increasingly fragmented TV business "could be a drag on cable TV profits" (L.A. TIMES, 8/5).
KEEPING CORDIAL: Bloomberg Intelligence Senior Media Analyst Paul Sweeney said of ESPN, “I don’t think it’s truly in trouble, but I am not sure it is going to be the consistent growth-driver for Disney as it has been over the last, really five to 10 years." Sweeney: "At the end of the day, I think Disney sits back and says, ‘You know, sports is still going to be a compelling program; we’ve just got to figure out how to get paid for it. ... I believe that we will see some form of ESPN over-the-top, direct-to-consumer over the Internet at some point. It may not have all of their programming, like the NFL, but it’ll have some programming" (“Bloomberg Surveillance,” Bloomberg TV, 8/4).
LOOKING DOWN THE ROAD: CNBC's Seema Mody notes the "big question out there" is whether or not at "some point, does Disney spin off ESPN?” CNBC’s Wilfred Frost noted, “The way is changing how we consume television content, but sports was thought to be one of the ones that you would continue to watch in ... a traditional way. Because it's live, you don't need to pause it and watch it on demand. The fact that this is also hurting ESPN is bad, bad news for broadcasters globally” (“Worldwide Exchange,” CNBC, 8/5). BTIG Media & Tech Analyst Rich Greenfield said, “It's just getting harder to see why you have to be a multichannel cable subscriber unless you absolutely have to have sports” (“Squawk Box,” CNBC, 8/5).
