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Volume 22 No. 39
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Analysts want answers on ESPN’s OTT service

When Disney announces its third-quarter earnings this week, Wall Street analysts expect company Chairman and CEO Bob Iger to focus on ESPN. They look for Iger to offer guidance on everything from cord-cutting trends to future rights deals.

It wasn’t so long ago that ESPN was an afterthought on these calls, rarely brought up because its huge profits were so reliable. But as the pay-TV business sheds subscribers, analysts are more concerned with ESPN, which has dropped to 87 million homes since its peak of more than 100 million in 2011, according to Nielsen. Those once reliable profits have slowed, and analysts want to see how ESPN plans to turn things around.

That’s why I expect Iger to offer more specifics on the over-the-top service ESPN is launching with BAMTech. Even though the service is supposed to launch this fall, Disney has offered few details on it. Executives have been mum on the launch date, pricing and programming plans.

Disney Chairman and CEO Bob Iger can expect more focus on ESPN during an earnings call this week.
Here’s what we know so far about the OTT service:

It will launch as an ESPN-branded service with niche sports that aren’t being carried on ESPN’s TV channels — think rugby, cricket, tennis, soccer and some college sports.

ESPN executives expect the initial subscriber base to be made up of diehard fans of these sports. When aggregated, those fans could make up a sizable audience.

It seems like ESPN is treating the launch as a test of sorts, an opportunity to make sure that it can provide a high-quality OTT experience. ESPN executives want to spend the first couple of months figuring out a good programming mix — which sports should stay on television and which sports should migrate to OTT. The sports that draw the biggest audiences, obviously, will remain on TV.

I am also curious to see how the OTT service compares with ESPN’s broadband service ESPN3. Initially at least, ESPN plans to keep the two services separate. After all, ESPN’s affiliate deals require ESPN3 to keep a certain number of exclusive events — such as The Basketball Tournament or select college softball. ESPN has to be careful that its OTT service does not affect those ESPN3 deals.

I reached out to four financial analysts whom I respect to identify the topics they will be focused on during Disney’s earnings call. Their answers run the gamut, from cord cutting to rights fees.

Michael Nathanson, senior research analyst, MoffettNathanson

As has been the case for much of the past two years, we expect questions about ESPN to remain front and center for Disney’s earnings call. Despite the extraordinary success of Disney’s film studio and the continued impressive growth of Disney’s global parks and resorts, investors keep coming back to the future of ESPN.

This laser focus continues despite the lessening impact that ESPN has on Disney’s results. Five years ago, Disney’s consolidated cable networks (which include ESPN) contributed over 60 percent of the company’s earnings; in 2018, that contribution will be less than 34 percent. While Disney’s other assets have grown nicely over this time frame, profits at the consolidated cable division have increased by less than 2 percent per year.

This slowdown is well-known and well-critiqued and is due to a perfect storm of rising content costs from new rights deals and the slowing of affiliate fees from cord cutting and skinny bundle mix shifts.

As we look out over the next few years, we would love to know how Disney and ESPN will approach the next “Monday Night Football” agreement, which expires after the 2021 season. The NFL effectively has lowered the value of this package as “Thursday Night Football” has moved to broadcast.

ESPN pays close to $2 billion for 17 games and highlights. That deal looks suspiciously over-valued given “MNF” ratings trends. What will ESPN do as the deal gets closer to ending? That’s a question that we will want clarity on this week and in future calls, as well.

Eric Jackson, president and founder, EMJ Capital Ltd.

This Disney earnings call will mark the 2-year anniversary from when Bob Iger admitted ESPN was losing subscribers, an admission that caused the stock to respond by immediately selling off 9 percent. It’s still at $110/share versus the $120/share where it was before that call.

This week, I’ll be listening for:

(1) The rate of loss of linear subscribers and whether it seems to be moderating; and

(2) Any concrete details about new skinny bundle subs, the economics of those subs, and/or any new direct-to-consumer services that will launch this year.

Michael C. Morris, senior managing director, equity research analyst, media and entertainment, Guggenheim Securities

We have a “buy” rating on Disney stock even though we’ve been cautious on the media industry in general. It has been an awesome industry for a long time. Now there are so many more options for the consumer, the ability to monetize is so fragmented.

First and foremost, I will be looking at subscriber trends for the business. ESPN is the most expensive network on the dial. As such, it’s been under more pressure than the average network on its subscriber numbers. As distributors offer more flexible packages, some of which give the option of a lower price point without sports, they’ve seen a greater amount of subscriber loss than the industry overall.

I’m also interested in the opportunity for the new virtual MVPD partners to help mitigate some of those losses — specifically YouTube TV which launched during the quarter and the Hulu television product which launched later in the quarter. Both carry ESPN. To the extent that they get traction, they could serve to counterbalance the cord-shaving phenomenon.

I think it will be too early to see specific results. The reported revenue is unlikely to be significantly impacted by the new distributors. But the company commentary can at least give us some insight as to whether they are seeing traction from those services and whether they can be additive in the future.

Omar Sheikh, equity research, head of U.S. media, cable and satellite, Credit Suisse

The three most important topics I’ll focus on in relation to ESPN will be:

(1) What will be included in the new ESPN-branded direct to consumer offering, how will it be priced, and how much investment will they put behind it? It’s worth saying investor expectations on this are low — most don’t believe the service will have any material impact on ESPN financially or strategically;

(2) Are they seeing/do they expect to see any benefit on domestic subscriber numbers from “virtual” MVPDs?

Nothing material has been evident in recent quarters, but many investors hope that the launch of Hulu and YouTube TV will have an impact in the second half of the calendar year; and

(3) Will ESPN remain focused on reducing costs? If so, are there more opportunities in non-programming costs or is there any scope to reduce programming expenses as well?

John Ourand can be reached at Follow him on Twitter @Ourand_SBJ.