In preparation for an ESPN bridal show, Disney boss Bob Iger offered a first peek behind the curtains on Thursday that revealed just how crucial a contributor the network is to his bottom line.
In a nutshell, investors now have definitive proof the U.S. sports broadcaster is a bigger profit center than Disney’s entire movie and television business combined, including everything from Marvel Studios to Disney+.
Fresh from a contract extension, boomerang CEO Iger is on the hunt for a strategic partner for the 80%-owned subsidiary, someone who has the wherewithal to help transition the business from cable to digital as more and more Americans cut the cord.
Iger is realigning the century-old media giant to create a more transparent and comparable business, one in which executives are more accountable and investors can more easily model company value as its shares languish at near-decade lows.
In the process, the CEO is breaking up the previous financial reporting structure and creating a new “Sports” division alongside the content business, which has been renamed as simply “Entertainment.”
The operations centered on its extremely lucrative theme parks, cruise lines, and merchandising operations are now grouped under “Experiences.”
Ahead of fourth-fiscal-quarter results that will reflect the new organizational lines for the first time, Disney published restated figures that finally break out the performance of ESPN, a fifth of which is owned by media group Hearst, within the company and its broader sports division.
For the nine months, the network posted operating income of $1.9 billion on revenue of nearly $12.6 billion. The overwhelming share of that comes from its domestic U.S. market, where it generates fat affiliate fees from cable companies like Charter eager to distribute its programming.
That represents however a deterioration in both profit and margins compared with the previous year’s period, when ESPN earned $2.1 billion on turnover of just $12.3 billion.
And here lies the potential dilemma that faces Iger and his shareholders, including activist Nelson Peltz, as they go shopping for a new partner for the broadcaster.
Cable television, once highly lucrative, is losing out to less-profitable streaming, much like free-to-air programming, as more customers prefer the convenience of watching their favorite films and shows on demand.
Cutting costs, as Iger has with his scripted content, is tricky. Even if producing fewer films and series for Disney+ risked losing subscribers to rivals Netflix, Warner Bros. Discovery’s Max, or Paramount+ in the process, this was deemed acceptable and indeed necessary by investors as Disney’s streaming service continues to lose money.
Disney looks to be outgunned in sports streaming wars
But ESPN is in a much different position, not least because the demand for live sports—unlike other scheduled programming—remains extremely resilient to prevailing trends in consumer behavior.
Simply cutting content costs could threaten its status as Disney’s cash cow in the content space, because it could lose out to streaming deals where Disney finds itself bumping up against deep-pocketed rivals in the tech industry.
Amazon pays $1 billion per year to the NFL to secure the digital rights to Thursday Night Football, while Apple inked a $2.5 billion deal to bring Major League Soccer, home to Lionel Messi’s Inter Miami team, to its customers.
“The sports streaming wars are heating up as Apple, Amazon, YouTube, and Peacock vie to create the next ESPN,” former media exec Aden Ikram wrote last month for Fortune. “Some analysts believe Apple should just acquire ESPN and put its many leagues on streaming.”
Disney has always been a major player in the entertainment industry alongside Netflix, but it doesn’t have the financial firepower to match two companies like Amazon and Apple, collectively worth a combined $4 trillion on the stock market.
That’s why Iger, a dealmaker tipped to be eyeing a sale of Disney to Apple, needs help to secure his company’s claim to the thriving sports streaming business.
“If they come to the table with value that enables ESPN to make a transition to its direct-to-consumer offering, then we’re going to be very open-minded about that,” Iger told CNBC in an interview in July, confirming initial exploratory talks have already been held.
Disney’s sports division isn’t just ESPN though. It also includes the branded sports channels of its Indian broadcaster, Star, acquired as part of the 20th Century Fox assets.
Unfortunately for Iger, his subcontinent subsidiary racked up a whopping $444 million in losses on just $637 million in turnover over the past nine months and remained consistently in the red each quarter.
