An activist investor’s suggestion this week that Walt Disney Co. spin off ESPN rekindled a long-running debate over what the company should do with a sports network that has been a major profit engine for years but whose subscriber base is eroding, according to The Wall Street Journal.
Daniel Loeb’s Third Point LLC told management in a letter last Monday that there is a “strong case to be made” for Disney to part with ESPN, which would result in a company that is “no longer haunted by the specter of cord-cutting,” or consumers canceling their pay-TV subscription in favor of streaming services.
Fewer Americans are getting cable TV—and, by extension, ESPN—every year, but the network remains home to some of the most popular content on TV, particularly as many people no longer watch live programming that isn’t news or sports.
ESPN attracted more prime-time viewers so far this year than any other cable network but Fox Corp.’s Fox News, according to Nielsen. And the channel brings in significantly more in fees than any of its rivals: On average, every American with a pay-TV package that features ESPN pays more than $100 a year for access to the network, according to Kagan, a media research group within S&P Global Market Intelligence.
The network currently has 73.2 million subscribers, down from 87.7 million in 2017, according to Kagan, which estimates that number will fall to 60.8 million by 2025. Marc Ganis, president of the consulting firm Sportscorp, expects U.S. cable subscriptions to stabilize around the 50 million mark.
In its response to Loeb’s letter earlier this week, the company said it welcomed the views of all investors. Disney’s statement said the company achieved record streaming subscriptions and strong profit growth at its U.S. theme-parks business, but didn’t mention ESPN.
Pat Crakes, a sports-media consultant and former Fox Sports executive, said Disney needs ESPN and other cable assets to fund its streaming business’s losses. The company’s TV networks generated $2.5 billion in operating income during the most recent quarter, more than its thriving parks division, which brought in $2.2 billion. Meanwhile, Disney’s streaming services—which include Disney+, Hulu and ESPN+—lost $1.1 billion.
Loeb isn’t the first to suggest jettisoning ESPN. Inside Disney, there have been occasional discussions over the years about where ESPN fits in the future of the company, people familiar with the matter said. However, its contributions to the company’s bottom line outweighed any long-term concerns, they said.
Beyond cord-cutting, the rapid escalation of sports-rights fees has eroded ESPN’s profitability in recent years. Last year, ESPN renewed “Monday Night Football” at a cost of $2.7 billion a season, a 35% increase from its previous deal with the NFL. The network has also indicated it will be aggressive in its efforts to retain rights to the National Basketball Association when that deal expires in three years.
Disney doesn’t break out ESPN’s financial performance, but a former executive estimated the network generates in the neighborhood of $3 billion in earnings before interest, taxes, depreciation and amortization annually, and has a valuation of around $25 billion.
That’s about half of what ESPN was valued at by analyst Matthew Harrigan in 2014, who at the time projected its Ebitda to be around $4.5 billion. Mr. Harrigan declined to comment.
A Disney executive said that the valuation is significantly higher than $25 billion. Disney and ESPN representatives declined to comment on the unit’s finances.
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