So, ESPN is still “The Worldwide Leader In Sports”… for now, but it’s position as the king of the hill is being challenged as business models centered around linear TV distribution start to crumble and tech titans enter the realm of entertainment. Live sports have historically been one of the safest bets in television. Because the content is more compelling when it is seen live and appeals to millions of Americans that advertisers want to target, advertisers are willing to pay-up to have their commercials displayed during sports programming and cable distributors are willing to pay-up for networks that air live sports.
And no one does sports better than ESPN. The Entertainment & Sports Programming Network, or ESPN, has been a subsidiary of the Walt Disney Company since 1996 and has driven Disney’s Networks Division, the company’s most profitable division, for over a decade. The network is consistently able to charge the highest affiliate fees (a rough proxy for a channel’s popularity) of any cable network and is one of the most watched cable networks in the country (note ABC, CBS, FOX and NBC are broadcast, not cable, networks). This success has largely been driven by the company’s continued ability to secure the rights to some of the most popular sports content in the country including the MLB, the NFL and the NBA. But these rights cost ESPN billions of dollars a year though. As entertainment industry disruptors such as Netflix and Hulu offer digital only video services and more Americans become “cord-cutters” or “cord-nevers”, ESPN has seen its subscriber numbers fall substantially. This in turn has put its ad fee and affiliate fee revenues under siege and called into question its ability to afford the multi-billion dollar sports rights in the future.
Going forward, these woes are likely to worsen as tech giants, whose market caps significantly outsize Disney’s and whose revenue streams come from businesses outside of entertainment, set their sights on content-related assets and start to bid for the rights to live sports content. We’ve already seen television production and marketing costs start to rise, and we’re still in the first days of Silicon Valley’s invasion of Hollywood. The sports world has seen tech companies dip their toes into the pool of sports rights but they yet to make meaningful waves. Twitter secured the rights to stream Thursday Night Football games in 2016, with Amazon securing the rights to 2017. Internationally, Facebook bid against a Fox subsidiary for the rights to India’s premier Cricket league last year. But this dillydallying is unlikely to last as some of the most sought after rights go up for grabs in the early 2020s.
If Disney’s legacy business models continue to struggle and we see some of the FAANGs make meaningful bids for football, baseball and basketball rights, ESPN may be unable to compete. Amazon, Facebook and Google are some of the biggest platforms in the world. Facebook and Google have a duopoly on the digital ad market. The amount of customer data they own gives them the ability to generate ad revenues in unprecedented ways. Amazon is the largest online marketplace in the country and is disrupting every industry from food shopping to healthcare. Should Amazon bid on the rights to sports, not only would it be able to monetize the content through ad sales and prime subscription fees (essentially affiliate fees). It can sell you merchandise related to the content you’re watching from its marketplace, offer you a delivery from your favorite local wing spot and potentially even allow you to buy tickets for the next game of the team you’re watching. Despite Disney being the 20th Century master at monetizing intellectual property in unique and disparate ways (ie. movies, theme parks, consumer products), it has yet to apply that model to the digital advancements we’re seeing in the 21st Century world and could struggle to win the rights to entertainment and sports IP in the future.