ESPN, owned by Disney (NYSE:DIS), is the global leader in sports video programming and arguably the world’s most popular sports channel. Disney and Microsoft (NASDAQ:MSFT) have now agreed to stream live sports programming via Microsoft’s Xbox 360 device. These streams will be available only to Xbox Live Gold members.
Although some sports enthusiasts might view this as an opportunity to ditch their cable subscriptions, we believe Xbox has a long way to go before it poses a serious threat to cable providers like Comcast (NASDAQ:CMCSA), AT&T (NYSE:T) and Time Warner Cable (TWC). Below we present our arguments.
Although Xbox Live Gold membership is cheaper than cable, video options are limited
Xbox Live is an online multi-player gaming and digital media delivery service created and operated by Microsoft. In exchange for a $50 annual subscription fee, XBox Live Gold members will now have access to streaming HD video of over 3500 live sports events from ESPN at no additional cost.
This might encourage individuals who are primarily interested in watching sports to disconnect from cable networks to save money. However, Xbox Live is not a viable alternative for general TV viewers because of its limited streamed content offerings, which currently includes video from Netflix (NASDAQ:NFLX) along with some music and news programming. On balance, we believe that the Microsoft/ESPN partnership will cause minimal cable disconnects.
Cable channels are protected by bundling
Cable companies offer programming packages in bundles, with no à la carte option. As a result, Xbox Live Gold members can’t disconnect specific channels like ESPN from their cable packages.
In the future, Xbox could threaten cable providers if it creates a meaningful à la carte video market by continuing to add additional channels to its platform. We believe that this threat is not imminent.
ESPN can realize additional ad revenues via XBox
ESPN earns revenue from subscription fees and advertisements. Because Microsoft’s Xbox Live network will not charge its subscribers additional fees, ESPN will probably seek to grow revenues by selling advertising on XBox. Because the cable disconnect threat is currently low, ESPN can afford to explore this new ad delivery channel with little fear of hurting subscription revenues.
We estimate that ESPN contributes about 31% of Disney’s stock value. We expect ESPN to earn more than $3 billion in subscription revenues and close to $1.5 billion in advertising revenues in 2010. If you believe that ESPN will lose subscribers as a result of this move, you can modify our Disney stock forecast below.
Disclosure: No positions