Disney's Crown Jewel May Unravel Quickly

| About: The Walt (DIS)


When I recently noted that ESPN had, very quietly, been unbundled by Sling TV, I noted three qualifications. None should reassure Disney investors.

Making ESPN easy to add and drop month to month can have a very significant subscriber impact.

Disney's financial vulnerability is exactly equal to what it would be if ESPN stood alone, since it is now being subsidized only by Disney's own alternative channels.

Comcast and DIRECTV now have grounds to demand unbundling of their own, a potentially fatal blow to ESPN.

ESPN: Sinking or Sailing?

Last month I wrote an article noting that a seemingly significant development in the Pay-TV world had gone seemingly completely unnoticed: the unbundling of Disney's (NYSE:DIS) crown jewel ESPN from the basic Pay-TV bundle. The article generated a fair amount of comment -- and controversy -- on Seeking Alpha, but no one else has made similar comments and Disney shares continue to hold above $90.

I always want to take some time after writing an article before returning to the topic. I have considered that, as many commentators said, perhaps I am overreacting to something not so important after all. I myself noted three qualifiers to my points: that only one provider, DISH Network's (NASDAQ:DISH) Sling TV had unbundled ESPN; that ESPN had actually not been fully unbundled since other Disney properties, Disney Channel and Freeform, were bundled with it; and that pricing was low enough at $15 that a lot of subscribers might decide to just keep it anyway, since ESPN does have a lot of value.

However, after consideration, I do not believe I was wrong to state the issue in the rather drastic terms that I did. I still regard this as extremely important, potentially even pivotal. And I think even my qualifications last month, such as they were, may have been too strong. They were all true, and remain so, but if I were a Disney investor I would not take much comfort from any of them.

Easy Come, Easy Go

Begin with the seemingly reasonable price, and the idea that maybe nothing will change because subscribers will just keep it. One of the things online-TV trailblazers like Netflix (NASDAQ:NFLX) and to a lesser extent DISH's Sling TV have found is that ease of exit matters. In fact, Netflix CEO Reed Hastings has said Netflix is deliberately designed to be easy to quit. If it wasn't, a lot of people wouldn't sign up for it in the first place, since they don't want the hassle of dropping it when they're through.

The same logic applies here. ESPN is legitimately popular for a reason, and a lot of people cite sports as their reason for keeping Pay-TV service. However, sports are also what drive Pay-TV's most hated feature, its high price. A service which offers ESPN but makes it easy to add and drop it month-to-month is probably far, far preferable to consumers than a service that either made them take it all the time or a service that didn't offer ESPN at all. That, in turn, may make Sling TV as a whole far more attractive to potential subscribers, reducing churn at Sling and increasing it for traditional providers who don't offer such flexibility.

A lot of consumers who want access to other channels year-round but only want ESPN for college and professional football, for example, could potentially start paying for Sling Orange only August through January, potentially cutting Disney's payments to less than half what they were. Someone who only wants basketball will only buy it from October through June. Baseball fanatics probably only need it April through September. And so on. And having 100% of a subscriber base that only subscribes 50% of the time is no different than having 50% of the subscriber base year round and losing the other half of subscribers. Even if the price is something consumers are willing to pay for, then unless they love every sport under the sun they probably won't need to pay it all the time.

Gaming the Game Channel

The whole point of the cable bundle is that people want to watch something year round, and to get it they have to pay for everything. Now, a childless family, who probably have little need of Freeform or Disney, can add and drop Sling Orange as needed, month-to-month. Disney probably would never have made ESPN available to Sling at all if it had any inkling this was going to happen.

In my opinion the only reason this hasn't happened yet is that this development has been so understated. DISH's marketing for Sling doesn't really emphasize the flexibility it offers in terms of Pay-TV's most important channel. Instead it seems to be letting customers, or writers like me, figure it out on our own. But that could always change, and even if it doesn't customers do tend to figure these things out. I expect interest in Sling to increase very substantially in the coming months.

The Corporate Bundle

Nor should the existence of a small bundle of channels around ESPN be any comfort. Whether ESPN is actually unbundled at this point is almost irrelevant. Disney has been unbundled. Disney the company, not the channel.

What I mean by that is this: Sling now takes a corporate approach to bundling, where each channel is grouped with the other channels that share a common owner. That is certainly far less preferable to Disney, which is accustomed to having its programming subsidized by other competitors, whose programs get higher viewership but lower compensation.

Subsidizing ESPN out of the coffers of other Disney-owned properties obviously does nothing for the company's bottom line. So in a way, it's just as if ESPN was being sold completely separately, at least as far as Disney's finances are concerned.

Precedent Set, No Matter The Size

Regardless, the cat is out of the bag. There is officially a TV service offering access to a broad range of channels that allows ESPN to be sold separately as an add-on. This is a moment that Disney CEO Bob Iger promised was still "more than 5 years away" as recently as last year, though earlier this year he seemed to be softening his stance a little.

Even so, this is probably far quicker than he'd planned. And it is undoubtedly less than thrilling news to most of Disney's other Pay-TV partners, who have pushed for years to get ESPN out of their core bundles so that they could try to stem the hemorrhaging of cord-cutting eating away at their business.

If large players like Comcast (NASDAQ:CMCSA) and AT&T's (NYSE:T) DIRECTV choose to make an issue of this, they will have a much stronger argument for breaking out ESPN from their core offerings as well, now that DISH has done it with Sling. Those two companies alone currently control almost half of the Pay-TV market, and therefore close to half of Disney's Media segment revenue stream. It isn't the size of the current threat that should worry Disney investors so much as the precedent.


The first chink in the armor of ESPN may not take long to grow if customers respond to the offer. And the offer itself is a fundamental threat to both Disney and any traditional Pay-TV company that can't get its costs down to compete with Internet TV, like Comcast and DIRECTV. I still regard this as a very significant development. On the other hand, if Comcast and others do manage to unbundle ESPN, they will have saved themselves at the cost of expanding the carnage at Disney. I would not touch Disney, AT&T or Comcast until we get more clarity on this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Entertainment - Diversified
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here