Disney CEO: ESPN Direct Is on the Table

By Markets Fool.com

Source: Disney/ESPN

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Although analysts are divided into two camps as it relates to The Walt Disney Company's outlook, the disagreement tends to hinge on one critical issue: pay TV. Bears are worried about the company's dependence on the large-package pay-TV ecosystem for its operating income; last fiscal year, the company's media networks division provided 53% of all operating income. But, the bears argue, pay TV is under strain from cord-cutters and cord slimmers.

Bulls, on the other hand, feel the dangers from the cord-cutting and cord-slimming phenomena are overstated. Additionally, these analysts argue, Disney is a multifaceted entertainment conglomerate with film studios, theme parks, and consumer products. Supporting the bullish thesis are the huge successes of recent films "Star Wars: The Force Awakens" and "Zootopia." However, last fiscal year, the film division was only responsible for 13% of operating income, meaning the company would have to tremendously increase its production of hit movies for thatdivision to generate anywhere close to what comes out of Disney's media networks division.

The crown jewel of Disney's media networks division is sports-focused network ESPN. Until recently, Disney CEO Bob Iger and ESPN President John Skipper were steadfast in their refusal to consider a direct-to-consumer ESPN service like Time Warner's HBO Now. But now, it seems Iger is now reversing his stance.

Speaking at Deutsche Bank's Media, Internet and Telecom Conference, Iger stated, "Some form of direct-to-consumer proposition" is under consideration. Going on, the CEO elaborated that price could be the sticking point.

Sports content costs a fortune
It's widely known that ESPN is by far the most expensive cable channel in terms of carriage fees. SNL Kagan estimates cable subscribers pay nearly $6.61 a month to have the network in their bundles. It isn't as if ESPN is a wasteful network; the prices ESPN pays for sports content rights have tremendously increased. ESPN has been able to pass along these increases to consumers, mostly due to the fact the large-package model limits channel choice and obscures channel cost.

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Those hefty carriage fees have been extremely lucrative to ESPN. According to analysts quoted in The Wall Street Journal, ESPN would have to price its standaloneover-the-top ESPN offering at $30 per month to make the same money as it does from cable fees. A poll from media-analyst firm BTIG Research found only 6% of Americans would pay $20 per month for ESPN and ESPN2. If the economics of the pay-TV industry changes, and it does appear it's under pressure from cord-cutters and cord-slimmers, it appears ESPN will feel the most pain from the changes that follow.

Is this bluster?
There are three major parties in the pay-TV relationship: End consumers who paying the bills; the networks which receive affiliate fees and advertising; and the multichannel video programming distributors, or MVPD, which collect the bills, ensure content delivery, and take a markup for their efforts. While end users are not privy to these negotiations, unless the other parties cannot come to an agreement, content deals depend on a number of factors.

The reason why ESPN has been able to charge such a high monthly fee per subscriber is that there's a dedicated contingent of pay-TV subscribers who are seriously interested in live sports programming. As such, ESPN tends to create a moat against cord-cutting among that sports-desirous demographic. If Disney offers a direct-to-consumer ESPN option at a reasonable price, it could cut MVPDs out of the monetization chain. Openly discussing that direct-to-consumer option could be a wise negotiation tactic for the company as it continues to hammer out deals with MVPDs.

ESPN has been steadfast in its opposition to a direct-to-consumer option because they're the biggest beneficiary of the current pay-TV model. In the end, I doubt they're looking to kill the golden goose now.

The article Disney CEO: ESPN Direct Is on the Table originally appeared on Fool.com.

Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.