Walt Disney Co Hedges Its Bets for the Death of Cable

By Markets Fool.com

Regardless of how cable evolves and loses its influence, people still want good content, andWalt Disney(NYSE: DIS) has a ton of it. Thus, it is now just a question of how to actually deliver that content to consumers. The company has just invested $1 billion in BAMTech, a streaming platform which will help Disney reach audiences through over-the-top networks.

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In this episode ofIndustry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Daniel Kline dig into the finer points of the deal -- what Disney is getting, what BAMTech can offer, and more. The pair also discuss what the House of Mouse plans for its first streaming offering coming later this year, and where Disney may eventually go when the traditional cable model meets its end.

A full transcript follows the video.

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This podcast was recorded on Aug. 23, 2016.

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Vincent Shen: Disney and their $1 billion investment in a minority stake in BAMTech, coming from theMLB. Just a little bit of background here -- Disney acquired a 33% stake of BAMTech, which is basically the streaming video arm originally created by MLB, I think in 2000, to help the League with their different team websites. This $1 billion is going to be paid in two installments, one now and one in January 2017, also giving Disney the option to acquire majority ownership in the future.

This obviously plays into a lot of the long-term issues we've seen with Disney, withESPN. I'm going to let you kick it off from there, Dan.

Dan Kline:Sure. This is a really smart play by Disney. If you look at where BAMTech is, they're the technology behind, most notably,WWE Network. So, they have it down in terms of subscription model, delivering content direct to your house with all sorts of on-demand. I'm a WWE network subscriber. It works really well. What Disney is going to do with this is, first, they've already said, they're going to launch a sports platform. They haven't specified what that's going to mean, but let's assume it's going to rope in a bunch of ESPN content. And the reason for that is, cable subscriptions are going down, and more networks are offering skinny bundles, and some of those skinny bundles do not include ESPN. That means you'll have the ability to get cable and say, "I don't want ESPN."

Given that Disney gets paid about $6.50 a customer for every cable home that gets ESPN, whether they want it or not, they need a venue to charge more than that to the people who desperately want it but don't necessarily want cable. So, the guy who's a huge SEC fan, or a huge Big 10, Big 12, whichever college network, or they love Major League Baseball, or whatever other things Disney has rights to, they might be able to spend $19.95 a month and get a huge sports package from ESPN where Disney will do better than it was doing from the cable company. So, maybe one new customer will make up for the loss of three or four customers. This is very much a future play.

Shen:So, $1 billion. This is probably one of Disney's bigger deals in the string of acquisitions, but I think CEO Bob Iger has a really good track record when it comes to his different deals, be it Lucasfilm, Marvel. Those have obviously proven themselves to be very long-term, forward-thinking plays that have worked out very lucratively for the company. With BAMTech now, Disney mentioned the service that they want to release will be out by the end of the year, right?

Kline:It'll be out by the end of the year. And it's going to be the first of many. You already have Disney in Europe and other markets has talked about, or even launched, I don't remember exactly, a service with some of its children's networks. Disney owns so much content, and it's content that people really want. There's a lot of cable networks that people could live or die with. Who cares if you get, I don't know, the cooking network. Maybe it has a small cadre of devoted fans. OrVH1, orMTV...yeah, people like them, but if you don't have them, it's probably not the end of the world. If you have a young child and you don't have the Disney channels, you will pay anything they charge in order to get them. The same is true when you get to teenagers or tweens with some of that programming. So, Disney's ability to use BAMTech to create all sorts of different packages, without having to make that technology investment, is huge.

And it's also worth noting that they're offsetting some of the purchase price with the fact that this is a company, a private company, but a company that has revenue. So, they're already taking a cut of the WWE network subscriptions, which is around 1.3 million. They're already getting a cut of the different Major League Baseball packages. This was a huge technology buy that also offsets itself.

Shen:Yes. Some of BAMTech's other clients, other services that run through their technology -- obviously MLB, the creators, but alsoNHL, WWE, like you mentioned, evenHBO, actually, so...

Kline:NHL has a small stake in it as well, so they're not going anywhere.

Shen:Annual revenue, from what I could find -- I think this came from TheNew York Times-- for BAMTech is actually about $900 million. Like you mentioned, that stake has some of that revenue flowing back to Disney now that they have that one-third stake in the company. For BAMTech, the package that Disney is planning to release by the end of the year, they have all this content that you mentioned with sports and ESPN, but they don't even air.

From what I could find, there's not going to be a crossover between what you see on traditional television ESPN and this service that they're planning to release at the end of the year. But it's basically all the things they currently have the rights to but don't air. And I think with college sports, or maybe other sports beyond the major leagues that maybe just aren't as popular, relatively, but do have their audience, this will be a big offering for the viewers that are interested in that.

Kline:Sure. At first, it's a very regional service. They are televising the Rutgers football game, that otherwise going to make it on the air, to a very small percentage of people multiplied over tons and tons of content that works. But eventually, this is going to be ESPN, this is going to be SportsCenter, it's going to be all of the Disney content, because they're going to be very respectful of their cable partners. They're not going to break things off until they absolutely have to. But you've seen, they're part ofSling TV, they're part of theSonyVueservice. Eventually, as cable becomes weaker and doesn't have the leverage to say to Disney, "We're doing great by you, don't take your stuff away,". They're going to have to offer a stand-alone option for their content. And I think, eventually, that will be everything Disney owns, from its movies to its television channels, to all the sports content. And this is really about buying the platform that will let them deliver that.

Shen:You mentioned Sling TV and PlayStation Vue as the skinny bundles. I think during the earnings call, Disney also mentioned that they're part of the AT&T DirecTV Now service that's going to be over-the-top, I'm not sure on all the details around that, but that's another, essentially, offering or package that they will be a part of, and that's important.

Kline:There are so many skinny bundle packages in the works that are essentially variations on Sling TV that, if right now, you stopped the show and announced one, I would not be surprised at all. This is a Wild West where once one company negotiates a rights deal -- and originally, from what I've read, I would say the Sling rights deal is not a great one. It has caps on how many they can eventually sell, but now that Sony has come along, you're starting to see parameters for these agreements. And once you see a base price in place, it becomes easier for a small company, a new company, a big company, whoever it is, to go toTBS orCNN or whoever and, obviously, their parent companies, and say, "OK, I want these channels. I'd like to pay based on what Sony's paying, based on what these other parameters are." It becomes a lot like the music streaming space, where onceApplemade its deal, you then had the ability for all these other companies to come in and negotiate deals as well.

Shen:Thanks a lot for your thoughts, Dan. I want to end this segment on one final thought, very recent, too. It's the fact that with ESPN and moving some of its content to this service that they'll be announcing soon, it kind of reflects a trend, I think, was seen with the 2016 Olympics, too, in Rio. NBC, which is part ofComcast, saw significant declines in their traditional TV audience, for usually one of the biggest draws of the year, when the Olympics are airing.

On the other hand, their live streaming of events skyrocketed, I think it was triple digits from the 2012 London Olympics, especially among younger demographics. So, while it's not a one-to-one trade-off, the dynamic is certainly one that I think Disney sees, knows is coming, they're thinking long-term. Bob Iger knows -- I don't remember when his tenure runs out, another couple years, but this is setting the company and shareholders up for the long term.

Kline:It's a trend, and Disney's playing it carefully. Eventually, we're going to be in an all-streaming universe, or a mostly streaming universe. What we don't know is what the time table is. I think you can take some things away from this Olympics, but you can also look at the fact that there were no bad guys. There was no Russia to battle the U.S. for medals, so generally we walked away with the medal count, which maybe made the Olympics less interesting, which probably drove away some of the television audience as well. So, you see signs that streaming is moving forward, but you don't see an end date for cable yet. So this is Iger saying, "I'm going to stay where I am, but I'm also going to go to the future." And it's a very smart play.

Vincent Shen has no position in any stocks mentioned. Daniel Kline owns shares of World Wrestling Entertainment. The Motley Fool owns shares of and recommends Walt Disney. Daniel Kline and The Motley Fool own shares of (and recommend) Apple. The Motley Fool has the following options: long January 2018 $90 calls and short January 2018 $95 calls on Apple. 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.