Theme Park Insider

An ailing ESPN is bad, bad news for Disney theme park fans

October 30, 2016, 1:06 PM · If you want to learn more about the long-term future of Disney's theme parks, you need to take a look at ESPN.

Disney's all-sports cable television network not long ago served as the company's cash cow, the largest channel in a division that contributed nearly half of Disney's operating profit and a third of its income last year. But ESPN is losing subscribers at what appears to be an accelerating rate, as more and more cable TV customers "cut the cord" in favor of online streaming.

What does this mean for the theme parks? If Disney starts losing gobs of money at ESPN, that means less cash in the corporate bank account for things such as new attractions at the parks. An ailing ESPN is already holding back Disney's stock price, according to many analysts' reports. If the channel tanks, so will Disney's stock price — further crippling Disney's ability to expand the parks or even maintain them at their current operational levels.

In short, an ailing ESPN is a disease that threatens the health of the entire Walt Disney Company.

According to Nielsen, ESPN lost 621,000 subscribers this month — the worst one-month loss in company history. Outkick the Coverage did the math, and based on a conservative estimate of ESPN's customer loss, determined that "within five years ESPN will be bringing in less subscriber revenue than they've committed for sports rights."

That's bad. And it gets worse, according to the writer's analysis: "The simple fact is this -- I don't see how ESPN's business model makes sense at all by 2021. The 'Worldwide Leader in Sports' is a dead channel walking."

The TL;DR is this: ESPN is losing customers but faces high fixed costs due to the billions of dollars it is paying in long-term deals for the rights to major sports leagues, including to the NFL for Monday Night Football. No amount of layoffs and cost-cutting can help ESPN maintain profitability given the cost of these contracts. And without rights to show pro sports, ESPN likely will lose even more customers.

Is there a way out for Disney?

The ideal solution would be for Disney to reverse the slide and start adding customers for ESPN. But that would mean finding a way to get more people to start subscribing to cable and satellite television packages again. As the Outkick the Coverage writer details, Disney's can't simply pad its subscriber base by selling access directly to consumers via online streaming, as that would jeopardize its ability to keep earning lucrative subscription fees from cable and satellite providers — ESPN's big source of income. Disney's hands are pretty well tied.

What's left? Sell ESPN, while Disney still can. But everyone in the business knows what's up with the channel. Who would want to buy a channel that's on course for financial disaster?

The businesses whose future is tied together with ESPN's, that who.

A cable or satellite provider could save itself a ton of money by owning ESPN, while also extracting subscription fees from its competitors, giving itself a major financial advantage over its rivals. Because Disney does not own a cable or satellite television provider, ESPN suffers as the market for cable television shrinks. But for the companies providing cable TV, it's all about their share of that market. A company can survive in a shrinking market if it is increasing its share of that market by enough. Owning ESPN might help a cable or satellite provide to do that.

Who are the potential buyers, then? Let's start with Disney's great rival Comcast, which owns NBCUniversal. Also, the newly merging AT&/Time Warner conglomerate. Those companies already have substantial sports programming networks, however. Does that make ESPN a better or worse fit? Your guess is as good as mine. Two other options would be Verizon and the newly combined Spectrum, formed by the merger of Charter, Bright House, and Time Warner's old cable business.

One way or another, Disney's theme parks needs to be freed from an ailing ESPN if they are to have a chance to thrive in the 2020s and beyond. Whether Disney accomplishes that by reversing the slide at ESPN or selling the channel is perhaps the most important challenge facing Disney's management at this moment. But if Disney fails to meet this challenge, fans of the company's theme parks can forget about seeing any big new additions for a long time after the Avatar, Toy Story, and Star Wars lands debut in the next few years.

Replies (36)

October 30, 2016 at 1:18 PM · The opening of the new lands will inevitably mean big crowds and continuing huge profits for the theme park division. ESPN, or anything else, would be no excuse for skimping on the parks when that division is doing gang-busters. We're already had penny-pinching cost-cutting because of Shanghai, ESPN, and God knows what other lame excuse. Enough is enough.
October 30, 2016 at 2:37 PM · It's sad that entertainment companies have ballooned into these huge conglomerates. Sure, it's nice while the money comes in, but when it doesn't? Now the ability of the company to create what was meant to create, i.e. entertainment, is crippled.
Sometimes specialization in an industry is better.
October 30, 2016 at 3:01 PM · i guess they never should have stuck their noses into ESPN to begin with. But I agree with still a fan. Disney still has PLENTY of money.
October 30, 2016 at 3:15 PM · When ESPN didn't get the pick up expected in the UK, Disney were able to make the decision to shut it down.

But Disneyland Paris is still there.

I wouldn't be so quick to point to ESPN as a sort of "canary" about the future of the theme park division.

October 30, 2016 at 3:29 PM · It could mean Disney would want to make all it's WDW parks as successful as MK to expand hotel stays and sales of food and souvenirs. Non of the other 3 parks would make it on their own if they wen't part of the resort. A steady stream of investments in new rides, shows and a workforce that cares could be a lifesaver.
It's not strange Comcast is heavily investing in Universal Studio parks/resorts for probably the same reason as to what is happening with ESPN. They know the income from their cable service will demise over time and they need another product.
October 30, 2016 at 4:07 PM · If ESPN's locked-in deals with the sports leagues expire in roughly 2020, that coincides pretty well with the opening of Star Wars Land(s). I guess for me, it doesn't seem too bad, considering Disney could be out of those deals just as the last of their current attraction lineup opens. They should have more cash freed up by then, and will have seen the impact of Avatar Land.

Assuming Avatar and Toy Story, and the CA version of Star Wars Land all do well, Disney can just be more careful and conservative in their television rights deals after the current deals expire, and wait it out.

Then in 2021 or so, they can start looking at the parks again, without being weighed down by the insane fees they're paying for a sport (NFL) with a declining viewership.

October 30, 2016 at 4:47 PM · No contract is not negotiable. Ask the NFL, NBA, NCAA for a renegotiation of their existing contract or they can take their programming elsewhere. The truth is they have no where to go either. The major leagues and teams have their own channels, but they require the cable and satellite companies to pick them up. Less subscribers are willing to pay for special channels. In the end, one good package is better, but the public prefers a la carte. A la carte is ultimately more expensive per each channel, but customers can save on their overall bill. ESPN needs to lower prices to keep customers, but they aren't willing to do this. Offer a cheap inclusive package or a slightly more expensive a la carte price.
October 30, 2016 at 5:04 PM · The article I linked used the term "sports bubble," which I think is an excellent description of what's happening in that industry right now.

But when bubbles pop, things get ugly in business. No amount of lightsaber sales in Star Wars Land will make up for what Disney will lose if ESPN's subscriber loss continues. All parts of the company will feel the pain of that, including the parks.

October 30, 2016 at 5:58 PM · I would hate for it to affect the parks, but as for ESPN having problems.

Tough.

I've never been a sports person and would have never subscribed to it, but because I didn't have a choice I've been paying for something I didn't want for almost 25 years. The fact that their business model isn't sustainable is something they should have been dealing with long before now.

October 30, 2016 at 6:00 PM · Maybe Disney should just sell the game broadcasting rights to other channels and shut the network down completely. Maybe put the sports talk show guys on Sirius and the highlight shows on the internet with ESPN branding or something. Disney used ESPN as a major cash cow for a long time, but now that "cow is an utter failure" so they need to drop it before it starts going in the red. I think the problem whether they sell it or not is that that major source of income is gone. However, unlike in the 80s when they let their product quality slide and focused on the VHS cash cow, this time they are actively keeping their quality up and trying to increase profits by tapping into large markets like China. The stock annalists are absolutely besides themselves about ESPN. They go on and on and on about it.
October 30, 2016 at 6:03 PM · People still have cable? I cut the cord well over 10 years ago and never missed it a bit. Cable is dead, and good riddance. The future is online streaming and a la carte. Disney could convert ESPN to an online streaming service and leave cable forever, but even better is to sell it now while it's still worth something. The demise of the cable/sports juggernaut will be swift and severe. Spectator sports is a dinosaur along with its audience of the elderly. Young people in particular want active lives, not being passive dupes in front of the tube.
October 30, 2016 at 8:06 PM · I admit it. I haven't cut the cord because of sports. But costs are tempting me.

The problem is that Disney/ESPN and other sports media bid the price of events up so high. Price became their defensive weapon to keep others out of the high visibility markets. But Disney has priced the audience out of the market. It took years and the Internet encouraged the beginning of the exodus. In other words, quality costs and you can work against yourself to make it cost even more ending by pricing yourself out. The bigger the investment, the more vulnerable you are.

What will be the similar trigger in the theme parks? Disney has been playing the same game with theme parks. The investment is huge, prices are at the extreme max, and they are vulnerable. The next economic downturn could be that trigger, especially if it's a 2001 or 2008 type event.

October 30, 2016 at 8:16 PM · I get what you're saying about ESPN's struggles and how it affects the bottom line of the parent company. However, Disney's parks will gain larger profits if they invest in the parks correctly. Of course, how they do that isn't an easy question. It will take some bright minds that may not even be with the company today to figure out that equation.
October 30, 2016 at 9:31 PM · While I will not deny that a failure of ESPN will negatively effect the Disney theme parks, I do not believe it will halt future attraction development. Instead, I'm guessing it would lead to a lot more cloned attractions, reskins, and lower cost options (such as screens over animatronics). Disney definitely doesn't want to lose attendance and I think it's clear they've reached the point where people will stop coming if there isn't a reason to return, so stopping development completely would be a mistake. How many fewer people would come, however, if Epcot simply rethemed Mission: Space to Guardians of the Galaxy rather than building a whole new ride for the IP? Does Walt Disney Studios need a major Toy Story Land expansion, or is a simple clone of Toy Story Midway Mania sufficient? Will the average Southern Californian care whether we include a big new roller coaster in Marvel Land? It is questions like these that Disney will likely be asking, not whether they should continue work on future projects.
October 30, 2016 at 11:13 PM · First My Magic Plus, then Shanghai, now ESPN? Disney should have never gotten into the media or sports business, they should have concentrated on their core product, animation, films and theme parks. It started because Eisner was a sports fan and bought the Angels and Mighty Ducks.

I've heard people argue that the next CEO needs to understand media, but I think the biggest Disney fans love the theme parks, witness the massive overcrowding at Disneyland. To me, Matt Ouimet, who understands the Disney fan and righted the deteriorating ship of Disneyland in the 90s is the best man to be the next Disney CEO.

Home media, even video games or VR cannot replace being in an actual environment. Universal has upped the game with innovative screen based attractions, but even they may soon reach the point of fatigue. I've heard the Jimmy Fallon may also be screen based. Add that to Fast and Furious, Kong, Transformers, Gringotts, Forbidden Journey and Spiderman, and that's a lot of screen based attractions. They're cool, but not the same as being totally in a real environment.

Also, screen based attractions tend to have a storyline, which is the same every time, whereas rides like Pirates and Haunted Mansion draw their strength on just being cool environments in which to lose yourself in. Walt Disney rightly decided to emphasize environment over story.

Amazon may take away business from brick and mortar stores, but IMO home media can never replace the theme park.

October 30, 2016 at 10:20 PM · Even with ESPN tanking a bit, Disney still has a strong profolio with movies and the parks. I think some media companies would kill to have Disney's successes.

Not saying that ESPN has made some bonehead decisions, but Comcast didn't have a strong start along with many other sport networks. ESPN is still the barometer and the standard. I think Disney should look into revitalizing it. This is Disney's franchise for the male demographic.

October 30, 2016 at 11:29 PM · Why doesn't Disney buy a streaming company, like Hulu or Crackle, and simply run ESPN as a streaming service with pay per view options. I don't think people's love of sports is gone, just that cable as a medium doesn't compete with streaming. It's one disadvantage of most streaming services that they don't have sports.

I'm sure people would jump at the chance to stream current matches, with advertisements, and have the option of streaming the last 5-10 years of matches at their fingertips (like Netflix, but with sport).

I don't buy that the current generation is more active, just check how many people binge watch whole TV series and the skyrocketing obesity rates.

October 31, 2016 at 6:30 AM · Disfan is absolutely right. Iger has been mismanaging the theme parks and hotel divisions for years. It's not surprising, considering Iger is a TV network guy who spent the first 20 years of his career working for ABC. Square pegs, round holes.

What's puzzling about ESPN is that the writing has been on the wall for years. Cord cutting is not a brand new phenomenon. ESPN/ABC is supposed to be Iger's core competency. Why didn't Iger spin off ESPN/ABC years ago when it could have earned top dollar? Was Iger more concerned with protecting the perks of his empire than doing right by shareholders?

It's time for large Disney shareholders to take an activist role in Disney. Spin off ESPN/ABC. Fire Iger. Fire Chapek. Replace Iger with someone like Matt Ouimet who understands hospitality and customer service.

October 31, 2016 at 7:04 AM · It's OK they will just put park admission bit more to stop more people from going.
False economy
October 31, 2016 at 7:20 AM · Would it be too much to suggest that Disney try to buy Verizon? All things considered, this could be a power move that would be good for the combined companies and shareholders.
October 31, 2016 at 9:24 AM · ESPN profitsmay be tanking, but Disney's film industry is blowing up like never before. Their Marvel movies are hits that regularly get over a billion at the box office, Star Wars as well, and their animated films for the most part are a great success as well. What they may be losing with ESPN they are making up for in other areas
October 31, 2016 at 9:58 AM · I think ESPN has been way too high on the hog over the past 3-5 years, and their day of reckoning is coming. They've been handing out rights deals like they're candy, no more so than what they pay for the NFL. ESPN pays more for their Monday Night Football package, almost twice as much, than NBC pays for their Sunday Night Package, which includes a spot in the Super Bowl rotation. ESPN says they pay a premium to show more lengthy highlights and the new contract allows them to produce more NFL-centric shows. However, if I were a business analyst, I would look at the rights contracts (along with the College Football Playoff) as the lead balloons.

ESPN has been smartly trimming their talent costs, understanding that an overabundance can actually be a hindrance. As such, the talent that ESPN has wisely let go (Skip Bayless, Bill Simmons, and Mike Tirico) has not moved the needle for their competitors, and in some cases, the competition is taking heavy losses.

I think they'll always be a place for live sports, and ESPN will continue to be the "Worldwide Leader", but the network does need to be a little smarter with their rights fees (especially when no one is bidding against them as was the case with the recent NFL extension) as the landscape of television changes. However, I don't think selling ESPN is a necessary move, nor will looses from the network bleed over to the theme parks.

I do find the concept of Disney purchasing a content distributor very interesting, but based on some of the negative buzz around the AT&T/Time Warner merger discussion, the idea of a content provider also owning a distributor (as currently exists under the Comcast/Universal merger) may not be allowed to happen again.

October 31, 2016 at 11:18 AM · What if Disney sold ESPN to Comcast/Universal for cash and the theme park rights to the Marvel superheros?
October 31, 2016 at 1:24 PM · Robert, I'd suggest you read up on Disney's recent acquisition of BAMTech and how they'll utilize the platform to help transition their content delivery model from a subscriber base to a streaming base. I'd happily pay $10/mo to stream all ESPN content to any device at any time. Current revenue per a subscriber, last I saw, was roughly $4.50.

I'd argue that ESPN is not "a disease" to the rest of Disney's businesses but a Business Unit that is appropriately expanding it's content delivery medium. Cord Cutters represents a huge opportunity for Disney as they outrace their competitors to this space.

I'd also argue that the Theme Parks monetizes the different Disney brands which are derived from outside ESPN and more in their Studios divisions. Studios has posted records years and continues to release successful film after successful film with more and more stories and characters. You can be sure Disney will invest in Parks to monetize these brands regardless of ESPN's performance.

*I am not a Disney employee, simply an avid fan of their business.

October 31, 2016 at 2:31 PM · Nielsen is now walking back its report of a 600,000-plus loss in ESPN subscribers this month. But since the Outkick the Coverage analysis was based on a monthly subscriber loss of half that - which ESPN has been suffering on a consistent basis recently - the concern should remain.
October 31, 2016 at 2:32 PM · Jeff,

That addition might double the cost of the transaction, I'm afraid. ;^)

October 31, 2016 at 3:29 PM · >>>they should have concentrated on their core product, animation, films and theme parks.

Err, the first two of those are... Media.

October 31, 2016 at 10:05 PM · This is the result of Disney becoming a giant conglomerate. Decades ago Disney was a boutique studio. They were driven by innovation and quality. Today they a hard ship to steer. One that has several icebergs on the horizon.

I say, it serves them right if ESPN crashes, the parks take a hit and their movie franchises burn out with time.

November 1, 2016 at 12:41 AM · With regards to the previous anonymous posts calling for Matt Ouimet being Disney CEO.

Sorry folks I don't see it happening due to how I assume Disney's board thinks.

Eisner, Walls, Iger and even I dare to say Ovitz are all Hollywood guys and Disney's board seems to want a CEO with a "Hollywood" background.

Disney was a movie studio first theme park second.

It's biggest unit still is it's media division followed by it's theme parks and resort so the prerequisite for Disney's next CEO according to it's board of directors os a candidate with a media background and unfortunately Ouimet does not fulfill that requirement.

Plus Cedar Fair just renewed his contract allowing him to stay as long aa his likes.

November 1, 2016 at 6:43 AM · I like Disney Movies. I like the parks. I like the cruise line. I don't care about ESPN. Unfortunately, they are owned by ABC, which is owned by Disney. The idea that ESPN is hurting the parks bothers me. What if ESPN is sold, even at a loss. Maybe Disney should cut its losses. Maybe they should cut ABC as well.
I understand that Disney is an entertainment industry. It used to be wholesome for the whole family. Now it's specialized to many different and separate areas. Let's get back to "family" entertainment.
November 1, 2016 at 1:37 PM · Chad said: "They should have concentrated on their core product, animation, films and theme parks.
Err, the first two of those are... Media."

I'm talking about media distributors, not media producers.

Yeoswer said: "It's biggest unit still is it's media division followed by it's theme parks and resort so the prerequisite for Disney's next CEO according to it's board of directors os a candidate with a media background and unfortunately Ouimet does not fulfill that requirement."

Matt Ouimet may not have a media background, but what has happened to Disney under Iger, former head of ABC? Yes ESPN made lots of profits for years, but as we see now, the market is changing, and Disney is left holding the bag. If Iger was so media savvy, shouldn't he have seen this situation coming?

Matt Ouimet has the most important quality, he understands the customer. He was a finance guy and became President of Disneyland. At first the Disney fans were wary of a finance guy heading Disneyland, but he made a concerted effort to learn all he could about Disney, Disney's customer and the market. And he revitalized Disneyland after years of neglect under Paul Pressler and Cynthia Harriss. That, to me is gold, worth far more than experience in any particular area. Ouimet's approach can work in any area.

November 1, 2016 at 12:28 PM · I have another question, when the cost overruns at Shanghai impacted the domestic parks, I wondered why Disney couldn't just draw money from the studio and other divisions that were doing gangbusters. But the argument was because all the parks fell under the same division. So why do the parks have to suffer now because of ESPN? Aren't they separate divisions? Cant they cut budgets in the media division? Or even if they are, why do they have to touch the parks?
November 2, 2016 at 7:58 AM · RE: Disfan

I do not dispute that Matt Ouimet is a great CEO, he has done a great job as President and CEO of Cedar Fair. In fact he will down as President of Cedar Fair but will retain the title of CEO, as Cedar Fair has just promoted their COO to replace him as president. Looks like succession plans are in play there as I assume he will follow in the footsteps of Andersen at Six Flags and move into a chairmanship role at Cedar Fair eventually.

I was just saying that he does not possess the qualities that DISNEY'S BOARD OF DIRECTORS is looking for in a CEO to replace IGER.

With regards to "why Disney couldn't just draw money from the studio and other divisions that were doing gangbusters."

I assume each division of any fortune 500 company is expected to keep a separate Profit/Loss Statement for the sake of the Board, shareholders and Wall Street.

Ever since the Enron/MCI WorldCom accounting debacle, it is expected that all accounting statements are as open and transparent as possible.

The movie studios maybe doing gangbusters but for every Marvel/Avengers Blockbuster, there is a John Carter/Tomorrowland Bomb to write off.

ESPN has fixed long term programming costs which cant be cut, cutting staff there would negatively affect programming quality which would make the situation even worst.

Disney is a media conglomerate, when its performance disappoints, all divisions suffer. Plus its easier to cut at the theme parks since it staff are more expendable/replaceable and its expenses and costs can be amortized over a longer period of time than at the other divisions

November 2, 2016 at 9:49 PM · Understood, I was just hoping against hope that the board would look beyond type and choose a person who has the best overall qualities.

Also, I'm tired of the domestic parks getting the short shrift. The theme parks are the most tangible connection between the Disney company and it's customers, when people have a great experience in the parks, it fuels passion for all things Disney. Growing up, I loved the animated movies, but it's Disneyland that really made me excited. But when the parks are over crowded, prices keep going up, and things are cut back, Disney is just hurting it's relationship with it's most loyal customers.

November 2, 2016 at 10:38 PM · Different decade; same story. Back when the film division was hemorrhaging money, the theme parks suffered. When ABC was turning into the "fourth network", the theme parks suffered. When Disney buys a new channel, the theme parks suffer. When the Paris parks do poorly, the US parks suffer. When other new parks are delayed, the theme parks suffer.

A REAL company would've long ago split the theme parks from the media portion of the company. But Disney doesn't care about the parks, apart from their usefulness in stockholder reports. "We're building a new park!" "We're building another new park!" "We're coming up with this new system that will make people spend more time shopping and eating in the parks!" "We're not building ANYTHING in the parks!!!" "We raised prices AGAIN!!!"

Now that the parks are all suffering from those price hikes, it'll be interesting to see how they solve their media-side issues in the future.

November 2, 2016 at 11:30 PM · I've been hearing for years that Disney loves to "rob Peter to pay Paul" by leeching profits from a thriving division in order to prop up a dying one. I can't imagine a worse business philosophy.

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