Walt Disney Co. is going to give the go-ahead on a more robust ESPN direct-to-consumer service somewhere down the road while weighing the impact of such a move on its linear sports business.
Speaking on the company's May 11 earnings call, CEO Bob Chapek did not provide a time frame, a structure or a price point for the prospective expanded offering. Chapek believes ESPN can create the "ultimate fan offering that will appeal to super fans that really love sports."
However, standing in the way of any immediate actions are considerations around ESPN Inc.'s portfolio of linear networks, which Chapek called "huge cash generators."
"So, the hesitancy to move too fast away from those is really a cash flow situation that I think puts our company in a healthier overall situation," Chapek said.
Kagan, a media research group within S&P Global Market Intelligence, projects that the flagship ESPN network alone will generate some $1.33 billion in cash flow during 2022. The channel's average monthly subscriber base is estimated at 73.2 million for the year with a net advertising revenue forecast of $2.13 billion. ESPN carries an average affiliate revenue monthly subscriber fee of $8.72, yielding affiliate revenue of $7.66 billion, according to Kagan estimates.
ESPN Inc.'s portfolio extends to ESPN2 (US), ESPNU (US), ESPNews (US), SEC Network (US) and ACC Network (US), among other properties.
Chapek said the company is "very conscious" of its ability to go more aggressively into the DTC arena with ESPN.
"What we're doing is sort of putting one foot on the dock, if you will, and one foot on the boat right now," Chapek said. "But we know that at some point when it's going to be good for our shareholders, we'll be able to fully go into an ESPN DTC offering."
Lee Berke, principal of consultancy LHB Sports Entertainment & Media Inc., said in a recent interview with Market Intelligence that he anticipates ESPN's top sports properties will likely become available on all screens over the next three to five years as the traditional pay TV universe unwinds.
As Disney's CEO teased a more expansive sports DTC offering in the offing, the company reported that ESPN+ added about 1 million paid subscribers sequentially in the fiscal second quarter to reach 22.3 million customers. ESPN+'s paid-subscriber count stood at 13.8 million at the close of fiscal 2021's second quarter.
Average monthly revenue per paying subscriber improved 4% to $4.73 from $4.55 in the prior-year period, stemming from an increase in retail pricing and, to a lesser extent, higher-per-subscriber ad revenues. Those gains were partially countered by a higher mix of subscribers tied to multiproduct packages.
ESPN+ retails for $6.99 per month and $69.99 annually. The Disney bundle, comprising Disney+, the ad-supported version of Hulu LLC and ESPN+, is available for $13.99 per month. Since Dec. 21, 2021, the Hulu + Live TV subscription video-on-demand service now includes Disney+ and ESPN+.
Disney saw programming expenses increase across its DTC segment as well as recording lower operating income at Hulu. As a result, the segment's operating loss almost trebled to $887 million, from a loss of $290 million in the year-ago period, despite a 23% jump in revenues to $4.90 billion.
The company reported 7.9 million new Disney+ Hotstar subscribers to reach a combined 137.7 million customers, up sequentially from 129.8 million in the prior quarter. Combined, Hulu SVOD and Hulu + Live TV customers reached 45.6 million, up slightly from 45.3 million at the end of the fiscal first quarter. Hulu's SVOD offering counted 41.4 million subscribers, up sequentially from 40.9 million at the end of the first fiscal quarter. The distribution service saw its base decline sequentially to 4.1 million subscribers from 4.3 million, though it was still up 8% from the year-ago period.
CFO Christine McCarthy said that ESPN scored a 30% rise in advertising in the quarter. To date, domestic cash advertising sales at ESPN for the fiscal third quarter are pacing significantly ahead of where ad sales stood at the corresponding stage last year, McCarthy said.
Ad sales are benefiting from a return to a pre-COVID-19 NBA schedule that is driving increased viewership and pricing, according to McCarthy. The company is also in the first year of its seven-year pact with the NHL, airing the sport's playoff action for the first time since 2004. ABC will present the Stanley Cup Final in June.
