Disney shakes up sports as costs surge and activists circle ahead of earnings report

Disney needed a big sports deal. This might not be it.

Feb 7, 2024 - 20:30

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Disney shakes up sports as costs surge and activists circle ahead of earnings report

Updated at 9:50 AM EST

Disney (DIS) - Get Free Report shares moved lower in early Wednesday trading as investors prepped for the media and entertainment group's fiscal-first-quarter earnings while parsing the details of a major shakeup in the sports-broadcasting sector.

Disney, which owns both linear TV broadcaster ABC and sports-focused cable group ESPN, has seen a massive surge in the costs of sports-broadcasting rights over the past decade, which now comprise around 40% of its overall content spending.

CEO Bob Iger, in fact, unveiled plans last year to seek minority partners for ESPN as more American viewers switched from cable bundles to streaming-service options and distributors balked at increased programming fees.

Disney has somewhat mitigated that by boosting the number of subscribers to its ESPN+ streaming service, which carries games from all four major sports leagues, to around 26 million last year.

But the unit only recently turned a profit, after Disney began reporting ESPN as a largely stand-alone entity in its sports division for the first time last year, while overall streaming losses were pegged at $387 million over its September quarter.

Iger: Building ESPN a 'core opportunity'

Iger told investors in November that building ESPN into the "preeminent digital sports platform" would be a "core building opportunity" for the group.

"We're already moving quickly down this path, and we are exploring strategic partnerships to help advance our efforts through marketing, technology, distribution, and additional content," Iger said.

ESPN, the heart of Disney's sports division, began reporting as a stand-alone unit late last year.

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Late Tuesday, Disney delivered on those plans with a deal to create a streaming sports hub, much like the one it created with Hulu in 2009, with sports broadcasting rivals Fox Corp. (FOXA) - Get Free Report and Warner Bros. Discovery (WBD) - Get Free Report.

The new platform, which doesn't have a name – or for that matter an expected monthly price – is expected to launch this fall and carry games from the National Football League, the National Basketball Association, Major League Baseball, the FIFA World Cup of soccer and a host of college sports.

The new services will be offered as stand-alones, or tied to streaming services offered by Warner Bros. (MAX) and Hulu itself. It will also include the main sports channels from all three partners: ESPN, TNT and FS1.

"This means the full suite of ESPN channels will be available to consumers alongside the sports programming of other leaders," Iger said in a statement.

KeyBanc: Pricing of new sports venture key factor

KeyBanc Capital Markets analyst Brandon Nispel said, however, that the deal likely gives Fox and Warner Bros. Discovery more upside, in that they get equal equity stakes despite having much smaller portfolios of sports-specific content and no clear (as yet) streaming strategy.

Nispel also notes that pricing will be key and will likely need to come in under $30 a month in order to be profitable.

CNBC's David Faber, meanwhile, reported that the service could be priced "not much more" than $40 a month.

"We are relatively cautious on sports in streaming given [that] our survey work indicates only about 20% of subscribers are willing to pay for a sports-focused [direct-to-consumer] service priced above $30/month and the cost of sports programming makes this very difficult to be profitable," Nispel said.

Making this deal work, in terms of both profits and subscriber growth, will be crucial for Iger as the group heads into another calendar year that is likely to be dominated by pressure from activist shareholders.

Activist investors targeting Disney want action

Iger has said he wants Disney's streaming business to be profitable by the end of this fiscal year, which ends in September, but he noted that “progress may not look linear from quarter to quarter.”

Disney, in fact, unveiled a new website earlier this week devoted to persuading shareholders to reject the activist investor Nelson Peltz's effort to install himself, as well as former Disney executive Jay Rasulo, on the group's board of directors.

Peltz, who has criticized Iger's efforts to boost profits and revive the group's moribund stock, owns around 3% of Disney through his Trian Fund Management group. Disney shares have fallen 10% over the past five years, compared with a 53.4% gain for the Dow Jones Industrial Average.

Blackwells Capital, another activist investor, also wants board seats and has called for Disney's overall business units to be split in order to maximize their earnings potential.

“Disney may simply be too complex for any one successor (Iger) to manage holistically, and Blackwells believes that it is the responsibility of the board to oversee these types of analyses in the ordinary course," the group said earlier this week.

Disney will hold its annual meeting, at which shareholders will vote on the board nominees, on April 3.

Earnings and streaming profit in focus

Ahead of that, however, comes today's first-quarter-earnings report, where Disney is expected to report profit and revenue over the three months ended in December came in largely flat with 2022 levels, at 99 cents a share and $23.69 billion respectively.

Disney's sprawling empire, which includes everything from cruise ships to sports-content licensing, was condensed into three new reporting segments last year (Entertainment, Sports and Experiences). PepsiCo's (PEP) - Get Free Report chief financial officer, Hugh Johnston, was brought in to succeed departing veteran Christine McCarthy.

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Sports revenue is expected to come in at $4.65 billion, a 19% increase from the September quarter, linked in part to price hikes for ESPN+ and a crackdown on password sharing.

Experiences revenue, which include Disney's theme parks and consumer products, is estimated at 3% above a year earlier to around $9 billion.

Direct-to-consumer revenue in the Entertainment division, meanwhile, is seen at $5.5 billion, with another operating loss of around $390 million.

Disney shares were marked 1.8% lower in early Wednesday trading to change hands at $97.58 each, a move that would trim the stock's six-month gain to around 12.4%.

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