Monday AM Briefing #70
*Need* to know stories and trends for this morning & the week ahead; A Short Essay on CEO Bob Chapek’s Choices for ESPN's Future at Disney
A Short Essay on CEO Bob Chapek’s Choices for ESPN's Future at Disney
I don’t think it’s that surprising that Disney is considering whether to spin off ESPN, as both Dylan Byers of Puck News and Alex Sherman of CNBC have reported over the past week.
The growth of cord-cutting and sports betting are two, new guiding market paradigms in sports that are the antithesis of ESPN’s business model and brand, to date.
But the real complicating factor is streaming. I wrote about how Disney was A/B/C/D market testing sports in streaming back in February in Mic Drop #18: Some Rewards for Skeptics of Disney+
Test A (U.S. only): Bundle of Disney+, Sports (ESPN+), and vMVPD (Hulu + Live) and/or adult audience content (Hulu)
Test B (Latin America): Bundle of Disney+ and Star+ (ESPN and adult audience content)
Test C (Europe, Canada, ANZ, Singapore): Disney+ app with Star Branded Tile (adult audience content)
Test D (India, Indonesia): Disney + Hotstar (Disney+, adult audience content, and sports)
Still Early Days for A/B/C/D Tests
Tests B and D involve ESPN.
Star+ (Test B) launched in Latin America six weeks ago, but it has not been ideal, as Chapek told the Goldman Sachs Communacopia Conference last month:
I will tell you, though, that our experience inside Latin America with Star+ is almost identical to what we saw when we launched Disney+1 just a few months ago. And what I mean by that is that you're somewhat dependent in Latin America on a lot of your partners in order to get your proposition out to the consumer. And we saw that that was a slower ramp-up on Disney+ than we might have expected. But very quickly, we caught up, and then really hit an inflection point.
And I think we're seeing pretty much the same thing with Latin America with Star+ is that it's a little slow going in the beginning as we get our partners sort of mobilized and outreaching to their consumers. But at the same time, I think our trajectory is going to change very quickly just like it did with Disney+.
So assuming that this test is relying on market data, Disney is nowhere near close to learnings from Test B.
As for Test A, we are about five months into the integration of ESPN+ into Hulu.
If Disney is considering selling off ESPN, it is too soon to blame streaming as a key factor in the decision.
The Two Outcomes for the A/B/C/D Tests
There are basically two outcomes for these tests:
They prove ESPN+ and bundled sports content offer a viable, post-linear future for ESPN, or
In the U.S., outcome #1 that ESPN+ has a path to ~$10 per month per subscriber, which is what ESPN earns from affiliates right now.
Outcome #2 means that Disney is better off in cord-cutting. s I have written before, the projected outcome of 40MM to 50MM linear households by 2025 will still be at a greater scale than every U.S. streaming service other than Netflix and Hulu. That number includes Disney+ (which is hovering around 40MM).
So in outcome #2, cash flow from affiliate fees needs to stay or be on a negatively correlated path to staying similar to what it is today at ~80MM households. In other words, affiliate fees would need to double or be on a path to doubling by 2025.
No MVPD seems to be considering that yet.
With downward pricing pressure on the linear bundles to retain customers, the inevitable outcome will be a smaller bundle, which in turn could pay higher fees to a smaller number of channels.
No MVPD or virtual MVPD seems to be considering that outcome yet, either.
Bob Chapek - Visionary or Fiduciary Executive?
Chapek was asked at the Goldman Sachs Communicopia Conference, “where does ESPN fit into your portfolio over time?”
Well, again, we love sports, and we love ESPN as a brand. And right now, it's kind of the third leg of the stool for us domestically, and we love the way that operates for us.
We think that while certainly, there are sports fans, sports is such a broad foundation for so many peoples’ viewing habits. And I already mentioned the fact that the #1 most viewed thing every year tends to be sports, something like 9 out of 10 of the top viewership events in television are sporting events.
And we know that's important, and we're going to continue to invest in that because if it's important to our viewers, it's important to us. And we think it's a nice way to round out our portfolio.
Again, who knows what the future will bring, but it’s certainly part of our important guest offerings and consumer offerings across The Walt Disney Company.
This is the answer of a fiduciary executive who understands he is constrained by the reality that sports are important to Disney’s domestic business model, and to its consumer and guest value propositions. It is also the answer of an executive who does not have a vision for where sports is headed, nor seems to feel invested in it.
It’s also non-committal to ESPN, opening the door to both the Alex Sherman and Dylan Byers speculative pieces.
A follow-up answer to sports betting is a tell:
Let's just say that our fans are really interested in sports betting. Let's say that our partners with the leagues are interested in sports betting. So we're interested in sports betting.
Strategically, what sports betting gives us is the ability to appeal to a much younger sports fan viewer who can be very strong in their affinity for those sports. And so it's definitely a place we want to be.
Chapek speaks and sounds like a fiduciary executive, risk averse to sports betting. But not only that, Chapek is a fiduciary executive ruthlessly focused on moving Disney’s stock price. Dylan Byers writes Chapek is not “nearly so emotional” about the linear business and sports as his predecessor Robert Iger:
He could give a shit if ESPN has rights to the Rose Bowl,” one source who knows him said. “He’s focused on moving the stock.”
So, that leads to the logical question: how will spinning off ESPN move Disney’s stock northwards?
It is not yet clear. What is clear is it won’t be the CEO’s vision for ESPN driving it.
Must-Read Monday AM Articles
Netflix shared with Bloomberg’s Lucas Shaw that the success of Squid Game “generated $891.1 million in impact value, a metric the company uses to assess the performance from individual shows…. [and] cost just $21.4 million to produce”.
As for Netflix’s controversy with Dave Chappelle’s Closer and accusations of “transphobia”, I thought this essay by Wired Angela Wirecutter captured and navigated the dynamics well.
Also, like The Ankler Richard Rushfeld, I think Ted Sarandos’ handling of the situation in a series of memos has been both surprisingly and unusually “klutzy” and “ham-fisted”. ($ - paywalled)
Emerging "Metaverse"-type convergence strategies
Netflix is teaming up with Walmart to create a digital storefront on the retailer’s website that will sell merchandise tied to hit shows such as Stranger Things and Squid Game. ($ - paywalled)
Epic Games is considering launching an entertainment division focused on scripted video programming ($ - paywalled), announced in the same week it made an investment in Lebron James’ Springhill.
Awful Announcing’s Ben Koo asks in a Twitter thread “if ESPN could have staved off any of this collapse [of the RSNs] if the government didn't intervene.”
Audio Up, the podcast production studio founded in 2020 by audio innovator Jared Gutstadt, entered into an agreement with SiriusXM for the development of new original scripted series and audio entertainment concepts. With the agreement, SiriusXM will have a first-look co-production option for Audio Up original podcast concepts, and will offer options for exclusive distribution across SiriusXM properties.
Sports & Streaming
The launch date for NBA’s new streaming service built with Microsoft Azure is still TBD
MLB Commissioner Rob Manfred “publicly bashed” the Sinclair Broadcast Group during an appearance at the CAA World Congress of Sports,
Fox is making progress competing with ESPN by presenting itself as an alternative to perceived SEC favoritism
Electronic Arts doesn’t need the FIFA name anymore.
Creative Talent & Transparency in Streaming
Simon Owens writes that with YouTube creator budgets going up, we are “quickly approaching an era in which reality TV shows are almost indistinguishable from their YouTube counterparts”
Interactive elements are making their way into the podcast space. Spotify is giving all its Anchor creators the ability to make polls and Q&As and is testing interactive ads.
Three people with knowledge of TikTok’s rollout of its first-ever NFT Collection described it as “a challenge,” “a mess,” and “a complete joke.”
Original Content & “Genre Wars”
CNBC’s Alex Sherman writes the success of Squid Game shines a light on how cheap it is to make TV shows outside the U.S.
Amazon Studios announced a re-org, with longtime COO Albert Cheng, who also has served as Co-Head of Television for the past three and a half years, will focus solely on his duties as COO going forward, and Co-Head of Television Vernon Sanders becoming Head of U.S./Global Television at Amazon Studios.
Rick Ellis has a must-read interview with Crackle Head Of Programming Jeff Meier
The Entertainment Strategy Guy argues that we shouldn’t be duped by the success of Squid Game (or by the availability heuristic): international titles generally perform poorly in the U.S.
Alan Wolk had a good summary of the implications of Squid Game
Comcast’s & ViacomCBS’s Struggles in Streaming
Xumo, an ad-supported streaming service owned by Comcast, will begin offering some movies completely ad-free from October through December 2021.
AVOD & Connected TV Marketplace
Ampere’s Analysis found that in the past month, 34% of domestic internet users have used an AVOD service. In Q3 2020, just 17% of internet users had tried an AVOD service.
The IAB Tech Lab is trying to bring some clarity to the wild proliferation of advertising IDs online by creating a new protocol that shows what ad networks and publishers work with which new IDs.
Smart TV voice assistant transactions to approach $500 million in 2023
YouTube video action campaigns now include CTV inventory to help advertisers reach new customers and drive more online sales.
Slovenia pitched a ‘European Netflix’ to bolster digital sovereignty