That makes the move to take sports network ESPN fully over-the-top as high-stakes as it can get. Sports has long been viewed by the industry as a key content category to lure in loyal viewers.
The risk, though, is that while audiences are willing to pay for the network as part of the traditional cable bundle, they may not be so interested in subscribing to a standalone streaming service.
But its one Disney CEO Bob Iger seems willing to take.
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"Sports stands very tall in the media landscape for its ability to convene millions of people all at once," Iger said earlier this month, reiterating his bullish stance on ESPN and confirming plans to take the network fully over-the-top as a direct-to-consumer (DTC) platform.
Analysts and media watchers have cautioned the full transition to streaming will be a difficult journey, particularly when it comes to consumers footing the bill for an additional streaming service versus watching sports as part of the cable bundle.
ESPN charges pay-TV operators between $8 and $9 per subscriber, according to an estimate from SNL Kagan. To compare, ESPN+'s average revenue per user is $5.64.
"In a future world of streaming, it's à la carte, meaning if you want to pay for it you have to actually go out and pay for it. There isn't going to be somebody subsidizing you," Brandon Nispel, equity research analyst at KeyBanc Capital Markets, told Yahoo Finance.
Nispel, who has a Sector Weight rating on the stock, pointed to recent KeyBanc survey data that showed a "low willingness to pay."
In a note published on June 29, the analyst wrote, "Who's going to pay $30+/month for ESPN? Not many."
Disney hasn’t disclosed any details regarding pricing, although analysts have estimated the service would need a minimum cost of around $30 a month in order to break even — let alone turn a profit.
"From our survey work, we found consumer interest in sports is relatively high in linear, though willingness to pay in streaming is low: we found >25% of subscribers would not be willing to pay for a pure sports streaming service, 46% of subscribers would be willing to pay <$10/month, and 26% would pay >$20/month."
"The future profitability in sports is really the question," Nispel said. "How many people would sign up and then what's the profitability profile? Going from linear to streaming is much more difficult, because you don't have the masses subsidizing."
Macquarie analyst Tim Nollen agreed, telling Yahoo Finance, "It's a huge, huge risk to massively disrupt the bundle, which is already [in decline.] It's just a massive, extra disruptive event to put sports completely streaming over-the-top."
The analyst, who has a Neutral rating on Disney and $94 price target, added ESPN would likely have to offer different incentives, along with the ability to turn the service on and off given the fragmented nature of sports fans.
"There are a lot of people that might be sports specific," the analyst said. "So you might not necessarily want the thing year-round, or you might only want it for the first two months of the season."
As a result, ESPN will likely "have to give that minimum price to generate as many possible subscribers as they can, but the real way to make money is going to be from targeted advertising on the service," he continued.
On top of pricing, another question revolves around how many subscription services people are even willing to pay for, especially within streaming's oversaturated marketplace. ESPN+ currently boasts 25.3 million subscribers.
"The consumer taps out at 7 to 8 streaming services a month [at] about $60 to $70 a month," Mark Boidman, partner and global head of media at Solomon Partners, told Yahoo Finance.
"So what happens then? People go to bars to watch sports for free, they go to a friend's house to watch it, they try to find it for free on some site. Young people are even fine just watching the highlights on TikTok," he said.
Still, Boidman maintained he continues to see value in sports. After all, ESPN has seen an uptick in TV viewership, which climbed 8% year-over-year in 2022, despite sharp declines in linear subscribers, which dropped to 74 million at the end of last year from 100 million in 2011, according to an SEC filing.
But that value may diminish over time as the transition to streaming takes hold.
"The question is will [sports be valued] the same way as it had been valued historically, because everybody who had a TV subscription was indirectly paying for sports, even if they didn't watch any sports. That's going to certainly change because people are no longer going to be paying for things that they don't want to consume," he said.
"For streaming, there will be value, and it'll be paid for by consumers directly and paid for by advertising and paid for by packaging sports content into Prime-type memberships or other things. So people will still pay for sports indirectly, but they may not pay for it directly and certainly not at those [historic] price points."
Who will be ESPN's strategic partner?
Disney CEO Bob Iger speaks at the Bloomberg Global Business Forum on Sept. 25, 2019, in New York.(AP Photo/Mark Lennihan, File) ·ASSOCIATED PRESS
Disney's Iger said the company is open to strategic partners, either through a joint venture or part ownership, to enable ESPN to make the transition to DTC.
In an interview with CNBC earlier this month, Iger said he's looking for partners that "come with value" — whether that be content value, distribution value, or capital value to de-risk the business. If that's found, "we're going to be very open-minded about that." He said there have been "some" conversations with possible partners but did not elaborate on potential names or timelines.
On Thursday, Comcast President Mike Cavanagh shot down the possibility of NBC partnering with Disney.
"I've been asked about and read the speculation that, in some way, we might be interested in swapping businesses [with Disney] as part of what's going on in the sports space," he said.
"I would just say that, that's very improbable given [there's] tremendous issues around tax, minority shareholders, and structuring generally. So I would put aside the idea that there's anything inorganic that is likely to happen around ESPN, in particular."
Disney has held exploratory talks with major sports leagues including the NFL, NBA, and MLB regarding strategic partnerships, according to a source with knowledge of Disney's plans.
"I really struggled with understanding why the leagues would do that," KeyBanc's Nispel said. "It seems almost like a conflict of interest, if you will, because the leagues get paid by ESPN. If they have ownership in ESPN, they would be sort of favored to continue to provide the rights to ESPN over others."
Nispel said Disney will likely need to find multiple partners and that the media giant will need to make "difficult decisions" in terms of the content they keep in order to capture the broadest audience possible.
A button for ESPN+ is on a remote control in Portland, Ore., Aug. 13, 2022. (AP Photo/Jenny Kane, File) ·ASSOCIATED PRESS
Another potential strategic partner could be Apple (AAPL).
At the time, the executive revealed users will be able to watch movies and TV shows from Disney+, in addition to a more immersive sports viewing experience.
Another bonus? Apple has a lucrative deal with Major League Soccer (MLS), which has recently seen a boost following international soccer star Lionel Messi's decision to join MLS.
"Streaming is a lower margin business and the only way that it really works is through global distribution," Nispel said, calling out the potential upside with Apple and its MLS partnership.
The analyst said, at this point, Disney is likely considering all options: "I think it goes down the list of basically everybody."
Disney will report quarterly earnings results on Aug. 9.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
