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A deep dive into Disney numbers show rapid transition to OTT

A casual glance at the Disney quarterly numbers seems to reveal a house in order, with few clouds on the horizon, but underneath the surface the rising swell of OTT networks and consumer dissatisfaction with the ESPN cable model have begun to tell their own story. Potentially this could sow the seeds for destructive change at Disney.

Revenue was up $3.6 billion to $52.5 billion, and net income was up 7% to $8.8 billion.  But its business is changing and you have to go back to the previous two years figures to see that ESPN has gone from 99 million US homes two years ago to 95 million last year to 92 million now. The rest of the ESPN bundle has fallen in the same way – with the two year fall in ESPN2 also 7 million, ESPNU has fallen 4 million, ESPN Classic is down 6 million and ESPN News is also off 6 million over two years.

Disney did not break out ESPN international figures two years ago, but last year it had 115 million and now it has 127 million subscribers, so while it has lost sports fans in the US, it has gained almost as many outside it, so much so that it has hardly affected its revenues. ESPN continues to squeeze cable operators to take all of its ESPN channels and include them among the most basic packages – but some, such as Verizon, with its clearly stated “unbundling” offers, have clearly not listened and it is showing in its US subscriber numbers.

And yet the accounts show higher affiliate fees for ESPN up 13%, and higher advertising for it too, up 4%, while programming costs have also grown 6% for ESPN. Most of this is hard negotiating, but we wonder if some of the affiliate fees are now coming from OTT service?

ESPN is substantially the largest business at Disney and if it falls, or changes direction, then Disney falls or changes with it. It forms the backbone of the Media Networks segment, with was up 10% this year and generated $7.8 billion of its $14.7 billion operating income, more than half.

And the truth is that what is also going on is a sustained and stealthy attack on OTT services, with Disney extracting $2.9 billion out of the $23 billion of its Media Networks revenue, from TV and SVoD delivery, rising 15% as its fastest growing business.

While TV and Movie content is attributed with much of this $2.9 billion, there are also its own OTT sports services such as ESPN Play, Watch ESPN, ESPN3 and SEC that soak up some of this revenue. It is important that Disney goes OTT ahead of the crowd, something that CEO Robert Iger has addressed many times, otherwise sports will begin to go direct, and bypass ESPN – so it has to do that on behalf of sports as soon as it can, harnessing any OTT partners it can.

The investor worlds’ focus is on Disney right now and during its last quarter numbers the media picked up the idea that one day sport would go direct OTT, and so ESPN must do the same. Iger chose his words carefully and said not for the next five year or so, but news reports merely took that as a starting point or an agenda, preferring to suggest that within 5 years all ESPN would go direct OTT. These numbers would suggest that interpretation is actually correct and Iger is systematically transferring viewers as fast as he can to OTT platforms that Disney can control and make more profit from.

ESPN has planned a significant OTT shift during the next Rio Olympics, the first Olympics to be exclusively broadcast on ESPN, when all content will also go through ESPN Play as well as TV. If OTT trends continue as they have, it will be a great success, and show another significant burst of OTT revenue growth, with more pay TV subscriber falls.

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