Disney vows “bullish” OTT strategy to rescue ESPN

A growth in international SVoD distribution drove Disney’s first quarter operating income for its Studio Entertainment sector up by 21% to $656 million, but despite seeing subscriber gains on streaming platforms, these were not enough to offset snowballing cable losses – spearheaded by ESPN’s turmoil.

Disney is famously not a business to shy away from embracing OTT video, but so far the world’s largest entertainment company has not been particularly successful in its attempts. However, CEO Bob Iger hinted that Disney has some big plans for OTT going on behind closed doors, stating in this week’s earnings call that there is a focus on expanding ESPN’s mobile presence – looking to build on a huge surge that has resulted in almost 80% of ESPN interactions now taking place on mobile devices.

“The substantial growth we’re already seeing makes us bullish on the future of these nascent offerings. Right now, they’re a small part of the pay TV universe, but we believe they’ll be a much bigger part of the business going forward. And from a per sub pricing standpoint, these new services are just as valuable to us as traditional platforms,” said Iger.

Iger’s comments suggest that Disney could potentially be plotting an en masse escape from cable in the future – which is dragging ESPN’s earnings down as subscribers jump ship from cable pay TV packages and programming costs shoot up. What is preventing a move of this type at the moment are the multi-year contracts in place, as well as Disney’s poor track record in technology. There is a lot of pressure being placed on the shoulders of Disney’s streaming technology subsidiary BAMTech to return ESPN to profitability.

Operating income for cable dropped by 3% to $1.8 billion for the quarter, due to higher programming costs, namely a renewed NBA contract, missing expectations by around $60 million.

As well as ESPN’s own suite of mobile apps, which have grown to a monthly audience of some 23 million unique users, Iger also told analysts this week that ESPN is quickly adapting to platforms including Hulu, Sling TV, DirecTV Now, YouTube TV and PlayStation Vue – where ESPN has found comfortable new homes.

Having lost over 5 million subscribers in the past two years, Disney has little option but to drive up streaming deals for ESPN on OTT subscription services, and as for ESPN’s long-awaited streaming service, Iger said that a new ESPN-branded service will be launched later this year. Disney announced last month that ESPN would be scrapping 100 jobs as part of its digital transformation.

As capable as BAMTech’s technology may be, Disney has a history of failed online projects – technology is not Disney’s forté, content is. This is why Disney should continue focusing on signing more distribution deals with the established online platforms to open up as many routes to market as possible, both on home turf and overseas, before throwing ESPN in at the deep end. Perhaps the two most forward thinking business moves Disney has ever made have been to partner directly with Netflix and work with Alibaba in China.

On the topic of disastrous business ventures, we sincerely hope that Disney (on Iger’s watch) has given up on the dream of building its own device; a stubborn endeavor which the company has wasted millions of dollars on, but which more importantly has distracted Disney from its core content skills.

Disney posted total revenue for the first quarter of $13.34 billion, a year-on-year rise of 3%, with net income growing 11% to $2.34 billion. Disney’s parks and resorts sector was its best performing of the last quarter, recording revenues up 9% to $4.3 billion, with operating income soaring 20% to $750 million, following the opening last year of its Shanghai-based theme park. Its consumer products and interactive media business saw revenues decline 11% to $1.06 billion.