BY JENNIFER SABA

Bob Chapek is coming up on his one-year anniversary in February as chief executive of Walt Disney. He has made good work of shifting the Magic Kingdom’s focus on streaming video and capturing some Netflix fairy dust. In the coming year Chapek could make his mark in another way: An ESPN spinoff would keep Disney ahead of the game.

The $300 billion entertainment conglomerate’s stock has been buoyed by the eye-popping success of its direct-to-consumer service Disney+. In just over a year it has landed 87 million subscribers, near its five-year target of 90 million customers. It now expects to gain up to 260 million customers by 2024. Netflix, by comparison, has 195 million subscribers more than a decade after its debut.

Chapek reorganized the ranks to put streaming front and center in October. Sports, TV and films are created under separate division heads but Kareem Daniel, chairman of media and entertainment distribution, has been given financial oversight over all content across the Magic Kingdom.

To reduce Disney’s reliance on cable distributors and further change within the group, he should set ESPN free. Disney doesn’t own the channel’s core content: It pays princely sums for the right to air sporting events, such as National Football League matchups. Overall, Disney is on the hook for more than $40 billion in sports programming commitments –more than triple the amount a decade ago.

More viewers might help offset the expense, but consumers are eschewing cable and ESPN’s audience is shrinking. The prime network counts over 80 million subscribers – down approximately 16% from 2010. Direct-to-consumer service ESPN+ has about 12 million customers, yet that’s less than 10% of Disney’s overall streaming video subscriber base including Hulu.

MoffettNathanson estimates ESPN accounts for about 60% of Disney’s cable operating profit of some $6 billion last fiscal year. But the unit’s margin has been shrinking from about 39% in 2010 to an estimated 30% in 2022 according to forecasts from Barclays. Chapek could cleave ESPN into a separate company, which could be worth some $40 billion at just under 12 times operating profit. It would be a bold play to make Disney more agile in its battle with Netflix.

First published December 2020