Friday, November 11, 2016

Should Disney Sell ESPN?

The Wall Street Journal reported this morning on Disney's quarterly earnings announcement, noting that the news disappointed investors.  "Declining income at ESPN continued to overshadow quarterly results at Walt Disney Co., with the sports powerhouse posting lower advertising and subscription revenue that dragged company earnings below Wall Street expectations."  These results continue a multi-year slide in subscriber numbers at ESPN, as many American consumers "cut the cord" - ending their cable television subscriptions.   Some people estimate that ESPN has lost more than 10 million subscribers in the past several years.  

This news raises a key question for me:  Should Disney sell ESPN?   That question may shock some people, as ESPN has been a substantial contributor to Disney's total net income since it was acquired as part of the Disney acquisition of Capital Cities/ABC two decades ago.   However, Disney's corporate strategy has evolved considerably since that time.   During the second half of Michael Eisner's tenure as CEO, Disney diversified well beyond the businesses that leveraged the animation studio as a central asset (acquiring ABC, owning baseball and hockey teams, etc).  However, during Bob Iger's tenure, characters have become the driving force of the corporate strategy once again.   The three major acquisitions during Iger's tenure have focused on expanding the character portfolio, so that Disney can leverage those characters across multiple platforms (i.e. Pixar, Marvel, and Lucas Films).  In many ways, Iger has returned Disney to its roots.   Below you will see famous chart created by Walt Disney himself to describe synergies at the company.   One has to ask:  How does ESPN fit into this chart?   Absent major synergies, and facing a long term disruption to ESPN's business model, might Disney be better off divesting the business unit?   Alternatively, Disney has to take a hard look at reinventing the business model at ESPN, rather than tweaking the strategy.   A reinvention seems necessary given the long term trends regarding cord cutters.   

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