|Dan Loeb, (Source: CNBC)|
News reports this week indicate that activist investor Dan Loeb has written a letter to Disney's leadership team, calling on the firm to make a series of strategic changes. Specifically, Loeb recommended a divestiture of ESPN. He also recommended that Disney accelerate the planned acquisition of Comcast's 33% stake in Hulu, and then for Disney to integrate Hulu into its Disney+ streaming service. Disney's leadership has rebuffed Loeb's attempts to push for change.
The ESPN recommendation certainly has triggered a lively debate. Students will find this question an interesting one that goes directly to the heart of many core corporate strategy concepts. On the one hand, ESPN has been a cash cow for Disney for years. According to CNBC, "Disney is making more money from cable subscribers than any other company solely because of ESPN. ESPN and sister network ESPN2 charge nearly $10 per month combined, while Disney requires pay TV providers to include ESPN as part of their most popular cable packages." Moreover, ESPN+ has become an important part of Disney's efforts to offering streaming options for customers. ESPN+ has had limited content to date, but perhaps, Disney will eventually offer customers an opportunity to stream all Disney and ESPN content in a true over-the-top option for those wishing to cut the cord.
Imagine having all Disney cable channel content, all ESPN cable channel content, and all Disney/Hulu streaming content available directly to customers who don't want to purchase cable. Disney has been reluctant to make this type of aggressive move, in part because the firm continues to generate a ton of cash from fees secured through cable TV subscriptions. Moreover, Disney would anger cable television partners greatly if it circumvented them completely and went directly to customers. Still, as more and more people cut the cord, the calculus there may change, and Disney may pursue a complete over-the-top solution for customers.
On the other hand, in corporate strategy, we typically argue that multiple businesses should only be owned and operated under one roof if they pass two tests: the better-off test and the ownership test. The better-off test asks whether significant economies of scope exist, such that ESPN has a stronger competitive advantage because it is owned by Disney. Loeb argues that it is not obvious ESPN has a more powerful advantage because it is part of the Disney corporate family. For example, in his letter, he writes, "“ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting." Moreover, the synergies between ESPN and other parts of Disney do exist, but they are not nearly as substantial as, for example, the synergies between the theme parks and the movie studio.
The ownership test asks whether the corporate parent needs to own a particular subsidiary to actually achieve key benefits of collaboration. Could another organizational arrangement (ranging from market contracts through strategic alliances or joint ventures) be more efficient and effective than full ownership? Here too Loeb argues that ESPN may not pass the ownership test. He writes, "We believe that most arrangements between the two companies can be replicated contractually, in the way eBay spun PayPal while continuing to utilize the product to process payments.” In other words, ESPN could still work with Disney and its portfolio of companies without being fully owned by the corporate parent. This argument reminds me of one criticism back when Disney purchased ABC in the mid-1990s. Some analysts pointed out that Disney already collaborated closely with ABC on events such as the Disney Sunday night movie of the week on ABC (which Michael Eisner would introduce). The analysts then argued that Disney could pursue more of those types of partnerships and collaborations without having to spend billions to acquire ABC.
The debate will be fascinating to watch. The key point here is that Disney should not necessarily own ESPN simply because the subsidiary is profitable. It also should not necessarily divest ESPN simply because cord-cutting is reducing subscribers at the sports network. The longer strategic view should be driving this decision with a focus on these two critical corporate strategy tests.