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"Disney's Desire for Sports League Partnerships with ESPN Meets Uncertain Response"

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Disney's ESPN Seeks Equity Partnerships with Major Sports Leagues

Exploring New Partnerships with Sports Leagues

In the realm of professional sports, Disney's ESPN has expressed potential interest in forming equity partnerships with the four major U.S. professional sports leagues. This proposition, however, has been met with uncertainty from the leagues themselves. Both the National Basketball Association (NBA) and Major League Baseball (MLB) have expressed reservations about such a partnership, especially if Disney's objective is to offset or replace payments for sports broadcast rights with equity in ESPN.

Disney's Financial Considerations

Disney, a media giant, is currently exploring various strategies to save cash and strengthen its balance sheet. The company's streaming division has been operating at a loss, with a reported $512 million lost in the most recent quarter. Disney is also burdened with a massive debt of $44.5 billion and an expected debt of at least $9.2 billion to Comcast for its minority stake in Hulu.

ESPN's Potential Equity Trade

A potential solution for Disney's financial woes could be a deal where ESPN trades equity for sports rights. This could potentially save Disney billions of dollars, which could then be redirected towards other strategic ventures. In fact, ESPN has recently struck a deal with Penn Entertainment, which will provide it with $1.5 billion in cash over the next decade.

The Need for Cash in Sports Leagues

However, the sports leagues also have a pressing need for cash, particularly as the regional sports network business is under threat. Teams primarily pay their players from the sports rights fees, and ESPN's bids play a crucial role in how the leagues generate revenue. ESPN is almost always a potential buyer, allowing the organizations to generate competitive bids for game packages.

Disney's Transition to a Direct-to-Consumer Model

Disney CEO Bob Iger has stated that the company is not necessarily seeking a cash infusion if partners could provide other assets, such as content, as the company transitions ESPN to a direct-to-consumer business. Disney is reportedly targeting 2025 as a potential launch date for an ESPN streaming service that is separate from cable. This service, unlike the existing ESPN+, would include ESPN's most valuable live sports, such as Monday Night Football and most NBA playoff games.

Disney's Search for Strategic Partners

Disney has informed the leagues that it is also engaging in separate discussions with strategic investors who can provide distribution benefits. The company is looking for partners that can help ESPN transition successfully to a direct-to-consumer model. This could come in the form of content, distribution, marketing support, or a combination of these.

The Future of ESPN

Iger has reiterated his desire to maintain a majority ownership stake in ESPN. He has previously stated that Disney is not necessarily considering spinning off ESPN. However, it is possible that Disney could maintain a majority ownership in ESPN while also spinning it off, an option that is reportedly "on the table". A spin-off of ESPN would give potential partners clarity on the value of their minority stakes if it trades publicly and separately from Disney.

ESPN's Value within Disney

Within Disney, ESPN's value would be obscured by the larger parent company. In the next quarter, Disney will begin to report ESPN's finances separately from the rest of the company, a move that could be a precursor to a separation. ESPN has been Disney's crown jewel for decades, generating billions in profit from lucrative pay-TV subscription fees.

The Changing Landscape of Cable Subscriptions

Even as U.S. cable subscribers have started cutting the cord, ESPN has managed to offset subscriber revenue losses by boosting the amount of money it receives from pay TV distributors. However, this trend has reversed within the past 12 months. Despite this, ratings have increased this year on ESPN's linear channel even as cord cutting has accelerated.

Future Strategies for Disney and ESPN

Disney will have to decide if it's more strategic to keep ESPN's positive free cash flow to reinvest in streaming entertainment or if spinning off an asset with a declining growth trajectory makes more sense. Regardless of the decision, industry experts believe that ESPN is well-positioned to navigate these changes, thanks to the leadership of its top executives.

A "Hot Take" on the Impact of Disney's ESPN Equity Partnership Strategy on New Businesses

Disney's potential strategy of forming equity partnerships with major sports leagues could have significant implications for new businesses, particularly those operating in the sports and entertainment sectors. This move signals a shift in the traditional business model of sports broadcasting, with equity replacing or supplementing the usual payments for broadcast rights.

For new businesses, this could mean a need to rethink their strategies. Those in the sports industry might need to consider similar partnerships, especially if they aim to compete with giants like ESPN. Meanwhile, those in the entertainment sector, particularly streaming services, might need to consider how they can diversify their offerings to compete with a potential ESPN streaming service.

However, this strategy also presents opportunities. New businesses might find openings in partnering with sports leagues, providing services that complement the leagues' partnerships with broadcasters. For instance, they could offer marketing, distribution, or content creation services.

Ultimately, Disney's potential strategy represents a significant shift in the sports and entertainment industries. New businesses must stay abreast of these changes and adapt their strategies accordingly to thrive in this evolving landscape. This situation underscores the importance of agility and adaptability in today's fast-paced business world.

Article First Published at: https://www.cnbc.com/2023/08/10/disney-wants-sports-leagues-as-espn-partners-but-its-not-clear-they-want-espn.html

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