Walt Disney (DIS) reported Q1 2023 earnings to a hoard of jumpy investors after the bell on Feb. 8.
The streaming and entertainment giant, which enjoyed a period of healthy growth as more folks stayed home during covid, reported its first decline in subscribers to its Disney+ streaming service following the return of CEO Bob Iger. Disney also announced it would be cutting 7,000 jobs and reducing up to $5.5 billion in costs in an effort to shore up the bottom line.
Cost-cutting efforts aside, the house of mouse still reported a surprise $0.99 earnings per share (Wall Street was expecting $0.78).
Also surprising was Disney's decision to break out its organizational structure into three new groups: Parks, Entertainment, and ESPN. It's not uncommon that companies restructure organizations, especially as revenue inflows change as a business evolves, but this reorg caught the eye of more than a few astute analysts.
Image source: TheStreet
Is ESPN Up for Sale?
Of particular interest is ESPN's own individual unit. Rumors about a potential sale of the sports network have been swirling -- to varying degrees of seriousness -- for some time now. But its segmenting out into a unique structure could make it ripe for a sale.
JP Morgan (JPM) analyst Philip Cusick asked just that.
"There's been a lot of talk in the last year about whether Disney should keep, spin, sell, or trade ESPN," Cusick said on the Wednesday afternoon earnings call. "With it now as a stand-alone segment, can you give us your view on the future of Disney and Sports, in particular, and maybe TV in general? How integral is ESPN to the company's future?"
Activist investor Dan Loeb was particularly vocal about the potential sale of the sports giant in 2022.
"We are fairly certain that when we created the structure and broke ESPN out on its own that it would lead to questions like this. We did not do it for that purpose, actually. ESPN is a differentiator for this company," CEO Bob Iger said.
"It's the best sports brand in television. It's one of the best sports brands in sports. It continues to create real value for us. It is going through some, obviously, challenging times because of what's happened in linear programming."
"But the brand of ESPN is very healthy, and the programming of ESPN is very healthy. We just have to figure out how to monetize it in a disrupting and a continuing -- or disrupting world. That's it. But we're not engaged in any conversations right now or considering a spin-off of ESPN."
Iger made it clear that the demands to sell -- which were mostly while he was not serving as CEO (Bob Chapek was in charge during most of those demands) -- had been very much on the table at one point.
"I'm told the company concluded after exploring it very carefully that it wasn't something the company wanted to do," he said.
So, Is ESPN Still in Trouble?
ESPN might not be for sale, but there are still many questions surrounding the underlying business.
Disney didn't detail exactly how much its streaming service ESPN+ is losing, but with dwindling advertising, it needs to shore up more lucrative sports deals. To its credit, ESPN has been working on this. It recently signed a deal to extend coverage of the NFL through its popular "Monday Night Football" offering, including wildcard playoff games. It also now has the "ManningCast," on ESPN2 and ESPN+, and a divisional-round playoff game beginning in 2023. ABC and ESPN also nabbed the rights to broadcast the Super Bowl in 2023 and 2026 -- something that hasn't been aired on ABC since 2006.
ESPN+ gained 600,000 subscribers, taking it down to 24.9 million. Still a large number, but don't expect it to stay impressive for long.
ESPN advertising revenue was down 4% and its deal with the NBA expires after the 2024-25 season.
"I’ve had long conversations about this with [ESPN president] Jimmy Pitaro. And we’ve got some decisions that we have to make coming up — not anything particularly large, but on a few things, and we’re simply going to have to get more selective," Iger said, adding that the network is in a "very interesting transition period," that's "inevitably heading toward streaming."
The only question is whether taking ESPN toward a streaming-only business model is wise. With the myriad of streaming options now, the space may be getting simply too crowded to ask customers to add yet another monthly subscription to their bundles.
