Disney is wisely preparing for a cable-less future.
The media juggernaut is developing not one, but two Netflix-style streaming services to be released over the next two years. The first is Disney’s anticipated sports service for ESPN, the crown jewel of cable TV. The second, geared toward families, will be stocked with the latest Disney and Pixar releases, which won’t be heading to Netflix anymore, as well as new original programming from Disney’s studios.
But here and now, there is still at least $8 billion a year to be made from pay-TV programming—revenue that could now be at risk because of its move to compete against companies for which it has long provided content.
Pay-TV providers like Charter and Comcast pay top dollar to carry ESPN and Disney’s other cable channels. Cable providers may not be willing to pay more when Disney also sells packages that cannibalize their businesses. “If I were a distributor, I would not be happy about this,” Richard Greenfield at BTIG Research, told Quartz. “Are its best new shows going to be on TV or are they going to be on streaming?”
Both services will be adds ons to, and not replacements for, Disney’s existing TV channels, chief executive Bob Iger said on a call with analysts on Tuesday. But he also said Disney would invest heavily in original movies, TV series, and short-form video for the family-focused service. And there’s enormous potential for both the family and the sports services.
What are Disney’s cable channels worth?
ESPN generates $7.54 per month per subscriber for Disney in affiliate fees, estimated Kagan, part of S&P Global Market Intelligence. By comparison, the next most expensive US TV channel, TNT, is around $2.
Based on Kagan’s 2017 estimates, and the subscribers last reported by Disney in 2016, ESPN could stand to make as much as $8 billion in TV-rights fees alone this year. Its biggest US cable-TV channels combined stand to make as much as $12.6 billion.
(Disney posted $12.3 billion in revenue from affiliate fees in 2016, which also would have included fees for broadcaster ABC’s local US stations, and international cable channels. Its media networks make money from advertising and TV- and subscription-video-on-demand distribution, as well.)
The company hasn’t even talked over the streaming push with its distributors yet. “Wow, confidence,” wrote Bernstein media analysts, in an investor note on Wednesday. “Disney might be trying to set up a dynamic of ‘Give us good terms next time around, or we’re going around you.’ Of course, that could also backfire: ‘Since you’re obviously on your way to going around us, we’re dropping you, good luck.'”
It worked out for World Wrestling Entertainment. It launched the online subscription-video service WWE Network in 2014. DirecTV, the US’s second-largest pay-TV provider, stopped carrying (paywall) WWE’s pay-per-view events, which were cheaper through the WWE Network. But TV rights fees still make up the bulk of the WWE’s media revenue today. And streaming is a growing share.
It’s not just the future of the industry Iger is securing—it’s his legacy. Navigating the choppy transition from traditional TV to digital is one of the CEO’s last big challenges before he retires in 2019, by which time both the ESPN and family-focused streaming services will be out.