Disney's Foundation Is Set
$Walt Disney(DIS)$ reported earnings this week and this will be one of the most interesting companies to watch over the next two years. The market still doesn’t appreciate Disney in many respects, but the launch of ESPN over the top this fall could change the game.
For starters, Disney has an experiences business that’s an incredible foundation to start from. With $60 billion going into experiences over the next decade to build new cruise ships and expand parks, this is a slow and steady growth business.
Sports (ESPN) is suffering from the same cord-cutting that most of linear TV sees, but it’s the one channel that’s still a draw, carrying NFL, college football, NBA, and more. And it’s still a money-making machine. I’ll get to the importance of sports in a moment.
Where Bob Iger has turned the business around is entertainment, which includes film and streaming. You can see that it’s not a big growth business on the top line, but it’s suddenly very profitable.
Add it up and Disney is solidifying a solid foundation. But the 10x potential in the stock comes from streaming.
Disney’s Next Big Launch
Disney boasts the second-largest streaming subscriber base and the best advertising business with Hulu. Note: The Disney+ figures below overlap because Disney changed reporting after selling its India business.
What’s lagging on this chart is ESPN. And ESPN should begin holding its weight this fall when it goes over the top.
What happens when ESPN goes over the top?
Disney will be going direct to consumers, replacing a ~$10 carriage fee with the fee charged to consumers.
Advertising revenue per viewer should increase because ads can be targeted more effectively.
The addressable market will increase because Disney can take ESPN to houses without cable and doesn’t have geographic limitations.
You can see above that sports is a big business, but it could be much bigger with ESPN over the top. Let’s give some example numbers as a baseline:
Disney could reach 100 million subscribers with ESPN over the top.
I think revenue per subscriber could be $30/month or more. ($20 for a subscription and $10 in ad revenue)
Those two assumptions give you a $36 billion revenue business, double the size of the sports segment today. And margins could be significantly higher because content costs wouldn’t scale with revenue, they would remain relatively flat.
Instead of playing on a level distribution playing field with competitors, Disney’s sports business would also live more by the smiling curve.
For example, if Disney sports is a $36 billion business and Max is a $5 billion business (50 million subscribers paying $10/month), who wins the next big sports rights deal, like MMA? Disney.
And that attracts more subscribers and allows for higher prices. And on and on.
$Netflix(NFLX)$ is the only other game in town and it views sports as an ancillary piece of its business to pull in customers with one-time events or prevent churn. But you don’t subscribe to Netflix because you’re a sports fan.
Disney has an opportunity to be the biggest distributor of sports in the world. A decade from now, sports alone could be a $100 billion business.
Don’t sleep on the change the company is going through over the next 6 months and just how much this is the calm before a very important storm for Disney.
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