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With the World Cup wrapping up, NBA free agency in full swing, and Major League Baseball heading into the All-Star Break, there's absolutely no shortage of news for avid fans. That's not even including the NFL and the major college sports being in season either. The largest beneficiary of all this is clearly ESPN, the world’s most watched sports network and the crown jewel in Disney’s (DIS) media kingdom. In fact, ESPN has become arguably the single most valuable asset in the entire media world.
Wunderlich Securities recently slapped a $50.8 billion on ESPN, almost one-third of Disney’s entire market cap. By contrast, Disney’s ABC is only worth $3.2 billion. The valuation is higher than Yum! Brands (YUM) , Eaton (ETN) , Yahoo! (YHOO) , Allstate (ALL) , and DirecTV (DTV) . Some may find this shocking, given that ESPN is a family of sports television networks and only makes money on advertising and subscription fees.
So how can ESPN possibly be worth that much? In sum, people cannot live without it. ESPN commands a staggering $5.54 per subscriber per month from cable providers. The next highest cable network was TNT at $1.33. According to Forbes, ESPN’s ad revenue climbed 63% year-over-year, domestic affiliate fees hit $6.3 billion, and operating margins remain around 40% despite the rising cost of sports media contracts. With around 100 million domestic subscribers, ESPN’s total revenue could reach $12 billion this year.
“It’s an incredible brand that continues to drive tremendous value for us, and we’ve got a lot of reasons to be excited about what’s coming up,” said Disney CEO Bob Iger during Disney’s previous earnings call. ESPN has proven to be one of Disney’s best and most reliable sources of earnings growth.
ESPN has hit a sweet spot in a number of ways and remains immune from many of the ills surrounding other media companies. Its torrent growth pace may not yet be over.
Immunity to On-Demand Trends
Sports have always been outcome oriented and always will be. The dramas of the entire event lead up to the buzzer or the final whistle, when one team will emerge a winner and the other a loser. The final outcome of a live sporting event has significantly more value to the overall experience than other forms of content and entertainment, making it unsuitable for online streaming or on-demand consumption like shows. This is a fact of fanhood and continues to drive the value of live sports higher.
Sure, sports fans could illegally stream sports to their computers. However, quality is shoddy at best, lags frequently, and is often up to a minute delayed, particularly for high-demand events. In the age of social media and push notifications, this minute is more than enough time to ruin an outcome.
Therefore, for a sports fan to thoroughly enjoy an event without seeing it in person, sports must be consumed on live television. This inflates advertising revenue and shelters the sports media industry from the same piracy-related issues that plague the film and music industries. Thus, sports’ natural inability to be pirated or recorded allows ESPN to command its colossal $5.54 per month per subscriber and massive amounts of advertising revenue.
Self-Generated Content
A majority of ESPN’s airtime involves commentary and highlights packaged in various ways. This may sound like an oversimplification of ESPN’s programming, but is nonetheless a crucial aspect of its success.
ESPN’s most popular shows such as Around the Horn, Pardon the Interruption, NFL Live, Baseball Tonight, NBA Countdown, College Gameday, and SportsCenter, the network’s flagship program, are all based on commentary, opinion, and video highlights. These programs often share facilities and studios–such as its famous headquarter campus in Bristol, CT–lowering the cost of broadcasting these programs significantly.
ESPN also owns and manages the X-games, which occupies a large amount of programming space for two weeks per year. ESPN not only profits from ticket sales and sponsorships, but can also sell its own advertising space during airtime. Minus the expenses of hosting the event, ESPN’s X-Games advertising revenue is almost pure profit.
With such an enormous viewership – up to 100 million per month – ESPN can utilize cheap self-generated programming to inflate margins and drive profit.
Seamless Transition to Mobile
In addition to successful digital properties such as its flagship website ESPN.com and Grantland.com, ESPN boasts the most successful mobile platform in the entire sports media industry. According to Businessweek, ESPN accounts for 70% of the sports content consumed on mobile devices. Its mobile website is easy to use and generates some ad revenue.
Meanwhile, the WatchESPN app allows any cable subscriber with ESPN to sign into his or her cable account and watch live content on any computer, smartphone, or tablet. The app has been downloaded over 10 million times and is revolutionizing live sports on non-TV platforms. Sports fans can watch Monday Night Football, the World Cup, the NBA, and so on via WatchESPN.
Due to retroactive contractual obligations, ESPN does not advertise on WatchESPN but will surely begin to do so in the future. While ESPN currently profits little from WatchESPN, it is equipped to dominate the market for live sports on mobile platforms for years to come.
Monetization of College Football
Over the previous decades, college football has transformed into a billion-dollar industry and a nationwide fascination. The business reflective of professional sporting leagues – star players are celebrities, stadiums larger than NFL stadiums are filled to the very last row, and media contracts are worth billions. The NCAA is also set for its first ever playoff this season, which could be the second most watched sports event behind the Super Bowl.
With all this in mind, ESPN recently signed a 12-year, $5.64 billion contract with the NCAA for the rights to broadcast the college football playoffs starting in 2014. In 2011, ESPN and Fox agreed to a $2.7 billion 12-year contract with the Pac-12, one of the NCAA’s best football conferences. College football generates up to 12 hours of programming per channel on Saturdays and ratings continue to rise.
How Valuable Could ESPN Become?
In sum, people cannot live without sports in a live setting. The aforementioned combination of factors is driving ESPN to unforeseen heights and this growth has no end in sight. ESPN may be Disney’s most valuable asset, once an unthinkable prospect for what started as a small network with 30,000 viewers.
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While it’s hard to imagine how ESPN can gain significantly more value from its current $50.8 billion valuation, it certainly has room to grow. ESPN continues to find ways to improve monetization methods for live events. As long as live sports remain an integral aspect of daily life, ESPN will continue to find ways to capitalize on it.