The Walt Disney Company (NYSE:DIS)’s most valuable property isn’t a tiny cartoon mouse; it’s not from a galaxy far far away; it’s not a place “Where Dreams Come True;” and it’s not a team of superheroes led by Tony Stark. No, The Walt Disney Company (NYSE:DIS)’s biggest profit center is, by far, ESPN.
Throughout its three decade history, ESPN has seen numerous competitors pop up to challenge its dominance as the Worldwide Leader in Sports. Time Warner had CNNSI in the late-1990’s, but its clock ran out more than a decade ago. The NFL, MLB, and NBA have all started their own networks since then. More recently, however, Comcast Corporation (NASDAQ:CMCSA)’s NBC and CBS started their own cable sports networks, and Twenty-First Century Fox Inc (NASDAQ:FOXA) just launched Fox Sports 1.
Twenty-First Century Fox Inc (NASDAQ:FOXA)’s highly promoted new entry into the 24-hour sports arena poses, perhaps, the biggest threat to ESPN. I don’t believe, however, that ESPN is in any immediate danger or that Fox Sports 1 needs to take away ESPN’s audience in order to succeed.
Just how important is ESPN?
Last year, ESPN brought in approximately $9 billion between advertising revenue and subscriber fees. That’s set to top $10 billion this year. Its position as the most desirable cable network for subscribers allows it to charge approximately $5.15 per month to cable companies per subscriber. That’s just for ESPN. ESPN 2 charges another $0.67. To put that in perspective, the new Twenty-First Century Fox Inc (NASDAQ:FOXA) could only convince cable providers to pony up $0.23 per month for FS1. NBC Sports Network receives $0.33.
Even more impressive than generating over 20% of The Walt Disney Company (NYSE:DIS)’s revenue is the fact that Disney’s Media Networks (which include ESPN) have the highest profit margin. Cable networks, in particular, posted a 41% operating margin last fiscal year. This led Fool Daniel Sparks to estimate that ESPN contributed about 43% of Disney’s total operating income last year.
By some estimates, ESPN is worth more than all the rest of The Walt Disney Company (NYSE:DIS)’s assets combined.
Fox Sports 1’s challenge
So far, FS1 hasn’t even made a dent in ESPN’s ratings. In its first week, the new network saw 161,000 viewers tune in during primetime. Comparatively, ESPN had 2.17 million viewers. FS1’s launch-week audience was good enough to place it fifth among sports networks.
Still, Twenty-First Century Fox Inc (NASDAQ:FOXA) represents the biggest threat to ESPN in its 34-year history. Fox already has a large portfolio of sports broadcasting rights that includes pro and college football, major league baseball, and NASCAR. Additionally, FS1 is launching with rights to Pac-12, Big 12 and Big East basketball, UEFA Champions League Soccer, and the UFC to round out its live sporting event broadcasts.
Some of these are areas ESPN has largely ignored (UFC) and others are events ESPN wanted but lost the bidding war on (soccer). Either way, Fox Sports 1 has an opportunity to attract niche crowds while ESPN continues to go after the mainstream audience. This is similar to how ESPN started off in the ’80s.
With FS1’s portfolio of broadcasting rights and star lineup of sports personalities, it could certainly reach its goal of increasing subscriber fees from $0.23 to $1 in the next four years. The company’s ability to raise its fees will be crucial over the next decade, as certain sports rights contracts at ESPN and other networks expire.
Twenty-First Century Fox Inc (NASDAQ:FOXA) has always aggressively gone after sports rights, and with the launch of its new channel, I expect that to continue. NBC, too, has increased its spending on sports since launching its 24-hour sports network. It’s spent record amounts for the rights to the Olympics, Barclay’s Premier League soccer, and partial NASCAR rights in the last two years.
All this spending, however, has yet to show a significant boost in NBCSN’s ability to charge a higher fee to cable companies. NBCSN charges $0.33 and generates less than $300 million in revenue from fees per year. It remains a niche channel for viewers to tune into for special events like the Olympics or Stanley Cup Playoffs.