ESPN was already expected to be a hot topic for Walt Disney Co. as the company planned to separate out the business’s financials later this year, but now the sports network appears to also be a major sticking point in a distribution dispute.
KeyBanc Capital Markets analyst Brandon Nispel already had a cautious view of ESPN, whose outlook he views as negative and overinflated by the consensus view.
And ESPN’s prospects “could materially worsen” if Charter Communications Inc.
CHTR,
which is in an unconventional carriage dispute with Disney
DIS,
opts against renewing their agreement.
Read: Disney-Spectrum feud heats up as ESPN goes dark for college football and U.S. Open. Could the NFL be next?
Looking at the big picture, Nispel calls ESPN “a melting iceberg” that faces a difficult transition to the streaming landscape. Disney already offers the ESPN+ streaming service, but it doesn’t include live access to ESPN’s flagship programming. The company will ultimately have to transition the core ESPN service into a direct-to-consumer proposition.
By Nispel’s math, ESPN+ delivers average revenue per user of $5.45 a month inclusive of advertising, while linear ESPN drives $16 to $17 a month on the metric.
“In other words, ESPN+ ARPUs are going to need to more than triple to match that of linear,” he wrote.
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Nispel also sees “a bigger problem” in that “linear TV affiliate rates are paid by everyone in a PayTV bundle and are generally tied to a contract, contrary to streaming.” The implication of this dynamic, he wrote, is that “ESPN is going to have to grow subscribers while materially raising prices for streaming, a challenging task we struggle to see working given our survey work indicates a low willingness to pay for sports in streaming.”
He thinks ESPN should be valued at $30 billion, “likely below consensus,” and threw cold water on the idea that it could get scooped up by Apple Inc.
AAPL,
See also: Apple buying Disney? Analyst explains why they’re ‘worth more together.’
Nispel rates Disney shares at sector weight.
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