What the launch of the “Hulu for sports” platform means for Disney and for sports TV
Photo: Sandro Schuh
Today, ESPN (a Disney subsidiary), Fox, and Warner Bros Discovery announced:
“...an understanding on principal terms to form a new joint venture (JV) to build an innovative new platform to house a compelling streaming sports service. The platform brings together the companies’ portfolios of sports networks, certain direct-to-consumer (DTC) sports services, and sports rights – including content from all the major professional sports leagues and college sports. The formation of the pay service is subject to the negotiation of definitive agreements amongst the parties. The offering, scheduled to launch in the fall of 2024, would be made available directly to consumers via a new app. Subscribers would also have the ability to bundle the product, including with Disney+, Hulu and/or Max.”
This announcement is led by ESPN and comes ahead of Disney’s earnings call for its Q1 2024 (calendar Q4 23) financial results. This also comes a week after activist investor Nelson Peltz called for Disney to consider bundling Disney’s D2C sports streaming service ESPN+ with streaming rival Netflix. Peltz, whose activist investor fund Trian Fund Management controls nearly $3 billion in Disney shares, is pushing for two Disney board seats and greater transparency around Disney investment and cost-cutting measures. They believe that Disney’s profitability in streaming can be achieved by partnering with a larger competitor interested in offering live sports to subscribers.
Disney’s CEO and Chairman Bob Iger has previously headed off Peltz’s shareholder activism by initiating a range of efficiency measures to de-risk its streaming bets and by placing a greater emphasis on its Parks and sports businesses (sports is now a sperate reporting segment alongside experiences.)
Disney is being pushed to de-risk its sports dependency through a Hulu-like collaboration
Of all the media and tech players that have launched streaming services to compete with Netflix and Amazon, Disney has committed most heavily both ideologically and financially. Now, over four years after the launch of Disney+, its direct-to-consumer segment is still loss-making, with the division losing $420 million in Q3 2023 alone. This contrasts with its linear networks business that is still consistently generating profit; $805 million in Q3 2023 alone and generating a 31% operating profit margin for the company. The recently formed sports division, consisting of ESPN and Star, generated $953 million of operating income for Disney in Q3 – a 28% operating profit margin for the quarter.
Disney recognises that sports is one of its most valuable media assets. It is both a massive TV streaming opportunity and a change inhibitor. As MIDiA Research has identified, sports is a unique format for TV streaming as it combines appointment-to-view live content with predictable scheduled content output that can be delivered over the duration of a calendar year – justifying long-term subscriptions and minimising churn risks. It also disproportionately appeals to older and higher income subscribers that over-index for time spent and are increasingly moving into streaming. In 2021 MIDiA identified the silver streamer segment of 55+ binge viewers as the most impactful growing demographic in TV streaming. However, these are still the core of the traditional linear audiences driving Disney revenues, with over 40% of Q4 2023 live sports viewers 55+ ( MIDiA research). The activist pressure from Trian and the 2024 investment in sports by rival Netflix have pushed Disney to find a new way to leverage its sports broadcast dominance into the TV streaming era. This is through partnerships with linear heavyweights Fox and Warner Bros Discovery to replicate the success of Hulu in their core domestic market. Back in 2007 Hulu was launched as a joint venture by News Corp, NBCU, Providence Equity, and later Disney to provide a studio / broadcaster hedge against Netflix’s decision to focus on on-demand subscription TV. Seven years later and Hulu is the third largest D2C service in the US with 48.5 million subscribers and a compelling and profitable TV streaming offering encompassing ad-supported subscription all the way up to live premium TV. Majority owned by Disney following its 21st Century Fox acquisition, Hulu’s blended SVOD and live TV average revenue per user (ARPU) was $90.08 in Q3 23. This is in stark contrast with Disney+’s ARPU for the same period at $6.70.
Disney needs to go on the sports offensive
Sports consumption has undergone a higher level of streaming era disruption than the rest of traditional TV, with demographic cliffs emerging among younger consumers. The percentage of the live sport viewing audience made up of 25-34-year-olds has more than halved between Q4 2019 and Q4 2023 in English-speaking markets according to MIDiA Research consumer survey data. However, penetration rates remain comparable, reflecting ageing demographics and a switch towards new formats for engaging with sports content. Prior to the WWE Raw announcement, Netflix spent years building its sports fandom through the likes of Drive To Survive and Break Point – creating a new category for sports fans that is driven as much by the personality-led entertainment appeal of sport stars as by the live sporting events themselves. To retain its ESPN-built sports proposition moat, Disney must go beyond just partnerships to create a Hulu-type complementary sports offering. It can actively front-load the new sports streaming app with its tier one sports content and go further by creating a sports fandom hub that services the newly emerging generation of entertainment-led sports fans. Get this right and it protects its existing sport rights by creating a Hulu-type ARPU model while investing in monetising the next generation of sports fan in a way that has currently been led by rivals Netflix and sports streaming service DAZN.
The future of sports will not be the same as what came before, but it will be built on similar lines. It requires the full commitment of the traditional linear distributors ahead of the next round of punishing sports rights negotiations (led by the NBA in 2024 / 2025) that are at risk of an Amazon type inflation without a meaningful digital competitor. This new ESPN-led joint venture should be empowered to become that competitor.