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Fe 458 Assignment 3: Espn

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Eduardo Caballero

FE 458: Equities and Securities Analysis

Professor Louis Salemy

February 11, 2019

Founded in September 1979 as America’s first ever 24-hour sports television network, ESPN quickly became an unprecedented success, boasting a large, loyal customer base and industry leading revenue generation not seen anywhere else in the market. Today, ESPN has grown into far more, with over 5 original television channels, print magazine, website and radio network under the umbrella of The Walt Disney Company. For the purpose of valuating ESPN as a sole entity, independent of its role within The Walt Disney Company, we will highlight the company’s competitive advantage within its primary business unit: Sports Television Broadcasting.

Aside from the company’s first mover advantage into this niche space, much of ESPN’s success can also be attributed to its pioneering strategy of content collection. The network produced 35,000 hours of programming in 2012, contributing to at least half of all live athletic events televised in the United States. It is a prodigious cash machine, consistently generating close to half of all operating profit for Disney. Wielding its wealth, it buys the rights to nearly all it desires: $15.2 billion for “Monday Night Football”, $5.6 billion for Major League Baseball and $7.3 billion for 12-year exclusivity around the new College Football Playoffs, to name a few. No competitor has had the vast array of distribution rights (MLB, NBA, NCAA, etc.) they have had, or even the capacity to spend the billions of dollars that ESPN has done to get them.

With more than $6 billion in annual cable fees from almost 100 million homes, it seemed nothing would stand in the way of ESPN’s dominance in sports. However, as growing numbers of consumers begin to cut ties with cable providers to avoid rising costs, we see an emergence of a new industry, Video Streaming Services, lending itself up as a substitute. In addition to the change in consumer sentiment, there have been external pressures from Washington as a renewed push to undo the industry standard of packaged channel bundling has taken form which will undermine ESPN’s core business strategy – to defend the cable-TV bundle at all costs. To properly evaluate ESPN’s competitive advantage; to truly capsulate the industry as a whole and ESPN’s unique positioning within it all, we must break down the primary pressures that mold the industry: Buyer Power, Supplier Power, Rivalry, Threat of New Entrants, and Threat of Substitutes. We will use Michael Porter’s tried and true Five Forces Analysis to identify whether or not ESPN possesses a sustainable competitive advantage, the sustainability of its pricing power, the effects of unbundling, changes in the Sports Television Broadcasting industry, and if ESPN would be considered a buy recommendation if Disney ever decides to spin it off into a separately traded company in the near future.

SUPPLIERS (Profit Inhibiting Force)[pic 1]

In the sports television broadcasting space, one’s main suppliers are the entities with the ability to license its content to distribution channels. Prime examples include names such as: NLF, NBA, MLB, NHL, NCAA, and more. Suppliers have full control over the distribution of its content through negotiated licensing to network broadcasting corporations, such as ESPN. With large, loyal consumer bases deeply rooted in the content of each supplier, and strong pull through demand from the end consumer (households), we can easily identify the bargaining power from suppliers to be highly influential and therefore an inhibiting force on the bottom line for this industry.

There have been; however, counter measures from the television networks to combat this inhibiting force on their profit. Such a method comes from few leading market players in the industry that boast larger than average viewership, such as the case with ESPN. Their promise of national exposure to the supplier has been unmatched by any other rival in the industry, which has allowed them to secure various contracts with the largest suppliers in the game. This “competitive advantage” from ESPN has helped them stay ahead of the curve, until recently where we see viewership numbers continue to plunge. ESPN has lost roughly three million subscribers in the past year because of people’s cancellation of their cable subscriptions. What’s more, ESPN ratings have even plunged by so much as 1/3 which has threatened ESPN’s advantage over suppliers’ bargaining power, and once again has restored control to the owners of these distribution channels. What’s more, suppliers have even started to realize their worth as they begin to raise licensing fees and programming costs to the players in the sports broadcasting space as they even begin to tease with the idea of downstream integration, threatening players in the industry with new entrant fears which will be discussed in more detail shortly.

BUYERS (Profit Inhibiting Force) [pic 2]

The buyers of this industry are identified as cable providers, such as Comcast and DirecTV, who pay monthly fees to network channels (i.e. ABC, CBS, ESPN, TBS, etc.) to later sell to households under a bundled price. This business model has allowed major players in the space, with large cult followings and strong pull through with households nationwide, to rake in revenue from not only those that benefit from having the service, but also those households that not even use the service but are required to pay nonetheless due to the era of bundled pricing. All this has only recently come to an end as external pressures threaten the very livelihood of the bundled pricing model and has therefore been bringing down the switching costs associated with a buyer’s bargaining power.

Washington, and other advocates against bundling, stress that while an expanded basic package offers subscribers a smorgasbord of programming for a single fee, they are most likely paying for channels they never watch. ESPN is a prime example of this argument. Of the network’s nearly 100 million households, an average of just 1.36 million viewers watch in prime times. Although marquee programming like “Monday Night Football” draw big numbers every week, the average number of viewers over a 24-hour period is still a meager 713,000. Young people simply aren’t consuming cable TV in the numbers they once did. ESPN has been “over-earning” with cable customers paying for the channel as part of their subscription bundle, whether they watched it or not. Now; however, it’s been pretty clear that the years of over-earning are going to end, eroding the industries profit enabling model and transferring powers on to consumers. What’s more, the current ~$7 average monthly price for ESPN is more than four times the fee for the next most expensive national network making this push to unbundling even more threatening to ESPN specifically as households will be more receptive to cutting the sports network’s line before anyone else’s simply because of cost.



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