During his extraordinary tenure as C.E.O. of The Walt Disney Company, Bob Iger methodically and dexterously transformed the organization from a single brand to a brand of brands, stringing together an M&A trophy shelf perhaps unparalleled in modern media history: Pixar, Marvel, Lucasfilm, and, in the final years of his tenure, the majority assets of 21st Century Fox. In sum, the accumulation of these extraordinary creative companies positioned a bulked-up Disney to enter the streaming business in a full-throated, double-barreled manner. It took Reed Hastings ten years to get Netflix to one hundred million subscribers. Disney+ achieved that feat in a year-and-a-half, and it continues to gain on Netflix every quarter.
As Iger grew the company, Disney was also buttressed by another set of assets: the linear television businesses, particularly ESPN, which came over in the 1995 Cap Cities deal that brought Iger to the mothership in the first place. For a generation, stars like Keith Olbermann and the late Stuart Scott turned ESPN into a synonym for the global sports business. The company competed aggressively for the live rights to franchises such as Monday Night Football and the College Football Playoff; SportsCenter, among other shows, seemed as much a part of the cultural firmament as Disney I.P., from Star Wars to Toy Story to Frozen. Not only was ESPN core to the overall business, but Iger also appeared to personally cherish it. After all, he came of age as a stage manager on ABC television sets and got his break as a senior program executive on the 1988 Winter Olympics. Today, he remains a loyal Packers, Yankees, and Clippers fan, and is friendly with the likes of Aaron Rodgers and Chris Paul. He even tried, and failed, to bring two NFL teams to Los Angeles. (The rival bid won.)
Even as consumers began cutting the cord on cable years ago, Iger remained steadfastly supportive of ESPN. For years, private equity firms have reached out to Disney and ESPN leadership to encourage them to spin off the sports channel, current and former high-level Disney sources told me. Industry analysts have similarly been beating the drum for the company to go all-in on streaming. By freeing itself from the stagnation and costs of the linear business, they argued, Disney could become a direct-to-consumer “pure play” and be valued at a far higher multiple, like Netflix. Iger spent years listening to this argument, the sources said, but assured his colleagues that ESPN would never leave Disney under his watch.
Now, it appears, Disney’s stance may be shifting. Since he took over for Iger in early 2020, Bob Chapek has successfully navigated Disney through the worst days of the pandemic, averting a potential existential crisis for both the production and parks businesses. His current challenge, however, seems almost nearly as thorny. For all its remarkable creative assets, Disney seems undervalued. Its market capitalization is around $317 billion, just some 13 percent above Netflix’s approximately $280 billion market cap. These are extraordinary numbers, to be sure, but they don’t appear to fully capture the extraordinary value of Disney’s library and decades of intellectual property, particularly multiplied by its rapidly growing direct-to-consumer platform.
Moreover, Disney’s stock is sitting at about $174 per share while Netflix’s trades in another altitude, at $633 per share. One potential reason? Despite its streaming success, Disney is still valued by Wall Street as a behemoth with legacy assets rather than as a pure play streamer. And this, in large part, is thanks to ESPN, which fuels a “media networks” segment that makes $7 to $8 billion in profit annually, but keeps the company tethered to a linear television business that is in structural decline.
Iger is an impossibly hard act to follow: glamorous, charismatic, as comfortable with creatives as with quants. The company that he architected was imbued with a vision of American wholesomeness: a mixture of sports, family-friendly entertainment, and creator-friendly intergenerational story franchises. (Iger never bought Twitter, in part, because it fell short of this ideal.) Chapek, who rose to the C.E.O. job from the parks division, is famously more analytical. He is not nearly as sensitive about the intricacies of the Hollywood talent ecosystem, as evidenced by Disney’s scorched-earth statement following Scarlett Johannson’s lawsuit over her compensation for Black Widow. He’s also less sentimental about the linear business and sports, according to a number of people who know him well, though he is a Michigan State Spartans fan. One high-level Disney source described Chapek as “less emotional about everything,” and said he “takes a more mathematical, tactical viewpoint.”
In recent weeks, Chapek has enlisted his closest deputies and his finance team to explore the strategic rationale for separating ESPN, two sources with knowledge of the matter tell me. In executive meetings and in at least one board meeting, conversations about the business have subtly shifted from an Iger-style defense of the company’s ownership of the asset to an open, if not yet decisive, question about whether to uncouple it. As one source with knowledge of the discussions told me, “There are now conversations happening regularly at Disney about whether or not to spin off ESPN.”
High-level strategic conversations like this happen frequently at enormous media conglomerates, and it is the job of C.E.O.s, management teams, and boards to ask provocative questions about all portfolio companies and assets. As one former Disney executive put it, it would be “a dereliction of duty” not to explore the benefits of a spinoff. But what makes the current situation more poignant than in years past, when Iger brushed back speculation about ESPN’s future at Disney, is that there is an increasingly apparent logic to uncoupling the business—for both companies. (Disney communications chief Zenia Mucha declined to comment for this story, and did not make Chapek available for an interview.)
The argument for a spin-off goes like this: ESPN, while still extremely lucrative, is a zero-to-low-growth business, and it’s destined to lose significant subscriber and advertiser revenue as linear television declines, forcing it to manage the downturn. While other Disney linear assets like ABC, FX, and NatGeo may be able to more easily transition their content to Disney+ and Hulu—indeed, much of FX’s best content already lives on Hulu—even Chapek himself has said that moving sports to streaming is “a much more complicated equation” because ESPN is locked into expensive, long-term rights deals that keep the most popular sports programming on linear and off of ESPN+. Exiting ESPN, therefore, could allow Disney to go all-in on streaming, which could pop the stock and deliver meaningful shareholder value. And presumably the windfall from some form of exit or spin could be reinvested in streaming to achieve a Netflix-like stock price.
Meanwhile, this logic could be equally beneficial for ESPN. A stand-alone ESPN would still be highly valuable because of its hold on top sports rights, which includes Monday Night Football through 2033. It would also be able to pursue new growth opportunities currently unavailable at Disney, most notably by taking advantage of the rapidly growing sports betting industry, which is exploding as individual states legalize gambling. Wagering, and microbetting in particular, appears to be the trend that will define sports consumption for the next generation as fans place bets on their phones, usually small ones, while they watch a game in person, on TV, or on another app. In this oncoming economic environment, ESPN could become not only the market leader for live sports and sports news, but also the platform for a global sports book. It has inched toward this position in fantasy sports, but actual gambling is order of magnitudes more consequential. Imagine it as the Robinhood of sports, this logic goes.
Currently, this option to transition from the declining cable business to the lucrative gambling space doesn’t fully exist for ESPN. While Disney has expanded its presence in the world of sports wagering, and is currently exploring a $3 billion-plus deal to license the ESPN brand to a sportsbook, the wholesome, family-friendly House of Mouse is reluctant to become fully embedded in the world of sports betting.
A stand-alone ESPN could pursue any number of routes: among them, going all-in and merging with a major sportsbook through a Reverse Morris Trust transaction, a popular and tax-efficient maneuver for conglomerates spinning out subsidiaries, allowing the solo entity to start taking money directly from bettors. (AT&T is spinning the Warner Media assets to Discovery in a Reverse Morris trust, which has delighted Wall Street.) Indeed, some keen media insiders see ESPN’s forthcoming licensing deal as mere foreplay for just such a merger.
Still, there are many people at Disney who believe that retaining ESPN is a smarter decision in the long term. Live sports remains the most in-demand content on television; as Chapek said publicly last month, “something like nine out of 10 of the top viewership events in television are sporting events.”
Keeping ESPN could give Disney an advantage over Netflix, which has no appetite for live sports. Spinning off ESPN would force Disney to cede the live sports business to rivals like the soon-to-be WarnerDiscovery and Amazon, both of which have big ambitions in live sports and might even look at acquiring a stand-alone ESPN later down the line. While moving the top sports leagues to streaming will take time, that is its inevitable future. (ESPN’s production resources could be especially valuable to Amazon, which still relies on traditional media partners to produce its sports programming. Though a deal could need the blessing of regulators.)
The fate of ESPN is very much to be determined, but what once seemed implausible is now quite possible. And the fact that a spin-off is even under discussion is testament to how much has changed since Chapek took over the company. Iger was never willing to envision a Disney without ESPN, perhaps in part because of his personal attachment to the linear business and to sports. Had he stayed at the company for another five years, this might have changed—his most fervent attachment being to Disney itself, and to his own legacy. Either way, Chapek is not nearly so emotional: “He could give a shit if ESPN has rights to the Rose Bowl,” one source who knows him said. “He’s focused on moving the stock.”
This underscores a larger point about Disney, in particular, and the media, in general. Of all Iger’s plentiful gifts, maybe the most significant was his talent as a storyteller—he took over a company in need of innovation, built it into something the company’s founders could never have envisioned, and yet always found a way to connect the Disney of his creation with its lineage: Walt and Roy, the inkers and the painters, Mickey and Goofy. Disney now finds itself in an even more unsentimental media ecosystem, surrounded on all sides by trillion dollar behemoths and ambitious disruptors. And chances are that it will look quite different in ten years than it does now.