A new streaming service is coming Robert Way
The Walt Disney Company (DIS), Warner Bros. Discovery Inc. (WBD), and Fox Corporation (FOXA) announced that they are taking their sports content and bundling it into a new sports-streaming service.
This doesn’t strike me as a game-changer by any means, but more as an accounting move that will help increase margins for the three companies. This article will discuss why. But first, let’s discuss what we know about the deal.
Details on the New Disney-WBD-Fox Sports Streaming Service are Scant
We have no name for the service, no price point for it, and a vague launch date of this fall. Even the new management team wasn’t announced. In fact, this wasn’t an official announcement of an agreement at all, but rather “an understanding on principal” to launch this service.
What we do know is that it is owned a third-each. We also know the sports included which range from football, basketball, and baseball to college sports, tennis, and UFC among many others.
Additionally, we know that both Disney and WBD can bundle this new service with their respective streaming services. That’s Disney+ & Hulu for Disney and MAX for Warner Bros. Discovery.
The New Sports Streaming Service Helps Lower Costs for Disney, WBD, & Fox
The key point here is that the new joint venture is owned equally at a third for each of the three companies. This means that the new JV will not be consolidated into any of the three companies. Instead, it will be reported under the equity method giving each company will have significant influence on the newly formed joint venture. Disney already adopts the equity method accounting treatment for its investments (of which the JV will be one), as can be seen from Note 1 of its latest 10-K. Both WBD and Fox use the same accounting treatment as per their latest annual reports, and there won’t be a reason for them to change that.
The new service is streaming networks that are already up and running, as indicated by media journalist Matt Belloni in an interview with CNBC. As a result, there won’t be much more investment required to stream the content.
This means that all three companies are deconsolidating some of their current operating costs, while also realizing additional licensing revenue (they will license their sports content to the new service on a non-exclusive basis according to the official statement). This alone should inflate the profitability of the three companies. They will then recognize their share of the joint venture’s income in a separate line below the operating income. This will result in a higher GAAP operating income for them once the joint venture is formed.
As the statement clearly states, none of the three companies will transfer any sports rights ownership to the joint venture, they will simply license it on a non-exclusive basis. That means that Disney, WBD, and Fox won’t deconsolidate any content costs from their content assets, with the joint venture recognizing its licensing agreement as its content asset. What the companies do get is the added revenue that they could use to buy more sports right, with the burden to generate additional revenue and run profitably on the joint venture. It is worth emphasizing that the companies will get their licensing revenue and transfer some of the costs to the JV regardless of the latter’s profitability and performance.
This almost identical to the Hulu arrangement when Disney, Comcast, and Fox owned the majority of the company pre-2019. This is what prompted the JV to be called the Hulu of Sports.
Having the hindsight of knowing that original Hulu didn’t last as a joint venture, I’m skeptical this arrangement will work out. In original Hulu’s case, Comcast actually complained in an arbitration that Disney stifled the international growth of Hulu in order to ensure Disney doesn’t pay more than the $27.5 billion valuation the two sides agreed on as a minimum for the future sale of Comcast’s stake in Hulu.
Unfortunately, much of the same destructive dynamics are clear in this new JV, that’s why I do not expect it to be a real differentiator for the companies involved.
The New Disney-WBD-Fox Sports Streaming Service is Unlikely to Succeed
The first reason is that reporting by the Wall St. Journal was clear that Disney still intends on launching an ESPN DTC. Warner Bros. Discovery is likely to continue to offer its sports tier as part of Max. Not to mention that the networks that will stream their content on the new service, will also do so on competing platforms like YouTube TV.
Disney CEO Bob Iger confirmed in the earnings call that his company will indeed launch a competing ESPN product in 2025:
We announced yesterday the full suite of ESPN’s channels will now be available direct-to-consumer as part of a new joint venture with Fox and Warner Brothers Discovery to create a new streaming sports service launching this fall. This brings together content from all of these companies’ combined assets, including all the major professional sports leagues and college sports.
And in the fall of 2025, we’ll be offering ESPN as a stand-alone streaming option with innovative digital features, creating a one-stop sports destination unlike anything available in the marketplace today.
The fact that the companies will continue to compete with themselves and with the joint venture they launched, indicate that the goal is maximizing licensing revenue and improving margins, rather than pool their resources to launch a dominant sports streaming service. Iger actually said that the 2025 service will have things like betting and fantasy embedded in them, “features that this combination with Fox and with Time Warner Discovery will not have,” which is a clear sign which of the two is the more important product.
Additionally, the new service will stream most of the sports content that’s on the bundle for a much lower price, which could lead to cannibalizing the cable business. The counter-argument here is that the new product will reach new consumers who aren’t cable subscribers. Iger said this in the earnings call:
We know that there are a number of people who have never signed up for multi-channel television. This gives them a chance to do so at a price point that will be obviously more attractive than the big fat bundle.
Despite that, it will be prudent for the three companies to be careful in their marketing in order to avoid potential cannibalization, which could serve as a cap on customer acquisition. This in turn could mean that the service won’t gain enough traction or generate enough revenue to move the needle for any of the three companies.
And while the possibility of bundling the new service with its entertainment counterparts like Disney+ and MAX is a plus, the complexity around revenue sharing could hinder Disney and WBD from promoting this bundle, further undermining the new sports streaming service.
Conclusion
The launch of a new sports streaming service by Disney, Warner Bros. Discovery, and Fox could have been a game changer had it been a step towards bundling all of the three companies’ streaming service. Instead, the small details available from the official statement like the fact that Disney will continue to pursue ESPN’s DTC separately indicate that this move was simply done to enhance margins by deconsolidating some of the costs and recognizing new licensing revenue stream.
I would have been much bullish had I seen this as a path towards creating a new, supreme bundle of all the streaming services owned by the three companies. Since that is not the case, I maintain my ratings and view this development as eventually uneventful.
I rate Disney at a hold, and while I don’t cover Fox, I do cover WBD and rate it a Buy.
