Is Twitter The Answer To Disney’s Problems?

There is a lot of speculation about Twitter (NYSE:TWTR) potentially being acquired, with prospective buyers including Disney (NYSE:DIS), Alphabet (NASDAQ:GOOG) and Salesforce (NYSE:CRM). All these companies have different motivations for acquiring Twitter, but Disney may have the most potential synergies with the social/news platform considering the latter’s successful start to its live streaming feature with Thursday Night Football. In this article, we discuss Disney’s current problems and how Twitter might be the right fit for its future.

Disney Problems: ESPN

ESPN is one of the most valuable networks in the world, with an estimated valuation of $50 billion. However, it is facing meaningful subscriber declines due to increasing fees and cord-cutting. ESPN has lost more than 11 million subscribers over the past six years. At $6.45 per subscriber, its average subscription fee is the highest among all the channels owned by Disney, with TNT being the next highest at just $1.65 per subscriber. ESPN charges for its sports appeal, as live sports continues to be the most watched programming content on TV. All was going well for ESPN until cord-cutting became meaningful.

Cord-cutters refer to pay TV subscribers who cut their traditional cable networks subscription for alternate viewing platforms. ESPN is dependent on its subscribers driving more than 60% of its revenues from subscription fees in 2015.

Future Of ESPN

We forecast ESPN to lose more than 12 million subscribers by the end of 2020, reaching 80 million subscribers as compared to 100 million subscribers ten years ago. This is because:

1. Cord cutting is accelerating with an increasing number of U.S. pay TV subscribers shifting from traditional television each year to alternate viewing platforms. We expect the pay- TV subscriber decline to reach 1.6% by 2020, compared to growth in recent years.
2. We expect ESPN’s fee per subscriber to continue to rise by 6% each year to offset the impact of subscriber declines. However, the rise of a la carte services by online TV providers such as Hulu and Amazon is influencing consumer behavior and has made the expensive bundling of ESPN more apparent. Pay-TV subscribers tend to watch less than 20% of the channels they subscribe to. We expect availability of flexible alternatives to encourage people to cancel their bundled pay-TV subscriptions.

The expected loss of subscribers will impact advertising revenue negatively. ESPN currently spends approximately $6 billion annually on live sports programming rights. In the longer term, as the number of subscribers fall, ESPN would suffer more as the cost burden per subscriber would increase. Additionally, higher subscriber fees could influence more customers to drop subscriptions.

Disney & Twitter

The aforementioned scenario assumes Disney does not change its strategy for ESPN. However, this scenario seems unlikely, as Disney has already made an investment in MLB’s BAMTech which will help the company launch ESPN digital streaming service online. A social media partner like Twitter could enable a cash-rich company like Disney to scale up its live streaming plans. It could also create an interactive media platform where players, expert commentators and fans can easily communicate and enjoy the game together via live stream and live tweets. According to a January 2016 research report by eMarketer, nearly 80% of U.S. retail executives stated that producing live streaming video events helps them create more authentic interaction with audiences.

It would also enable Disney to jump into the highly lucrative and rapidly growing video advertising market of social media platforms. A survey from Cowen and Company published in Q1 2016 estimates that U.S. digital video ad spending will reach $28.1 billion in 2020, up from $9.9 billion in 2016. Although Twitter has had its share of problems in effectively monetizing its platform by selling ads, the company’s recent focus on video to attract new users (and effectively advertisers) through its different offerings such as Periscope, Vine and live-streaming could turn things around.

Twitter could give Disney the competitive advantage of social media and enhance the appeal of its live offerings. It will be interesting to see how this most recent development of Twitter’s rumored sale turns out, considering there are other suitors as well. We will keep an eye on any developments.

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