Could Big Tech drive ESPN out of business?

Once the go-to place for sports fans, ESPN may be losing its lead. Big tech companies are making big deals to reclaim sports rights and the fans that go with them.

disneyit is (SAY -0.36%) ESPN faces new challengers from Amazon (AMZN -0.70%), Apple (AAPL -1.68%)and Alphabet (GOOG -0.79%) (GOOGL -0.64%). These tech giants may not look like your traditional sportscasters, but they’re all into the bidding game for sports rights, content, and talent. This heightened competition comes at a time when ESPN is facing pressure from increased cord cuts and a declining advertising market.

Former Disney CEO Bob Chapek has fiercely defended the importance of ESPN as part of Walt Disney’s overall business. Current CEO Bob Iger – the former helmsman who recently returned to run the company again – has been a strong ESPN supporter during his first term. But with the changing environment, can Iger still make ESPN work?

Big names, big budgets

According to The varietythe value of US television and sports streaming rights will reach $26.6 billion in 2023, up 75% from $15.2 billion in 2015.

Two factors drive these prices up. First of all, live sports remain one of the few ways to get multiple people to watch the same thing simultaneously. This is important for attracting big advertising dollars. Second, networks with long-term sports contracts are essential for distributors and subscribers. In the era of cord cutting, this has greatly increased the relative value of sports.

To capitalize on these trends, big tech has been pushing for sports broadcasting rights. When Twitter originally bought the simulcast rights to Thursday Night Football in 2016, it paid just $10 million. Six years later, Amazon is paying $1 billion a year for the exclusive rights to weekly games.

Alphabet’s YouTube is the new home of the NFL’s Sunday Ticket package. For $2 billion a year, YouTube will be able to stream out-of-market NFL games, giving fans access to games not shown on local networks.

In mid-2022, Apple, which was also interested in Sunday Ticket, agreed to pay $2.5 billion for the rights to all Major League Soccer (MLS) regular season games and League Cups. League for the next 10 years. The iPhone maker also pays Major League Baseball (MLB) $85 million a year to launch around 50 Friday night baseball games per season in the United States and eight other countries.

ESPN, however, continues to fight for the rights. In October 2022, he was granted Formula 1 racing rights for a further three years, reportedly paying $85 million a year for a three-year contract. The rights were particularly coveted after the sport’s recent surge in popularity. In 2018, ESPN paid $5 million a year for Formula 1 rights.

There’s a reason big tech companies are so interested in sports rights: they attract subscribers. Amazon said it recorded its best three hours of Prime membership for the first Thursday Night Football game this season. While this means competition from ESPN is sure to continue, it also gives the company strong pricing power to mitigate the impact of the cord-cut on its business.

Can ESPN maintain its global leadership?

As part of Disney, ESPN certainly has the resources to compete with its deep-pocketed rivals.

ESPN is, in itself, a profitable business. Disney’s domestic linear networks generated more operating profit for the company than any other segment in fiscal year 2022, bringing in $8.5 billion. ESPN plays a big role in this segment because it anchors the bundle and sells a lot of advertising. (ESPN+ falls under Disney’s Direct-to-Consumer segment, along with all of the company’s other streaming services.)

Yet sports rights put pressure on profits. While the operating margin for linear networks has remained stable in 2021 and 2022, hovering around 30%, this measure has contracted over the past five years. In 2017, the operating margin of linear networks was nearly 34%. Over the same period, sports rights commitments for next year have increased from approximately $6.6 billion to $10.8 billion.

As Amazon, Apple, Google and others enter the bidding war for sports rights, ESPN will face pressure to keep what’s important and let go of some properties. For example, he will have to fend off Amazon when the NBA broadcast rights go up for auction next year. The retailer is reportedly very interested in adding a set of games to its catalog, and the NBA is considering a streaming-only package.

ESPN should also be wary of letting less popular sports rights go to tech companies. ESPN got its start buying up sports rights no one wanted, becoming the giant it is today thanks to NASCAR and NCAA basketball, which it helped popularize. Second-tier sports, like fighting or professional pickleball or alternative football leagues like the XFL, could prove to be valuable properties in the future. And, they won’t cost very much to lock down in the long run.

The good news for ESPN lovers and Disney shareholders is that the media mogul owns the brand, the people and the profits to seek out the sports rights that offer the best value and long-term opportunity. Although big tech competition is hurting its margins, it’s not going to put the company out of business. Sports rights remains a solid business, and ESPN is in the catbird’s seat when it comes to securing deals. It should remain a profit center for Disney for years to come.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Adam Levy has positions at Alphabet, Amazon.com, Apple and Walt Disney. The Motley Fool holds positions and recommends Alphabet, Amazon.com, Apple and Walt Disney. The Motley Fool recommends the following options: January 2024 Long Calls at $145 on Walt Disney, March 2023 Long Calls at $120 on Apple, January 2024 Short Calls at $155 on Walt Disney and March 2023 Short Calls at 130 $ on Apple. The Motley Fool has a disclosure policy.