something like nine out of 10 of the top viewership events in television are sporting events,” Chapek said in a virtual session on Sept. 21. “Who knows what the future will bring, but it’s certainly an important part of our consumer offerings at the Walt Disney company.”

Chapek’s generic response about the future for one of Disney’s most valuable assets inspired no follow-up questions or headlines. But Chapek was addressing an existential threat facing the media industry, and an issue that may one day rock the foundation of his media empire, which includes some of the most valuable studios and film franchises in the world alongside the dominant network for live sports.

Disney’s big dilemma for ESPN is whether and when to fully embrace a future without cable.

Broadcast and cable networks still make billions of dollars per year from the traditional TV model. ESPN is a huge beneficiary, because media companies earn monthly subscriber fees from pay-TV providers regardless of how many people watch their programming. Niche channels make just a few cents a month per subscriber, while sports networks charge several dollars.

Disney makes more money from cable subscribers than any other company, and that’s solely because of ESPN. ESPN and sister network ESPN2 charge nearly $10 per month combined, according to research firm Kagan, a unit of S&P Global Market Intelligence. That’s at least four times more than almost every other national broadcast or cable network, according to Kagan.

Disney requires pay-TV providers to include ESPN as part of their most popular cable packages. It’s a no-brainer for TV providers, who wouldn’t dare drop ESPN.

Meanwhile, the non-sports world is cutting the cord. More than 6 million people ditched pay TV in 2020, according to research firm eMarketer — the highest annual total ever. About 25 million Americans have dropped linear TV bundles in the past decade.

That creates a struggle within Disney that’s poised to escalate. Disney wants people to sign up for its streaming entertainment products, Disney+ and Hulu. Wall Street wants this too. Streaming video is a growth business. Traditional pay TV is a declining one.

It’s also a wise financial swap for Chapek. While Disney makes more than $10 a month per subscriber for sports, it makes far less for entertainment networks such as Disney Channel and FX, which draw lower audiences and don’t command high advertising rates.

If Disney can get a cord cutter to pay $8 per month for Disney+ and $6 for Hulu, it’s a huge win for the company.

The reverse is true for ESPN. Swapping an ESPN subscriber for an ESPN+ customer, who contributes average revenue of less than $5 per month, is a significant loss for Disney. ESPN+ is a streaming service with limited content.

Disney Chairman Bob Iger, who was CEO until last year, told investors when he launched Disney+ that Disney was “all in” on streaming video.

But ESPN isn’t. ESPN’s strategy is to cling to the cable bundle for as long as possible, knowing it can draw potentially billions of dollars from U.S. households that are each paying $120 for the network even if they never watch it.

Some analysts have even questioned whether Disney should spin off ESPN, allowing Chapek to focus more clearly on streaming. An ex-Disney executive, who recently left the company and asked not to be named, said there’s “strategic misalignment” between the parent company and ESPN, and the businesses no longer belong together because Wall Street doesn’t look kindly on declining assets. The executive said having ties to the legacy bundle will weigh down a company’s stock multiple.

ESPN’s fit within Disney
Whether or not the fit still make sense, Disney has a huge financial incentive, at least in the short term, to keep the marriage going.

At $10 per month, or $120 per year, multiplied by about 75 million U.S. homes, Disney earns roughly $9 billion annually in domestic carriage fees from ESPN and its associated networks. Advertising that comes with broadcasting sports brings in billions of additional dollars.

That cash allows ESPN to spend big on sports rights, continuing a virtuous cycle. Disney agreed to spend $2.7 billion for “Monday Night Football” in a deal that runs all the way until 2033. ESPN pays $1.4 billion annually for NBA games and will likely pay more when those rights will need to be renewed after the 2024-25 season. The network owns media rights to every major U.S. sport in some capacity.

It also allows Disney to pay up for original streaming content, bolstering the quality of Disney+ and Hulu as the company competes with Netflix and Amazon.

“We’re successfully navigating the evolution of consumer choice,” said Jimmy Pitaro, chairman of ESPN, which is majority-owned and controlled by Disney, in an interview with CNBC in April. “We believe we can be multiple things at the same time. As consumers continue to gravitate toward direct to consumer, we have the optionality that we need.”

ESPN’s role as cash machine works nicely for the time being. But if 25 million U.S. households ditch cable in the next four or five years, as some predict, the math will no longer add up, said LightShed media analyst Rich Greenfield.

“If we’re going to 40 to 50 million, the question is, ‘Is there any economic model that justifies the level of spending that we’re currently at?’” said Greenfield.

ESPN has to figure out how to make up $3 billion in annual lost pay-TV subscription revenue that’s coming in the next few years as cord-cutting continues, a decline that Disney executives are anticipating, according to people familiar with the matter.

Disney’s plan is to incrementally raise the price of ESPN+ as it adds more valuable content while maintaining contractual obligations for exclusive programming to pay-TV distributors, the people said. An early example is Eli and Peyton Manning’s alternative broadcast of “Monday Night Football,” which will air 10 times this season on ESPN+ and ESPN2.

Should the number of pay-TV bundle subscribers drop to a level well under 50 million U.S. households, Disney would likely take ESPN to consumers in a more complete streaming package, said two people with knowledge of the company’s plans. At that point, the economics would flip, as most of the people paying for linear TV would be sports fans. Disney could likely make more from a full-service sports streaming service than it would make in a wholesale pay-TV distribution model.

In the near term, selling ESPN separate from the linear bundle isn’t feasible. Disney has negotiated digital rights flexibility in almost every major rights renewal in the past few years. But the company is currently restricted by its linear pay-TV obligations, which require certain premium programming to stay exclusive to the cable bundle, according to people familiar with the matter.

What to charge for streaming ESPN
David Levy, the former president of WarnerMedia’s Turner Broadcasting, said that Disney will have plenty of leverage with consumers when the time comes to bypass the bundle.