Can ESPN-Fox-WBD Sports Service Break Hollywood’s Streaming Jinx?

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Hollywood’s struggling streaming industry got a jolt with news that three of its biggest companies plan to launch a joint sports-focused streaming service in coming months. Could the offering from Disney/ESPN, Fox and Warner Bros. Discovery WBD finally create a sustainable streaming service that customers will reliably pay for, and importantly, compete better against streaming superpower Netflix and its tech-giant compatriots?

Collectively, the subscription video-on-demand services from Disney, Comcast CMCSA , CMCSA NBCUniversal, Paramount PARA Global, and WBD have lost more than $11 billion, a ruinous run of losses that’s sent share prices tumbling the past two years and executives searching for stabilizing options.

The joint venture would finally give a Hollywood streaming service enough scale and subscribers to create a stable, sustainable service that a substantial audience likely would pay for (though pricing has not been announced). It holds promise to fundamentally reshape what’s left of the legacy broadcast and cable system, while shifting the streaming landscape with a powerful vertically focused offering of popular exclusive content.

This is happening as companies stop spending as much on streaming exclusives, license out more of their entertainment libraries to other outlets, and otherwise cut spending, Launching a shared service that’s actually big enough to pay for itself and make money would be a welcome change for the three partners.

The deal also surfaces a new set of issues, however.

Would, for instance, a joint service complicate any mergers & acquisitions. The traditional Hollywood studios are widely expected to look to M&A as they grapple with underperforming streaming ventures and declining revenues from theatrical exhibition, broadcast and cable.

Disney has been looking for months at spinning ESPN off as a standalone service, if CEO Bob Iger can find a suitable partner bringing programming or distribution. Fox and WBD would seem to fit that bill.

But would a tie-up obviate any standalone direct-to-consumer play for ESPN, which currently offers only a malnourished ESPN+ streaming option, mostly through a bundle with Hulu and Disney+? What would such a service mean for Iger’s Augean stable-worthy cleanup of Disney’s many challenges, and for what’s left of ABC and its other non-sports operations? Do they just get sold off to private equity in a big Mouse House kiss-off?

Coming into 2024, WBD was widely expected to be in deal-making mode, with expiration of M&A prohibitions in the Reverse Morris Trust that established the company in April, 2022. WBD also launched an add-on sports component for Max three months ago, but has so far refrained from imposing an already-announced $10 a month charge for the service, a decision that now seems far less mystifying.

Fox, meanwhile, has been almost an afterthought in M&A speculation, in part because it has not been a big player in streaming initiatives the past five years, after an aging Rupert Murdoch sold much of his media empire to Disney for $71 million in 2019.

Early in the pandemic, Fox did buy ad-supported streamer Tubi, and later launched Fox News Nation, a companion subscription service for Fox News Channel fans. But Fox also has retained strong sports rights for both Fox broadcast and the FS1 sports cable network, including the NFL and Big 10 college sports, and has leveraged those effectively.

A three-way partnership would avoid much of the regulatory headwind any actual M&A deal would face in Washington, especially in an election year, while finally aggregating many of the most valuable TV rights in pro and college sports.

MoffettNathanson analyst Michael Nathanson wrote in a note Tuesday that the proposed joint venture represents a version of the combined “skinny bundle” of content from the major Hollywood studios that he and others had long advocated.

“...This is in a sense a version of the ‘skinny bundle’ that kicks out all the cheaters (competing studios who leak legacy network content like NFL games onto their streaming services) that we have long been calling for,” Nathanson said. “The big caveat here, however, is that this bundle also excludes each of the company’s news and general entertainment networks. Yet, while we still do not know what pricing for this new service will be, it seems to us this is a long overdue repackaging of linear’s core content that strips out the bloat of non-exclusive content found cheaper elsewhere.”

Providing a sports-only streaming service would likely further hasten the decline of the legacy broadcast networks and their cable cousins. Sports have been a major reason many audiences continue to subscribe to cable TV. Indeed, in 2023, NFL games comprised 93 of the 100 most-watched telecasts on traditional TV. A number of top college games pushed football’s audience share even higher.

So what does that mean for the partners’ news and general-entertainment organizations, which are already facing cuts? A mega bundle of sports rights would be an imposing and attractive value proposition to hard-core fans, but still sets sports off with its own explicit price, instead of undergirding a broader offering that includes everything those studios do.

Such a sports-only partnership has follow-on impacts beyond the three companies. Paramount Global controlling shareholder Shari Redstone wants to sell her company. But what would this sports partnership mean for any buyer of Paramount, whose most valuable remaining assets include CBS rights to the NFL, March Madness and some Big 10 Conference games?

As Nathanson wrote ,“how can any bidder for Paramount underwrite the value of its linear TV portfolio with the added uncertainty this JV brings for future affiliate deals with existing partners, including Hulu Live TV? This also raises further questions over the future of all networks not included in this new bundle beyond just Paramount’s portfolio.”

What, for instance, does this mean for Comcast’s NBCUniversal, which also possesses plenty of prime sports rights and was expected to be a major player in any merger derby in coming months? Does CEO Brian Roberts still make a run at WBD, as widely expected? Can NBCU still compete ably against yet another formidable bidder?

More generally, how would cable and satellite service providers regard any such streaming operation? The studios still make substantial portions of their cash flow from cable and satellite distributors.

But they’re delivering increasingly threadbare programming to those distribution partners. Stripping out sports exclusivity makes the already weak value proposition far worse. Will service providers exact fee cuts, or require access to the bundle to sell wholesale through their services, much as Charter did in fraught negotiations last September with Disney over Disney+?

It’s worth noting that despite the sheer girth of the combined Disney/Fox/WBD partnership, it will still face far richer competition with deeper pockets, different motivations, and unknown metrics for success.

Apple AAPL , Amazon AMZN and Alphabet have been acquiring NFL, MLS, MLB and other rights at a steady clip. All three companies are far larger than the studios, with market capitalizations well north of $1 trillion, and global reach and ambition.

Netflix NFLX , meanwhile, has largely avoided live sports rights in favor of much cheaper “shoulder” content about sports and athletes, such as the Formula 1 behind-the-scenes series Drive to Survive. That approach changed last week when Netflix announced it will pay $5 billion over 10 years for weekly WWE Raw live ‘casts and related material. Will Netflix further insert itself into live sports-rights negotiations?

One or more of the tech giants is expected to make a play for the next round of NBA rights, and perhaps the upcoming College Football Championship negotiations.

Does it still make sense, given the joint venture, for ESPN to bid to keep exclusive control of the college football championship as its expands to a 12-team playoff format in 2024-25? Does WBD still push to retain an exclusive piece of March Madness?

Or do the three partners rely on joint bids, reducing the number of potential bidders for any rights package? As Nathanson pointed out, that could be bad news for the sports leagues, teams and athletes who’ve benefitted so richly from skyrocketing TV rights costs in recent years.

“Our initial first take is to view this announcement by Disney, Fox and Warner Bros. Discovery as the ultimate play to take ownership of their own sports destinies, foregoing their reliance on the current distribution system,” Nathanson wrote. “If this JV evolves over time into a different form and eventually bids as a combined entity for sports rights, that would clearly limit the number +1 bidders critical to maintaining the inflation in future negotiations that the entire sports ecosystem is built around.”