Disney, Fubo Deal Sets Sports Industry on Path to Economically Stable Digital Future

Disney, Fubo Deal Sets Sports Industry on Path to Economically Stable Digital Future

The Walt Disney Company (DIS) recently announced plans to merge its Hulu + Live TV service with FuboTV (FUBO). The newly combined company immediately becomes the second largest vMVPD, behind only YouTube TV.

Some media observers have suggested the deal signifies the ‘legit sports streaming wars are upon us’. 

Perhaps. But only in the context of all parties, save Netflix, replacing highly profitable business models with less lucrative ones (everyone loses in war).

"The new digital video distribution marketplace is driven by consumer choice and does not feature any of the government sanctioned protections of the established Pay TV bundle,” media consultant Patrick Crakes explained. “As a result, there are numerous players chasing a limited amount of high-quality media content that is desperately needed to just approach break even, let alone produce positive growing margins."

However, the DIS-FUBO merger does indicate that the media industry is finally en route towards definitively finding an economically stable, digitally re-bundled, sports television service.

“Figuring out how to make different versions of digital media distribution work together (linear channels, SVOD, etc.) in an at least a break-even way is imperative for all of the mega cap companies involved in media," Crakes said.

On the surface, Disney and Fubo may seem like strange dance partners. The latter had been suing the former, along with Fox and Warner Bros. Discovery, alleging their planned combined streaming venture (Venu Sports) was in violation of antitrust law.

Venu has since formally been dissolved. The debate over antitrust legislation was shelved without resolution.

But logic suggests Fubo was concerned about more than just reduced competition or rising content prices, as it claimed. Finding a suitable takeover partner for its channeled business was seemingly on its mind too.

“There was no route to profitability for the company,” Crakes said.

So, the lawsuit may have been a means of accelerating a potential merger.

“It's a public company. It didn’t have a parent co. backing it up that could afford to treat profitability as a secondary objective. And it's hard to make money when your revenues go up and down monthly and your costs are all fixed and increasing annually,” Crakes said.

Disney isn’t focused on Fubo’s short-term economics. 

“This was a somewhat obvious move for them. If you’re going to stabilize a system, forget about the profitability of it for a while; that is part of that process,” Crakes said. “No one knows what digital distribution is going to look like in the future or what is going to work. Disney just knows it needs to have assets in place to be able to react accordingly.”

So, the company is throwing out a bunch of different models and will see what sticks. It is going to have a flagship ESPN DTC product, ESPN+, and this new combined Hulu + LiveTV and Fubo platform (which will offer a skinny sports bundle) in market before the end of 2025—all while remaining connected to the pay TV bundle. 

DIS is also adding 1.3mm subscribers to Hulu + Live TV’s existing customer base with the merger.

It’s taken longer than most insiders anticipated for digital re-bundling to begin.

“If you would have asked me five years ago, I’d say we already be well on our way,” Crakes said. 

But because the media ecosystem is small and susceptible to ‘copycat’ behavior, and consumers have been willing to pay for multiple streaming services (as they were once much cheaper), most distributors avoided consolidation.

However, with the cost of streaming services now rising, all are beginning to run up against price elasticity.

“At some point, consumers won’t see value in paying an ever-increasing fee to everyone for everything,” Crakes said.

So, the boat to sports media’s distribution future is finally leaving the dock. 

No one is sure how long it will take for it to reach its next-gen destination, or what challenges the linear media companies –and sports leagues– will face along the way.

“This is going to get harder, not easier, until we reach that end point,” Crakes said.

While media co. margins will stabilize or even widen over time, it’s hard to see how they ever match what was generated by the old system. Consumer choice will limit their profit potential.

And that means meaningful content cost adjustments still must occur. There’s simply no way sports programming costs can continue to grow 50% (or more) each renewal cycle when revenues are only climbing ~5% over the same period.

Entertainment “streaming became profitable because Disney, Warner, and even Netflix reduced their content spending significantly,” Crakes said.

Of course, that’s not sustainable. Those companies know they must continue investing in quality content to draw and retain subscribers.

But they’re not going to repeat their mistakes of the past, either. Expect most sports leagues, except the very few at the top of the value chain, to take flat deals or even less money in their next round of negotiations. And those that do see a lift will likely have to add partners (i.e. fractionalized their rights).

Ultimately, there may only be a couple of digital distributors—each differentiated in some way.

“The logical thing would be to try and roll them all up,” Crakes said. 

Or at least the entertainment companies tied to the pay TV bundle that don’t go out of business first.

“That remains a real option for some of these entities if they can't get a merger done or repurpose their assets,” Crakes said.

The relative lack of players at the finish line should enable those still standing to gain some scale and pricing power. That’s not going to be a great development for sports fans.

“Consumers ought to forget about being able to find or get all the content they want unless they are prepared to pay a lot more than they do currently,” Crakes said. “You’re likely going to be looking at a minimum of a 2-3x jump above the $100/month Pay TV bundle with that price increasing at 6% per year.”

Most fans will instead work to cobble together an affordable channel lineup across multiple providers and business models, and they’ll likely do without some games.

“They will feel as if they are saving some money and DIS and other distributors will get more subs as more people will be interested in some level of customization with the multiple different bundle options they’re proposing,” Crakes said.

Having fewer bidders competing for rights will help the remaining media companies on the cost side of the equation too.

They “will be able to squeeze everybody, including the leagues, because sports, entertainment, and news channels can’t live without them,” Crakes said (see: Netflix acquiring the FIFA Women’s World Cup for a song and dance or the old Pac-12 dissolving due to a lack of interest from broadcasters and distributors).

And by contrast, they are fine without the broadcast rights. 

Remember, some/all their digital bundles may not even be profitable. The tech-first companies are investing in sports to drive value in other parts of their business.

We don’t know where the sports media distribution boat's trip will end, but the hope is its final destination will feature more stable economics than the vMVPD and SVOD models it is leaving.

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