Disney's Fox Deal Proves Its Faith In Live Sports

The Walt Disney Company’s (NYSE:DIS) $52.4 billion purchase of some of 21st Century Fox’s (NASDAQ:FOXA) most valuable assets is official. Now, it’s time to take a look beyond Disney’s new majority share in Hulu and the fusion of the popular Marvel Cinematic Universe and dive into what could be the biggest reason Disney made the deal: live sports.

The deal that was announced on Thursday will see Disney acquire the Twentieth Century Fox television and film studios, FX Networks, National Geographic, and other cable assets. Left off the deal are Fox News, Fox Business and the main Fox Broadcasting network, as well as FS1, FS2 and the Big Ten Network (also read: 21st Century Fox Shares Surge After Disney Deal Made Official).

But Disney did grab an array of properties, including Star India, Sky plc (OTC:SKYAY) , and Fox’s 22 regional sports networks, that could prove invaluable and make it a local and global sports giant for years to come.

Sports-Based Hope

ESPN’s struggles are widely known, and the sports entertainment powerhouse has lost a fair bit of steam in recent years.

Many consider the company’s multibillion-dollar Monday Night Football contract and its nine-year, $24 billion NBA TV rights agreement—which it shares with Turner—as bloated deals weighing the ‘World Wide Leader in Sports’ down.

The company has been forced to cut hundreds of jobs in the last year alone, and ESPN’s subscriber numbers have fallen to 88 million from their roughly 100 million peak in 2011.

Yet, the company’s losses can be attributed in large part to cable’s decline, as viewers who may have never watched ESPN—even though it came on their standard cable package—leave in favor of streaming services. In fact, ESPN’s subscriber fees have gone up in recent years and remain one of the highest in all of cable.

ESPN is banking on the fact that sports will always be watched live. This would give the network the advantage in the eyes of most advertisers, as nearly all other regularly scheduled TV programs can be consumed on-demand on Netflix (NASDAQ:NFLX) , Amazon (NASDAQ:AMZN) , or other streaming services, without diminishing the product.

How It Can Grow

As part of the deal, Disney will acquire Fox’s current ownership of U.K. TV powerhouse Sky TV and Sky Sports, which is nearly the equivalent of ESPN in the U.K. This gives the network the rights to the English Premier League—one of the most watched and valuable soccer leagues in the world. On top of that, Disney now owns the rights to the network’s golf, darts, cricket and Formula One properties.

With the acquisition of Star India, Disney now holds a massive TV presence in one of the world’s fastest growing and largest economies. The Indian network’s Star Sports boasts 10 different channels and holds the rights to the Olympics, as well as Indian soccer leagues.

Star India also recently won the worldwide rights to broadcast and stream Indian Premier League cricket for the next five years. The company spent $2.55 billion to beat out the likes of Facebook (NASDAQ:FB) and Sony (NYSE:SNE) . Nearly 1.3 billion viewers reportedly watched India’s top cricket league last season.

ESPN is also set to take over Fox’s 22 regional sports networks in the U.S., which currently have deals with 44 professional sports teams throughout the NBA, MLB, NHL, MLS and college sports.

In many markets around the country, sports fans ranked RSNs ahead of all other cable channels, including ESPN and HBO, in terms of their importance, based on a 2016 Nielsen survey.

“We have long known that our RSNs are akin to the fifth broadcast network in their markets in terms of ratings, and Nielsen’s research confirms the remarkable importance of these networks to viewers,” Fox Sports executive Jeff Krolik said last year.

“Local sports are tribal, and RSNs inspire the same loyalty and connection as the hometown teams they bring to fans.”

Disney’s acquisition of Fox’s 22 regional sports networks is worth roughly $23 billion on its own, which makes these local sports networks worth more than one-third of the total value of the deal—including debt.

Bottom Line

The 21st Century Fox deal was made to fight off streaming powers and give the company more content at a time when owning it will prove more and more valuable as the way people consume it changes.

The deal also gives Disney more possibilities for the planned standalone ESPN streaming services. This acquisition also allows for what could eventually become a skinny standalone streaming offering that includes regional live sports, ESPN, Indian cricket, and every movie and TV show Disney’s new mega-studio produces.

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