The Walt Disney Company (DIS), Comcast Corporation (CMCSA), Twenty-First Century Fox Inc (FOXA): Why ESPN Will Remain the Worldwide Leader

With the added bidding power of Fox, NBC, and CBS in the mix, the real threat for ESPN doesn’t come from these channels stealing its audience, but increasing its cost of business.

The cost of sports programming is rising
In the last two years, ESPN has agreed to huge deals for top-tier sports rights. It paid $15.2 billion for 10 years of Monday Night Football — a 73% increase from its previous rights. It shelled out $7.3 billion for college football playoffs — 480% higher than the cost to broadcast the BCS bowls. It’s paying twice as much now to broadcast MLB games and five times as much to show US Open tennis.

In this era of DVR and Netflix, live sports programming is increasing in relative value. It’s no wonder NBC, CBS, and Twenty-First Century Fox Inc (NASDAQ:FOXA) want in the game so badly. Now, increased competition is likely to bid up sports rights even more.

Lucky for ESPN, The Walt Disney Company (NYSE:DIS)’s free cash flow ($5.51 billion ttm) is significantly higher than Fox’s ($2.38 billion ttm). It can easily outbid Fox on most anything it wants. ESPN’s virtuous cycle of buying up sports rights and increasing its subscriber fee has worked in the past, and the company has the cash flow to invest in continuing this cycle.

Going forward, though, it seems like contract prices are increasing faster than the company can increase its fees. Therefore, ESPN will have to be more selective in its process. This leaves room for Twenty-First Century Fox Inc (NASDAQ:FOXA) and others to gobble up the scraps ESPN leaves on the table and cater to their niche audiences. ESPN will continue to tackle the biggest and most popular events.

Sports business is big business
There’s plenty of room for more than one 24-hour sports network. FS1 doesn’t need to be as big as ESPN to be a significant profit center for Fox. Even with a $1 subscriber fee, the network could bring in more than $1 billion. ESPN ought to remain the Worldwide Leader for some time as no network can touch its absolute popularity and dominant bidding position.

As an investor, one who owns shares of The Walt Disney Company (NYSE:DIS), I’ll be keeping an eye on new contracts signed by ESPN as well as the competition and FS1’s subscriber fee. But until ESPN’s ability to attract top programming falters, I’ll be holding onto my Disney shares.

The article Why ESPN Will Remain the Worldwide Leader originally appeared on Fool.com and is written by Adam Levy.

Adam Levy owns shares of Walt Disney (NYSE:DIS). The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney.

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