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How Disney will save ESPN

Daniel Roberts
Senior Writer

For four consecutive quarters now, Disney’s earnings report has contained the same sentence, almost verbatim, about its cable networks division, which houses ESPN: “The decrease in operating income was due to a decrease at ESPN… The decrease at ESPN was due to higher programming costs.”

ESPN, which has been steadily losing cable subscribers for six years (it’s now in 88 million households), keeps dragging down Disney’s financials. This has led many media outlets to speculate that Disney ought to sell off ESPN. That idea, which was once “improbable, if not crazy,” Bloomberg Gadfly wrote last year, “is now catching on.”

But Disney isn’t giving up on ESPN just yet. It has a secret weapon to turn ESPN around (maybe not-so-secret anymore, but still somewhat under the radar, still unknown to most sports fans, and still commonly misunderstood).

The secret weapon is BAM Tech, the video business spun off from Major League Baseball Advanced Media (MLBAM) last year. At the time of the spinoff, in August 2016, Disney invested $1 billion to get a 33% ownership stake in BAM Tech.

Now, one year later, Disney has paid another $1.58 billion to buy another 42% stake, giving it majority control.

Disney says its purchase of BAM Tech will weigh on its earnings per share for the next two years (yes, years, not quarters). That ought to give a sense of just how committed Disney CEO Bob Iger is about BAM.

What is BAM Tech?

MLBAM launched in 2000, as a tech startup within Major League Baseball, equally owned by the 30 ball clubs; each club committed to investing $1 million each year for the first four years, giving MLBAM $120 million in funding.

BAM’s initial purpose was to handle the live-streaming of games for the subscription product MLB.tv, a major undertaking considering how many different games there are on any given night during the baseball season. This was before Facebook or YouTube.

Soon enough, BAM was also handling back-end streaming tech for other sports entities, like WWE, PGA Tour, and the NHL, and even non-sports content providers like HBO Now.

So, the shorter version of that history: MLB was streaming games before almost any other major pro league was doing it, and by being first out of the gate, it grabbed a (wide) early lead in the business.

Fast-forward to 2016: MLB had considered bringing MLBAM public, but instead it spun off the video arm and sold a 33% stake to Disney. NHL had a 9% stake, as a result of an earlier content rights deal, and MLB retained 58%.

Now Disney is BAM Tech’s majority owner, and it spent $2.58 billion total to get it. In 2018, it will at last roll out an ESPN streaming service, and in 2019 it will roll out a Disney streaming service. Both will be built by BAM Tech.

It will help that BAM Tech poached the former VP of streaming video from Amazon, Michael Paull, to be its new CEO. Bob Bowman, the illustrious founder of MLBAM who had been pulling double-duty overseeing the BAM Tech spinoff, will remain MLBAM president.

To understand how much is riding on BAM Tech for Disney and ESPN, just think of it this way: Disney is so confident in BAM Tech that it is ending its relationship with Netflix. Yes, you could say that the confidence comes from its valuable content (including Disney, Pixar, Marvel, and ABC), but the tech will also have to be terrific. The content alone won’t get consumers to sign up.

The stakes are extremely high. Bob Iger says these streaming services will give Disney “greater control over our own destiny in a rapidly changing market.”

Chris Fowler, Lee Corso (in Oregon Duck head) and Kirk Herbstreit host ESPN College GameDay in Oct. 2013

What can BAM Tech do for ESPN?

The ESPN streaming service Disney will launch in 2018 will not represent ESPN “going over the top,” as the phrase goes. That is: it won’t offer everything that’s on the ESPN cable channel, but without a cable subscription. ESPN still isn’t ready to do that.

“We don’t have plans right now to take ESPN as it is currently distributed and go over the top with it,” Iger said on the Q2 earnings call in May. “Frankly, we don’t really feel we’ve got a great need to do that.”

Many, many others would beg to differ. But for now, ESPN will first try a streaming product that focuses on live games—more than 10,000 of them per year, including MLB, NHL, MLS and tennis, and not the primetime games that run on ESPN.

Although that is still not the streaming product most sports fans want from ESPN, expect the tech to be smooth and impressive, and ESPN will test the waters there first before it will go all the way to a full OTT offering a la HBO Now. If and when it does finally take the cable channel over the top, that product, too, will be powered by BAM Tech, and would likely be very lucrative—just the kind of thing that could bring cord-cutters back to ESPN. (Why not just go all the way OTT now, you might ask? It’s a fair question. The biggest reason is long-entrenched TV rights agreements.)

And Disney’s majority ownership of BAM Tech can even help Major League Baseball, which is doing its best to catch up with the popularity of the NFL and red-hot NBA. MLB Commissioner Rob Manfred, at Yahoo Finance’s All Markets Summit in February, specifically called out the Disney/MLBAM deal as something that will help baseball.

“I’m really pleased,” Manfred said. “I think it provides baseball with an opportunity to develop products that can help define what our new distribution system looks like.”

It’s no surprise, then, that as part of the new Disney deal, ESPN will get to show one MLB game on its streaming service every night, NBC Sports reports. That will attract cord-cutting sports fans—which is what MLB and ESPN both need to do to thrive.

More: Is ESPN doomed, or adapting wisely? Watch our Yahoo Finance face-off:  

Daniel Roberts is the sports business writer at Yahoo Finance. Follow him on Twitter at @readDanwriteSportsbook is our sports business video series.

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