Is a Netflix + ESPN Service in the Cards?

Insiders say it’s more likely than the Mouse House buying the streaming service

Netflix reports earnings this afternoon amid plenty of talk that the streaming giant could be the target of an acquisition — maybe even by Disney. That might be a stretch — Disney has historically made purchases in the single-digit billions range, and Netflix has a $43 billion market cap — but a larger relationship between the two, who have recently expanded their cooperation, could be intriguing.

And something like that — maybe even a “Netflix + ESPN” package — is probably a lot more likely than a wholesale acquisition, say experts such as Hale Boggs, the chairman of Manatt Digital Media.

“Would some kind of formalized larger relationship between Disney and someone like Netflix make sense? Absolutely,” Boggs told TheWrap. “But to get to the place where it makes sense would be a bit of a challenge.”

Disney, led by CEO Robert Iger, had historically been reluctant to untie ESPN — by far the most expensive non-premium cable channel, at about $7 per subscriber per month — from cable packages themselves. But as ESPN has fallen from a high of 101 million subscribers in 2011 to fewer than 89 million today, the Mouse House has become more amenable to standalone ESPN offerings.

“People are viewing sports differently than they were a couple years ago,” Boggs said. “There’s certainly a recognition of that among the senior folks at Disney. They’ve certainly seen it in the stock price.”

Disney’s stock is down 16 percent over the last year, driven primarily by subscriber declines at ESPN. And that’s one reason why the idea of a combination of ESPN and Netflix — which would give customers around the world a package of movies, TV and sports — seems compelling. ESPN is the priciest cable channel, followed closely by several other sports networks, and Netflix’s base content of movies and movie-quality dramas has always been a staple of premium cable channels like HBO and Showtime, which command a substantial extra fee.

Connecting the two — while cutting out the broader selection of cheaper channels that make up the bulk of most people’s cable menu — would add a very different product to the market.

Barry Haldeman, a former Paramount Pictures executive who’s now counsel at the law firm Jeffer Mangels Butler & Mitchell said that could scare competitors and excite the millions of Americans who have been slow to cut the cord for sports-related reasons.

“You’re adding a sports component which is usually an extra premium when you’re buying cable,” Haldeman said. “If all of a sudden you get that premium, that’s a whole segment of people who would be interested.”

In that case, he added, Netflix might seek to purchase additional sports rights, which would excite sports-minded consumers — but cost billions of dollars, exposing it to some of the same pressures weighing on Disney’s stock. But Netflix boss Reed Hastings (pictured) needs to keep finding ways to grow the subscriber base.

Boggs said the success of such a package would depend on whether the price was right.

“I could see if it was priced in a way that made sense,” Boggs said. “Certainly, being able to broaden the streaming ESPN content via a provider like Netflix at a 40,000-foot level — it definitely makes sense.”

But Boggs identified two big obstacles in the way of creating that product. For one, Disney paid $1 billion in August for a 33 percent stake in video streaming company BAMTech, developed by Major League Baseball, and has plans to use the service to launch its own version of a streaming ESPN. Boggs said another big streaming partnership might be premature — that Disney might “let [BAMTech] fester” for a while before it jumps headfirst into something else.

Boggs also said Disney wouldn’t want to do anything to disrupt the exclusive arrangement it signed with Netflix in May, which made the streaming service the only U.S. pay-TV to carry the latest films from Disney and its Marvel, Pixar and Lucasfilm imprints as of September, like “Zootopia,” which was recently added.

He also questioned whether Netflix, which produces expensive TV like “The Get Down” — which cost $120 million to make — can even afford premium ESPN content.

“Can Netflix really afford it?” Boggs asked. “Would Disney be willing to provide a pricing model that works for Netflix? Those are the kinds of questions that need to be addressed and I don’t know if they can get there.”

However, Boggs — who doesn’t think a Disney scoop of Netflix is in the cards — says something like that combination is a more realistic possibility.

“They’re very anxious to be bigger in streaming,” Boggs said. “But if there’s a deal to be done it will be something more discrete — and maybe more about the sports content.”