The SEC and Member Schools Need to Be Wary of Disney’s Woes

The Walt Disney Company is the Parent Company of ESPN and their current fiscal woes are a risk to the SEC and Member Institutions.

These are not typical times and The Walt Disney Company has chosen the wrong time to put themselves into a deep amount of debt.  This week, the company took out an additional $6 Billion of debt to pay off other creditors.  There was a massive spike in debt that the company took on in order to finance their acquisition of 21st Century Fox.  Antitrust provisions forced the company to shed the crown jewel of the acquisition, the Fox Sports Networks, a stable of regional sports networks that air professional and college sports programming.  Now, the company is reeling with a lack of programming, no one in the theme parks, debt, a cordcutting bonanza, and flagging economic conditions with the sudden halt.  This ought to bring about pause in the Southeastern Conference Headquarters in Birmingham, Alabama and in the Athletic Departments of all 14 member institutions.

The Walt Disney Company’s Financial Quagmire

The 21st Century Fox Acquisition put The Walt Disney Company in debt.

Debt was not an issue for The Walt Disney Company (Disney) during former CEO Bob Iger’s run at the company until the very end.  The Walt Disney Company purchased 21st Century Fox for $71.3 Billion and it was finalized on March 20, 2019.  The original arrangement would have The Walt Disney Company purchase all of the assets from the film and television production studios and networks to the prized Fox Sports Regional Sports Networks (Fox Sports South, Fox Sports Arizona, etc.) and share of the YES Network.  However, the company had to sell off the regional sports networks and did so at a massive discount to Sinclair Broadcast Group, which resulted in a massive loss for the company as it was only a $9.6 Billion transaction.

Disney added approximately $21 Billion in long term debt and another $13 Billion in current liabilities ($5 Billion of direct short-term loans) based on the company’s financial tendencies to make this transaction a reality.  In total, it ended up being approximately $37 Billion in new debt incurred.

Disney’s Free Cash Flow situation compared to past years was not strong as the company is more debt-laden and asset rich than ever.  In 2018, Disney had a Free Cash Flow of $9.8 Billion and in their last annual filing, they sported a $1.1 Billion Free Cash Flow.  Disney does not have as much as in reserve as past years.

The additional $7.3 Billion of debt taken on this week adds more challenges for the company to pay off their creditors during a global economic shutdown and an unstable, panicked world.

Presently, Disney has an Altman Z-Score (a measurement that is quite accurate in predicting insolvency) of 1.86, which is perilously close to the 1.81 threshold where the likelihood of bankruptcy proceedings is possible.  The safe zone is where the Altman Z-Score is above 2.99.

Cord Cutting and the ESPN Problem

ESPN is a subsidiary of The Walt Disney Company.  ESPN cross-promotes frequently with other businesses owned by The Walt Disney Company including Disney Parks and Resorts, ABC, Disney Channel, Disney+, and owned-and-operated ABC affiliates (WABC – New York, WPVI – Philadelphia, WTVD – Raleigh-Durham-Fayetteville, WLS – Chicago, KTRK – Houston, KGO – San Francisco Bay Area, KABC – Los Angeles, KFSN – Fresno).  ESPN is packaged with other Disney owned television stations to cable/satellite operators and subscription prices and terms are negotiated.  When contracts are set to expire, it becomes a dramatic time for cable operators and for The Walt Disney Company.  The biggest losers in the negotiations are the cable/satellite subscribers as they would see a price increase and hidden fees, which basically cover how the cable operator lost in the negotiation.

What customers are not told when they get any sort of a television package is that there are five major companies that the television/streaming provider negotiates with to include in the packages offered.

  • CBS/Viacom
  • Comcast
  • The Walt Disney Company
  • Fox
  • AT&T

Those who want to watch Big Ten Football on Big Ten Network have to get the full set of Fox owned channels including Fox News, Fox Business, FS1, FS2, and the local Fox affiliate if it is owned-and-operated.  There is no a la carte here.  Same applies for those who want to have TBS in their package, they must purchase the entire set of AT&T owned channels.

The only a la carte function in the process of creating a television package is choosing which set of channel packages from the five providers one would want to include.  However, this is actually not possible.  It can be done more indirectly through the streaming television provider or in the choice of provider.  An example would be Sling Blue vs. Sling Orange where the CBS/Viacom cable package is included, but the major differentiator is whether there are Comcast and Fox offerings or Disney offerings.

Those that cut the cord, but do not watch sports and still have ESPN in their plan are still subsidizing the network.  Disney for a long time counted on the packaging of their networks to cable companies to raise subscription prices and now there is more transparency in pricing.  ESPN subscriptions are still falling, but prices are rising and Disney is leveraging their entire offering of channels to prop up their most expensive network – ESPN.  When the cordcutting wave hit ESPN hard in 2017, the network was spending more than $8.1 Billion per year in exclusive live sports television rights.

The Coronavirus Outbreak has resulted in significant viewer losses and advertisers have been pulling out.

Audiences for ESPN have slipped since major sports leagues stopped play. Prime-time viewership on ESPN’s flagship network averaged 550,000 viewers the week of March 16, down from 647,000 a week earlier, according to Nielsen data.

Coronavirus Hits Disney Hard

The Walt Disney Company generates revenue from Disney Parks, television networks, television production, their subscription streaming service, intellectual property, and film production.  There are many shoes that drop for the company in the wake of a pandemic.  Forced shutdowns were the poisonous icing on top of this metaphorical cake of toxic ingredients.  The forced shutdowns by governmental officials on a global scale make the economic environment for The Walt Disney Company to compete much more challenging.

Disney does not provide a necessary service in people’s lives.

It may sound surprising, but the company is an entertainment company.  Their news division (ABC News) is largely replaceable within the scope of corporate mainstream media.  It is not as dedicated of a news resource compared to the offerings of AT&T (CNN), Comcast (CNBC and MSNBC) or Fox (Fox News and Fox Business).  News consumption is more of a distraction than a useful tool for a few reasons.

  1. Streaming or televised news content is limited in scope and time.
  2. The ramifications of the news is less impactful to the ordinary viewer and in times of crisis dramatized, milked, and often out-of-date.
  3. Breaking news is made by independent journalists, social media sites, and even forums.
  4. Deliberate misinformation and lack of trust in the information presented.

Disney does not provide businesses and individuals with data (like Fox owned Dow Jones) or telecommunication capabilities (like AT&T or Comcast).  Disney is in the entertainment realm and when businesses spend money with Disney, it is usually in the role of an advertiser, sponsor, vendor or convention/meeting organizer (the Republican Party would often host closed-door events at Disney’s Yacht Club Resort convention center) .  Disney’s scope in business spending is far more limited than their more diversified media competitors.  Expansion into providing streaming technology services through the acquisition of BAMTech has been murky with Disney Streaming Services, it is the backbone of Disney+ and ESPN+ and it is the streaming technology provider for TheBlaze.  However, they lost a massive account, which was WWE in 2019.

Amusement Park Closures Hit Hard

Walt Disney Company uses one part of the business to make up for losses in another part of the business.  The easiest way to make up for the television revenue shortfalls was to charge more at Disney Parks and Resorts.  This is a tactic that worked quite well globally, but there were clear signs of issues with the way Disney Parks was operating in the 2019.

Bob Iger’s Star Wars: Galaxy’s Edge Hubris

At Walt Disney World and Disneyland, 2019 rang in the opening of two major additions that were expected to provide a more immersive in-park experience that was based on the popular Star Wars franchise.  It was much hyped and awaited, it is Star Wars:  Galaxy’s Edge.

Disney Doesn’t Plan to Spend a Fortune Promoting New Star Wars Attractions

Bob Iger believed that Star Wars:  Galaxy’s Edge did not require a massive promotional budget or effort, the attitude was equivalent of “if we build it, they will come.”  Years of building and this was the approach.  Disney Parks were certainly ready for a surge at Disneyland and Walt Disney World for the opening of the park sections and the debut of Star Wars: Millennium Falcon – Smugglers Run .  They were expecting lines at Walt Disney World to rival Hagrid’s Magical Creatures Motorbike Adventure at Universal Studios Orlando’s Islands of Adventure.

This did not happen at Disneyland during and after the May 31, 2019 launch.

Excuses were made that Disneyland and Disney’s California Adventure are regional parks and that Walt Disney World, which caters to a more global audience, would be able to experience success.

Turns out it was an initial bust too at The Happiest Place on Earth as well at the Disney’s Hollywood Studios park.  Throw in the issues with Disney’s Skyliner and this was a troublesome time as the company was unveiling new attractions and systems.

Delays due to mistakes with the “trackless” functionality of Star Wars: Rise of the Resistance caused the section of the park to open in an incomplete fashion.  The news of the staggered opening resulted in re-bookings.

Disney Parks on pause during the pandemic and post-pandemic eras.

  • Shanghai Disney Resort closed on January 25, 2020.
  • Hong Kong Disneyland Resort closed on January 26, 2020.
  • Tokyo Disney Resort closed on February 28, 2020.
  • Disneyland Resort closed on March 14, 2020.
  • Disneyland Paris closed on March 15, 2020.
  • Walt Disney World Resort closed on March 15, 2020.

Shanghai Disney Resort is going through a phased re-opening that started on March 9, 2020 as Mainland China continues to experience the pandemic.

Expectations for the post-pandemic era do not appear to be rosy as far as a return to what would be considered normalcy.  A well-known insider posted on a Disney message board the following statement regarding the post-crisis future of Walt Disney World, which is the biggest revenue driver of all the parks.

This will result in a significant reduction in park attendance, visitor spending, hotel reservations, and conventions.  Revenues will fall considerably and even if there is a vaccine or treatment for this particular strain, it does not prepare anyone for the next pandemic.

Walt Disney World is presently furloughing 43,000 workers during this pandemic.  

Movies, Plays, and Television Production are Impacted

The obvious is that Broadway plays, Disney performance tours, and television production are negatively impacted.  These forms of entertainment require large crews, sets, and even a live audience.  With social distancing and fears of contracting Coronavirus, everything stops.  Disney is dependent on television programming that was made before the crisis, re-runs, news coverage, and local news coverage to weather this storm.  It alters traditional programming schedules and with less advertisers, revenue falls considerably.

In the case of ESPN, they are grasping for any sort of programming during this dead time in sports.  Without sports, cords have been cut altogether and advertisers have pulled out.  From H-O-R-S-E competitions to ESPN 8:  The Ocho, it has been an exercise in seeing how creative the programming and production teams can be in Bristol, Connecticut.

Movie production has obviously been halted and release of films in the box office has also been postponed and there is a consideration of re-directing films straight to Disney+ or some sort of a Pay-Per-View option.  The film industry is very dependent on China, which represents the largest amount of revenue generated per country.  There has been growth in China despite the Chinese bear market that has remained since 2015.  China is so important to the film industry that movies are edited specifically for Chinese audiences and even for global audiences.  Without revenues from China and 95% of the United States under some form of lockdown, it is painful for a company like Disney.

Disney is buoyed currently by Disney+, which has been extremely successful in generating over 50 Million subscribers, but this is not going to make up for the losses incurred in other business units.

Disney was once considered a stable business partner, but now they are a distressed takeover target.

“Red State” Concerns and SEC Country Values vs. ESPN Values

Coronavirus has more heavily impacted “Blue States” than “Red States”.  The “Blue States” have more interstate commuting and international travel than “Red States”.  This pandemic only deepens the divisions of a culture war as “Red States” consider the Coronavirus to not be a big deal and an assault on possessions and traditions of “Red States” while “Blue States” have experienced death, despair, and intense fear.  “Blue States” blame President Donald Trump for the Coronavirus pandemic and “Red States” blame China and the corporate media.  Both sides can be right at the same time, but in a culture war, a tribe is to be picked.

However, within the construct of U.S.-China relations, there is a conflict of interest that impacts the reddest dots within the “Red States” and it relates to the Walt Disney Company.  The SEC Network is under the ESPN Inc. subsidiary and the subscribers to the network are predominantly at odds politically with the business model of the Walt Disney Company.  The Walt Disney Company is dependent on Chinese revenue to impress Wall Street analysts and attract investment that results in their stock price rising.  In order to accomplish the goal of pleasing shareholders, they have chosen to appease the Chinese Communist Party rather than a regional network base.  Based on the revenues generated, appeasing the Chinese Communist Party comes before Southern and Midwestern U.S. sports fans who are opposed to Chinese government and outsourcing.

One of the big divides is the origin and name of the Coronavirus.  “Red State” individuals are more likely to call it the “Wuhan Virus” or “Chinese Virus” whereas “Blue State” individuals would call it “COVID-19”.  “Red State” individuals believe that the virus emanated from a lab in Wuhan near a wet market, “Blue State” individuals believe that it came from the wet market.  The language and presentation of where this pandemic came from impacts how ABC News and ESPN presents information to the audience.  If ESPN is going to claim that Taiwan is part of China as shown below, it is not a mistake as it reflects a top-down initiative within a company that cross-promotes and uses resources from other subsidiaries and business units FREQUENTLY.  Are these the values of SEC country?

ESPN aired a Chinese-endorsed map backing China’s claims to Taiwan and more, then declined all requests for comment on that move

Yes, it is fair to believe that ESPN and its parent company, The Walt Disney Company, is compromised by the interests of generating revenue in China.  Much like the way World Championship Wrestling was influenced by Turner globalization initiatives in the 1990s, remember the term “international object” as opposed to “foreign object”?  Culture often flows downstream within organizations.

The” S-E-C” chant is not as prevalent now as it was in the past?  Why?

If Hillary Clinton had won in 2016, it would be more prevalent.  However, the southern states got their President.  There is a sense of being politically placated and represented in Washington D.C. at least among those who attend College Football games.  College Football’s fanbase is the most populist-conservative of all team sports.  College Basketball’s fanbase happens to be as Moderate as they come politically.

The “S-E-C” chant is one of the last acceptable expressions of southern pride left.  It’s a remnant of regional pride and the only way to show those in power federally that they are still here without storming a military base or federal building.  Southernization trends were up-ended during the Presidency of Barack Obama and transplants from “Blue States” were changing the major southern cities.  Atlanta, Nashville, Charlotte, Raleigh-Durham, and Dallas have shifted considerably much to the chagrin of multi-generational natives of these states.

The fade of the “S-E-C” chant is a result of federal politics and changing demographics on the state level.  It also lessened the brand of the SEC and allowed the individual institutions to go beyond the label.

ESPN Built Up The SEC Institutions, They Cannot Tear Them Down

One of the residual impacts of the SEC’s relationship with ESPN was ubiquity and each school in the SEC saw their brand grow significantly.  There are no obscure programs in the SEC anymore, every school can stand on their own in terms of brand recognition.  ESPN built them all up and now there is the possibility that they can also cash in on the strength of their own individual brands.

5 of the Top 10 most valuable College Football Programs are in the SEC and so are 7 of the Top 12. 

College Football programs have valuations that are greater than NHL teams.  In the case of Georgia Football, the team has a greater valuation than the Los Angeles Kings, Philadelphia Flyers, Detroit Red Wings, Washington Capitals, and Pittsburgh Penguins.  It reaches into Major League Baseball levels of valuation, Alabama Football has a valuation greater than the Miami Marlins.

The individual brands and dependency that each school has on Football is significant, it’s most significant at the University of Georgia, where 80% of revenue comes from Football.  UGA can withstand the pandemic due to an over $100 Million rainy day fund, but preparing for a post-pandemic world where new pandemics and bioterrorism threaten any return to normalcy is a challenge.

SEC schools are national and global brands, this could not be said 20 years ago.

The problem with packing the stadiums and the unique opportunity that exists

There are a lot of misrepresentations and over-simplifications of an incredibly complex and political situation.  This leads to a lot of questions that are not exactly within the range of acceptable discourse, which seems to be shrinking.

  • Who is closing and re-opening the economy?
  • What does it mean that the economy is open or closed?
  • Is the economy actually closed?
  • Why have so few tried to adapt in this new world?
  • How did a country based in independence and liberty become so dependent on corporate/individual welfare and spending from the government prior to the crisis?
  • Why do so few businesses have Disaster and Business Continuity plans?
  • What is the responsibility of the Federal and State Governments?
  • Is there a possible secession coming?
  • What if this happens again and it is not a merely second wave, but rather a completely new virus?
  • Is it easy to undo state policies of closing borders?
  • Would the United States, Italy, and the European Union seek out reparations from China?

These are fundamentally difficult questions to ask and answer.  It gets more awkward once the culture war is invoked and the most precious of traditions is challenged – College Football.  It was fine and dandy to cancel March Madness because cooler heads are associated with College Basketball, but College Football strikes an incredibly political and cultural nerve as it is a religion unto itself.  To fear violent reaction over a cancelled College Football season is not unfounded.

Football Coaches such as Clemson’s Dabo Swinney and Oklahoma State’s Mike Gundy have expressed their desire to pretend that this is not a big deal, this will pass shortly or that the risk is greatly overblown.  Lost in this discussion is that the majority of the money flowing into the Athletic Departments does not come from the young, it comes from the 55+ year old population in a region that is more susceptible to graver illness as a result of the Coronavirus.

Obesity is a national problem.  The foods consumed, the commutes taken, and the sedentary lifestyle are a massive contributor to enriching pharmaceutical companies and enhancing the negative effects of Coronavirus.  In fact, this is a pandemic that exploits vices of smoking, vaping, drug use, and excessive consumption of alcohol.

This is the Adult Obesity Prevalence Map of 2018, it is the most recent edition of this map.

In the case of a second-wave in Fall 2020 or Spring 2021, there is a possibility that a packed stadium could be a super-spreader event and it could turn tragic as children lose their parents weeks later and grandparents could die with their last memory of a Football Game being a horrible loss.   Would a coach force a player with mild symptoms to play?  After all, at the University of Georgia, former Men’s Basketball Coach Mark Fox put a flu-infected Teshaun Hightower on a cramped plane with this teammates in 2018.

Mass deaths and illnesses will result in class-action lawsuits, which will ultimately ensure the demise of College Athletics.  However, there are too many short-sighted and interested parties willing to take this risk.  Priorities are not in order and these same “tough guys” could be asking for bailouts next.

The good news is that common sense will hopefully prevail and open a new opportunity.

In the current arrangement, 14 SEC schools split television revenue from their relationships with CBS and ESPN.  The relationship with CBS is set to end in 2023, which sets up an opportunity for ESPN to fully consolidate all Football programming produced by SEC programs.

College Athletics programs earn revenue more directly through licensing, tickets, and donations.  However, if the stadiums cannot be packed, the revenue generated will decrease significantly as Personal Seat Licenses (through “Athletics Donation Funds” of varying names) will also fall.  It is the same sort of a problem that Disney Parks faces, but it impacts spectator sports.  However, it can be addressed in a similar, yet different fashion to make up for the losses by the individual schools taking advantage of their own brand value and loyalty.

Direct-to-Consumer Over The Top Networks are the Solution

Each athletic department of the Southeastern Conference forms their own digital network.  Exclusive content, non-exclusive sporting events (much like MLB, NHL, and NBA on regional networks), more targeted advertising, and individualized subscription pricing that puts the individual schools in control.

Removes the Free Rider Effect

A viewer on any device is a virtual ticket-holder.  If a stadium cannot be filled, there is a loss of revenue that cannot be offset by the current television revenue arrangement.  This will change the on-campus environment and pageantry of College Football, it will change distractions at a College Basketball game, and it will change the Sunday family outing in southern college towns.

The free riders watching the product on television compared to those getting the in-stadium experience will have to pay more.  The programs that took advantage of other programs to generate equal television revenue will no longer enjoy such a luxury.

No more middle entities

The “Alabama Network”, “Georgia Network”, “Gamecock Network” and other variants can produce the programming that suits the needs of their own bases.  It would operate much like the way the YES Network, MASN or even WWE Network would operate.  Individual schools can choose to put some games on their network and then put some games on Pay-Per-View.  That flexibility exists when controlling a network of your own content.

A Hypothetical 2020 Georgia Football Schedule

9-7 Virginia (in Atlanta)  on PPV  $19.99
9-12 ETSU on Bulldog Network
9-19 at Alabama on PPV $59.99
9-26 ULM on Bulldog Network
10-3 Vanderbilt on Bulldog Network
10-10 Auburn on PPV $59.99
10-17 at Missouri on Bulldog Network
10-31 Florida (in Jacksonville) on PPV $59.99
11-7 at South Carolina on Bulldog Network
11-14 Tennessee on PPV $29.99
11-21 at Kentucky on Bulldog Network
11-28 Georgia Tech on PPV $59.99


The money has to continue flowing in and this is the next best alternative when social distancing is encouraged and fears of lawsuits are well-founded.

This means that the individual networks are able to have their own favorable messaging and propaganda 24 hours, 7 days a week.  It will encourage schools to find ways to create live sports programming during the “dead months” to ensure that subscription fees continue or devise a structure that discourages Football Season only fans from cancelling December 1 and re-subscribing on September 1 of the following year.

In the case of Kentucky Basketball, it is a massive opportunity to make more revenue from Big Blue Nation.

The purpose is to milk as much money out of fans as possible while not being able to pack the stadiums and arenas while avoiding lawsuits.  If College Football is as demand inelastic as fans tout, they will spend the money for subscriptions and Pay-Per-Views. 

The Inevitable Virtual Classroom and University is Here.  Adaptation is Necessary.

Once the toothpaste exits the tube, it cannot return.  This is a game-changer for students as the residential college/university model is now upended and the college/university experience can be had anywhere.  What is to stop university students from studying and residing on the beach and attending the University of Missouri-Columbia online?  There is no going back now, new buildings are not needed.  Universities can focus on research and teach to a much smaller subset of students on-campus.  The connection to the university/college can be enjoyed virtually.  The pride can still exist, but the immersive experience is currently challenged.

Sports cannot keep students on-campus, it is just not enough.  The idea of the college/university experience is changing and there are far too many over-invested in the status quo.  However, adapting and improving engagement is the path to maintaining and growing revenues as opposed to taking massive risks and sharing profits with 13 other schools and ESPN.

Change is happening quickly and it is too much, too soon for many, but now is not a time to be idle.

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