The Cap Cities acquisition brought a number of entertainment related distribution properties under Disney's ownership including the ABC television network, 10 other television stations, the ESPN network, the ABC radio networks and several newspapers and periodicals. Prior to the acquisition, Disney was primarily a creative content producer and a theme park operator. With the acquisition of Cap Cities, Disney became a major player in media distribution. The investment thesis was to combine, further capture, and improve vertical components of the value chain (i.e. content development and distribution). In hindsight, we would argue that the benefit and cost based synergies were minimal and generally below expectations. As a result, we believe that vertical integration decreased total value – in this case – given that the ...view middle of the document...
Thus, theoretically, other stations are able to charge higher rates for advertising time. While this may be a beneficial arrangement for Disney (i.e. guaranteed distribution), it isn’t for ABC. The tradeoffs seem to exceed the benefits, and therefore a contractual arrangement is preferable and creates more overall value. This dynamic differs from theme parks were the principal/agent relationship can be imperfect under a licensing agreement. In that case, Disney has a strong economic desire to wholly control the environment. In the case of network television, the environment is largely controlled by the content Disney produces regardless of the distributor (ABC, NBC. Fox, etc.). While Networks do have the right to sell advertising during TV shows, they are incentivized to match advertisements with audiences, so historically this is a non-issue.
In regards to the ESPN network, the outcome from consolidation with Disney is a bit less clear. By most any measure, ESPN has been a tremendously successful investment for Disney. However, we believe that dynamic is driven primarily by a somewhat unforeseen and substantial increase in consumer demand for sports entertainment, rather than consolidation with Disney. Furthermore, the advent of “TiVo” has increased the value of all forms of live entertainment and ESPN has successfully captured a portion of that increase. With that said, we do see some degree of benefit based synergies associated with Disney’s ownership of ESPN. For example, Disney owns the Anaheim Mighty Ducks and the Anaheim Angels. We suspect that there are substantial cross promotion opportunities for which working together would create more value than working through licensing agreements. While there are select examples of synergy, overall we believe that ESPN’s success has been driven by factors unrelated to Disney’s ownership.