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Management

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Deryn Theresia Tjoandi
MGMT 102
Strategy G4
Done by:
Deryn Theresia Tjoandi
MGMT 102
Strategy G4
“Write a two page report to the board of Disney recommending why your analysis suggests that ESPN should (or NOT) be sold from the Disney portfolio? Focus on establishing the evidence for (or lack of) economies of scope between Disney and ESPN.”
“Write a two page report to the board of Disney recommending why your analysis suggests that ESPN should (or NOT) be sold from the Disney portfolio? Focus on establishing the evidence for (or lack of) economies of scope between Disney and ESPN.”

Overview of ESPN
ESPN is a multimedia sports entertainment company that is part of Media Network division of Disney. ESPN became a subsidiary of Disney when ABC’s parent company Capital Cities Communications was acquired at $19 billion 1995. ESPN provides a 24-hour service and its family of networks includes ESPN, ESPN2, ESPNEWS, Classic Sports, ESPN Radio and ESPN SportsZone. The company is also broadcasting in more than 20 languages and to more than 150 countries.

Why did Disney Acquire ESPN?
Figure 1
Figure 1
With an aim in building a strong family brand, Disney has been continuously engaging in intense diversification strategy to expand its products offering to cater to both children and adults. ESPN acquisition has created a strong competitive advantage to Disney as it targets a totally different target audience from other Disney channels- primarily young to middle aged men. With its popularity and large user base, ESPN has been contributing significantly to the growth of Disney through affiliates fee and its advertising revenue. It was noted that Media Network division contributes to 45% (figure 1) of the total revenue in 2013. Disney’s CEO hoped to use the synergies ESPN creates for Disney for its long term strategies - international expansion and exploiting the established brand of ESP.

Economies of Scope
To decide whether or not ESPN should be sold from Disney’s portfolio, we will be analyzing the synergies reaped from ESPN through the economies of scope. We will be looking at four different aspects of economies of scope.

Revenue economies - Cross-Selling
Upon the acquisition of ESPN, Disney is able to cross-sell and cross promote media assets and brands across different media segments that were not linked in the way suggested by vertical integration. Disney’s decision to expand from entertainment industry to sports industry was indeed a smart move as it is able to maximize it revenue with broadcasting network and comprehensive global media platforms. For instance, Disney can advertise their products offerings during major league events such as Olympics. For instance, Disney and ESPN are embarking on global initiative to support Special Olympics’ goals to encourage social inclusion and acceptance through Sports in 2015. By doing so, Disney is able to associate its brand with a premiere worldwide sports broadcaster and this provides an avenue for Disney to promote its products. The linkage influence between the two companies allows Disney to share the channels for sales and leverage on existing customers with no competing business. The co marketing alliance between such established and well-known companies reduces an overall marketing cost while allowing brand enhancement for both companies.

Market Power & Mutual Deterrence
Having ESPN as part of the Media Network division, Disney is able to introduce product bundling to customers. This means that Disney is able to sell Disney and ESPN channel as a package rather than selling the individually. Disney benefits from this as it increases sales volume by promoting 2 products at the same time. Customers also benefit because the price of the bundle is lower than subscribing to the channels individually. In addition, since the ability to sell time for commercial advertisement on television are primarily depended on the size of the audience which the network can deliver to marketers, Disney has obtained a larger market power over other its competitors from the product bundling. The product bundling between two largest and most powerful channels that are family centric and sports oriented respectively result in a higher bargaining power, which leads to a higher overall advertising revenue from television subscription for Disney.

Cost Economies
The strategic acquisition of ESPN also allows the company to maximize production capacity as both ESPN and other Disney media network are able to share similar technology, sales and marketing, distributions and service. Therefore, Disney’s media network segment can utilize similar technical support services, distribution channel and operating labour to ensure high quality of programming across Disney and ESPN channels. For instance, Disney distributes its production worldwide in television markets, in DVD and online via Hulu and third-party services. This has eventually lowered Disney’s average total cost. Cost of providing each service separately would be much higher than the costs of using a single infrastrutctures to provide multiple service.

Innovation (Corporate Development)
Figure 2
Figure 2
Disney collaborated Hearts add Petersen Publishing to Produce ESPNSPorts Weekly magazine to compete with the biggest sports magazine company, Time Warner’s Sports Illustrated. The magazine targets an audience of an average age of 38 years and it has reached close to 500 thousands circulations within a year since its establishment. The revenue generated from the sale of the magazine has been stable in recent years and has contributed to the total revenue of Disney (figure 1). A media conglomerate like Disney uses corporate development strategy to leverage on ESPN’s expertise and knowledge to invest in new product offerings that Disney initially cannot participate in. By tying in with ESPN, there was no need for heavy advertising of new products as the standalone influence stems from ESPN strong branding can be leverage upon. Disney thus received a cost advantage by producing a complementary variety of products with a lower cost.

Future Outlook & Conclusion
ESPN has been facing intense competition from other sports channels such as Twenty-First Century Fox (FOXA) and CBS in the media network segment. The higher programming costs in the midst of increasing competitions and changing market conditions are indeed worrying as it contributes to the increasing overall costs for Disney in 2014. However, despite the existing pressure faced by ESPN driven by lower revenue and increased competition, it is clear that ESPN will continue support the growth of Disney since TV subscription is still the main revenue drivers for the company (Appendix). Based on my analysis above, ESPN is indeed a strategic acquisition as it provides Disney with economies of scope in terms of cost savings, market power and expansion of product offerings. Furthermore, the competitive advantage gained by Disney would not have been possible without ESPN as there is probably no other media sports property that worth as much as ESPN with an established global brand. Going forward, I believe that ESPN will remain a cash cow for Disney and will continue to generate substantial revenue, which is crucial for the long-term growth for Disney. There is so much potential which ESPN could offer in the future and selling it would be giving the opportunity to competitors. Therefore, I propose that Disney should keep ESPN in its portfolio.

Appendix

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