Welcome back to Dry Powder. I’m Bill Cohan.

Bob Iger’s blunt proclamation that Disney is considering a “strategic partner” for ESPN rattled the markets and reverberated through the hallways in Bristol. Is the stage at last set for a deal with Brian Roberts? And what does all this commotion mean for Jimmy Pitaro, ESPN’s chairman and chief operator? Herewith, an exploration of possible outcomes.

Left unsaid, of course, were the reasons that Iger was openly contemplating the business’s future in the Disney portfolio: the fact that ESPN’s subscriber numbers have declined from 100 million in 2011 to 74 million in 2022. The best estimate for the continued rate of subscriber decline, I hear, is about 6 percent a year, with ESPN’s linear subscribers eventually leveling off at around 45 million people who are still willing to pay the monthly bills to a cable company that includes ESPN in its basic bundle.

And he neglected to mention that its streaming entity, ESPN+, only has five million standalone subscribers and is by far the least valuable asset in the Disney+ bundle, as my Puck partner Julia Alexander reported recently. He largely dodged Faber’s question about the increasing cost of sports rights, which according to Disney’s public filings amount to some $44.8 billion through 2027 for ESPN alone.

But what really got the tongues wagging in Bristol was that Iger, as my other partner Dylan Byers has noted, truly said the quiet part out loud. Iger, who has always been an open negotiator, said almost nonchalantly that he’s considering a “strategic partner” for ESPN—a partner that could offer the network “content,” “distribution” and “capital;” who could help Disney “de-risk the business;” or one that could help ESPN make the “direct-to-consumer” transition. “We’re going to be very open-minded about that,” he said.

As my faithful readers know, this is where Comcast’s NBCUniversal could come in. It has content. It has distribution. It has capital. With Peacock, it also has its own (money losing) direct-to-consumer offering. Whether it could help ESPN make the D.T.C. “transition” is an open question. But perhaps most important, Comcast’s Brian Roberts has something that Disney wants: its one-third stake in Hulu, which Disney has more or less committed to buying for at least $9 billion sometime next year and more likely, $10 billion.

Sure, Disney has $10 billion of cash on its balance sheet, which it could use to buy Comcast’s Hulu stake. (The net debt load sits at around $38 billion now—a lot, but not as onerous as what Warner Bros. Discovery faces, debt-wise.) The more creative option, as I’ve written, would be a bit of clever dealmaking that involves swapping Comcast’s Hulu stake for an equity stake in ESPN, possibly avoiding a taxable event in the process, and giving Disney an ongoing and meaningful stake in an asset it spent decades nourishing.

Disney doesn’t yet break out ESPN’s financials, but I’ve seen valuation estimates ranging from between $30 billion and $50 billion. Those are probably high, especially as subscriber numbers fall and capital commitments rise. But, for the sake of argument anyway, let’s say that ESPN is worth $30 billion. And let’s agree that Comcast, which likes to control the action, would want 51 percent of ESPN to become Disney’s strategic partner in the property. That means Comcast would have to come up with $15.3 billion in value for the 51 percent stake. If Hulu is $10 billion, then for another $5.3 billion in cash, or contributed assets—a ploy Comcast used all those years ago in making the NBCU deal—it could get operational control of ESPN.

This is a short-term deal the market would love, especially Disney investors. (This is not investment advice.) It would preserve Disney’s cash to keep paying down debt and shift the majority of the ESPN+ streaming losses to another company, while also retaining for Disney a 29 percent stake in ESPN in case Comcast can work some magic with its powerful distribution network and its array of sports content. (Hearst owns the remaining 20 percent, and would probably just get dragged along in the deal.) I can’t really think of another company that it would be better for Disney to partner with on ESPN than Comcast.

I don’t want to minimize the likely ongoing antipathy that exists—or that I assume exists—between Iger and Roberts. But, as Shakespeare observed, “misery acquaints a man with strange bedfellows.” And Iger at the moment is enduring his fair share of misery at Disney, including at ESPN.

Maybe this is the conundrum that Pitaro was working on in Bristol while his boss was in Sun Valley offering up those newsmaking comments about Pitraro’s business. As best I can tell from my reporting in and around ESPN, Pitaro, no surprise, is focused intensely on how and when ESPN will make the full transition to digital.

Jimmy is extremely well-liked in the industry and within both ESPN and Disney. He’s a total charmer. And his low-key style is very different from his predecessor, John Skipper. That quiet confidence seems to have rubbed off on the culture of the place, even amid very public layoffs and Iger’s market-rattling soliloquy. “If you walk around the halls of Bristol and ask people what their priorities are, they’re going to talk about digital,” someone knowledgeable about ESPN told me. “They’re going to talk about social. They’re going to talk about audience expansion. How do we attract a younger audience? What are the levers that we can pull? How do we create alternative broadcasts, provide access to players by putting mics on them while they’re in the field live during games that matter? You’ll hear all those kinds of things.”

While the cable business is still extremely important to ESPN’s income statement—it is still the majority of ESPN’s revenue and close to all of its profits—it is also a business in serious decline. And there’s not much anyone can do about that. Anyway, it’s been a great long ride for ESPN. As Rogers likes to say, getting people to pay a monthly cable bill, with content providers like ESPN siphoning off a meaningful share year after year, has been one of the most enviable and profitable business models in the history of the country. And so ESPN and Pitaro and Iger are treading carefully, in order not to disrupt further the cash cow while also knowing that the move to D.T.C. is inevitable, and scary. The risk of mispricing the streaming product is huge and could result in more cord-cutting without that revenue being replaced by subscribers to the new offering. This is the crux of the conundrum facing both Iger and Pitaro.

There’s no date set, of course, for when ESPN will make the move to streaming. Probably sometime next year, the consensus seems to be. (Disney plans to begin breaking out ESPN’s financials in quarterly reporting in 2024.) But there’s intense focus on the how and the when in Bristol. How should the product be priced? How should the product be enhanced? Should there be the ability to interact with other subscribers during a game? Should there be a commerce element? A betting element? Or a tech element that allows consumers, say, to click on a player during a game to reveal his or her performance statistics?

There is consensus in Bristol that the new offering has to be more compelling than ESPN is today, otherwise consumers won’t go for it, let alone pay for it. Iger acknowledged the obvious—that the cost of sports rights is spiraling upward, thanks to their unique ability to draw a large audience, as he told Faber, and also because of the deep-pocketed competitors, such as Apple, Amazon and Netflix, that also want that content and are willing to pay big bucks for it. And while it’s true that Netflix outbid ESPN for the Cowboys documentary, as my Puck partner Matt Belloni shared recently, Formula 1 stayed with ESPN despite higher bids because, well, ESPN is still ESPN, and while the competitors can more than match the fees paid to the leagues, many haven’t yet been able to match ESPN’s production values and its studio shows, although they increasingly aren’t far behind.

Then there is the small matter of how to price the premium streaming version of ESPN when it’s finally unleashed. That is still being studied, analyzed and tested up in Bristol. But I suspect that the Bristol braintrust will take its time before unleashing ESPN’s D.T.C. offering: it won’t happen, I bet, until the ESPN brass believes digital ESPN can make more EBITDA than linear ESPN. It probably doesn’t have to happen that way on day one, or year one. But there does have to be a clear path toward that level of profitability before Pitaro & Co. pull the ripcord at ESPN.

That’s probably why Pitaro and his team have been closely watching the cost side of the ESPN income statement, resulting, in part, in the unexpected layoffs of around 20 on-air talents, including Suzy Kolber, Jeff Van Gundy, and Jalen Rose a few weeks ago—out of a total workforce of 900. It sounds like these layoffs resulted from some tough business decisions. If these on-air personalities are getting paid millions of dollars a year but people aren’t tuning in to watch them, then either they have to be willing to be paid less or, you know, suffer the consequences of the reality that they aren’t drawing sufficient numbers of eyeballs to justify their large contracts. ESPN has started to look at its costs in a different way than it has in the past.

My bet continues to be that Comcast would be a better majority owner of ESPN than Disney has been lately and is likely to be in the rapidly changing digital environment. But, whether that deal happens or not, Pitaro and his team are on the knife’s edge. They have milked the cash cow. ESPN is still the place of record when anything major happens in the sports industry. It still manages, arguably, to have most of the biggest important live sporting events. People still watch SportsCenter. In fact, coming out of the pandemic, ESPN’s ratings have proven remarkably resilient, and are up even though more people are cutting the cord.

But Pitaro’s challenge now is to get direct-to-consumer done profitably, either for Disney, or for Comcast, or for some other strategic partner that Iger cooks up, if he does. Figuring out how to manage decline while also taking the leap into an uncertain, but inevitable, future is one of the most difficult challenges for any business leader. The hard truth is this is a crucial moment for Pitaro and ESPN. He’d better not mess it up.