Disney’s ESPN Caught Between Rock and a Hard Place by Cord Cutting
Bloomberg News
ESPN's first effort to sell a stand-alone online video subscription service appears to be a pretty half-hearted one. It shines a light on the minefield the highly profitable Disney (DIS) - Get Report subsidiary is navigating as cord cutting takes a toll on its traditional pay TV revenue streams.
The Information reports ESPN will sell consumers an online programming package that "won't include high-value content such as football or basketball, but rather niche leagues and possibly some types of college sports." The sports network has previously sold access to streams for individual events such as the 2015 Cricket World Cup, but not a fully-fledged online subscription service.
Given the impact of cord-cutting on both its TV ad revenue and the massive affiliate fees it generates from pay TV providers, there's a clear need for ESPN to grow its online sales. Disney disclosed last fall that ESPN had 92 million subscribers as of September 2015, down from 95 million a year earlier and 99 million two years earlier. And the pay-TV industry's subscriber losses have clearly continued since then.
In spite of the subscriber declines, ESPN has continued growing its affiliate fee cash cow. Research firm SNL Kagan estimated last year ESPN obtained an average of $6.61 per month for each pay-TV subscriber receiving its flagship channel, regardless of whether a subscriber watched ESPN for a single minute. That figure is up sharply from an estimated $4.69 per month in 2011. Smaller monthly fees are obtained for other channels such as ESPN2 and ESPNU.
ESPN has been able to significantly boost what it charges pay TV providers precisely because its content, along with sports programming from other networks such as TNT, is what prevents many consumers from cutting the cord in the first place. But cord cutting is continuing nonetheless, and the fact that pay TV providers have been passing on fee hikes from ESPN and others to consumers certainly isn't helping matters.
Moreover, higher affiliate fees have led pay TV providers to experiment with "skinny bundles" that exclude expensive channels. ESPN recently settled a suit with Verizon (VZ) - Get Report over the latter's now-aborted attempt to provide ESPN-free subscriptions.
Meanwhile, given how vital marquee sports programming has been for propping up affiliate fee revenue and deterring potential cord cutters, ESPN and other networks have been paying through the nose for programming deals with major sports leagues, even as the number of viewers who can see the ads sold against that content keeps dropping. That's naturally denting the margins of sports programming providers.
Thus, it makes a lot of sense that ESPN wants to better monetize its content by launching online subscription video offerings. And it also makes a lot of sense that the company is treading very cautiously, lest it anger pay TV providers that are paying ESPN more and more for content reaching fewer and fewer subscribers.
But this is ultimately a catch-22. And as it continues, one can expect ESPN to be hard-pressed to offset pay TV subscriber losses with further affiliate fee hikes and the small sums one can expect from online subscription services that lack the network's most popular content.