
ESPN Could Start to Lose a Lot More Subscribers
LOS ANGELES (TheStreet) -- Walt Disney (DIS) - Get Report -owned sports channel ESPN could see more defections, as TV distributors increase the number of channel packages that exclude ESPN, long a staple of traditional pay-TV bundles.
Satellite operators DirecTV and Dish (DISH) - Get Report currently offer slimmed-down packages of cable channels that exclude ESPN, and have hinted that more such bundles may be on the way. Cable and satellite operators are increasingly concerned that longtime subscribers will abandon their video services for a collection of online streaming platforms that they're able to pick themselves.
Removing ESPN from some subscriber bundles allows distributors to cut costs. As pay-TV distributors have long known, not all of their subscribers watch ESPN or live sports.
For Disney, the stakes are high. When Disney CEO Robert Iger in August said that that "ESPN has experienced some modest sub losses," the stock dropped 9.2% the next day. Disney shares have fallen 12% since then. The S&P 500I:GSPC has declined 3.7% during that same period.
In an era marked by consumer choice, Netflix (NFLX) - Get Report has become standard fare, while viewers can choose from an assortment of Internet-based offerings including Time Warner's (TWX) HBO NOW, Hulu, Amazon (AMZN) - Get Report Prime video, Sony's (SNE) - Get Report Crackle, Vevo and IAC Interactive's (IACI) Vimeo.
And that's not even including video streams from Google's (GOOG) - Get Report YouTube or Facebook (FB) - Get Report , which also consume viewer attention.
To protect their subscriber model from more cord-cutting, pay-TV operators have begun offering lower-priced alternatives.
At DirecTV, more than 1 million subscribers, or about 7% of its residential customer base, are signed up for the satellite operator's $49.95 Select package, which doesn't include ESPN, said DirecTV's former CEO, Mike White, during an investor conference call in May.
A spokesman for DirecTV, which is now a part of AT&T (T) - Get Report, said the company wouldn't update that number or provide information on how many customers opt for the lower-cost service. DirecTV dropped ESPN from its Select service about a year ago, the spokesman confirmed.
And no wonder: ESPN is the most expensive channel for an operator to carry. ESPN charges $6.10 a month for each subscriber, according to digital consultants SNL Kagan. That's the highest price of any channel. The fee increased at a compounded annual rate of 8.6% over the five years ending in 2014, according to Kagan.
On that same August investor conference call, Iger sought to downplay the subscriber decline, saying that a Nielsen estimate in July that ESPN had lost about 3.2 million subscribers over the previous year was an overstatement. Disney is scheduled to report its third-quarter earnings on Nov. 5.
But it's clear that ESPN risks losing revenue as distributors seek to assuage their own subscribers eager for choice and lower prices.
Comcast (CMCSA) - Get Report, the country's largest cable operator, in July began a beta test in Boston of its $15-a-month Stream service. Stream allows Internet users to watch major broadcast networks, HBO and Comcast's movie streaming service Streampix on mobile devices. It plans to expand Stream to other markets later. Those packages don't include cable channels -- no ESPN. Comcast also offers a similar package of video channels for online customers for around $45 a month.
The high cost of the sports channel crimps margins for most operators, who face the unpleasant prospect of raising subscription fees for consumers who are increasingly contemplating dropping their subscriptions in exchange for online video streaming.
"Distributors are finally pushing back," said former Universal TV chairman Blair Westlake, who as a Microsoft (MSFT) - Get Report corporate vice-president negotiated deals with content providers for the Xbox gaming console. "They know if they don't offer their customers a lower priced alternative they could lose them."
DirecTV's Select package includes such highly rated cable channels as Bravo, AMC (AMC) - Get Report and Lifetime, according to its Web site. While it doesn't offer ESPN, it does offer the Disney Channel.
Dish offers its $19.99 per year Smart Pack, with 55 channels. Smart Pack includes fewer highly rated channels than the DirecTV package. Its lineup includes Animal Planet, the Food Network, Fox (FOXA) - Get Report News and the Hallmark Channel, according to its Web site.
Instead of ESPN, Dish provides subscribers of the package with the CBS (CBS) - Get Report Sports Network.
In April, ESPN filed a lawsuit against Verizon (VZ) - Get Report , asserting that the telecommunications company breached its contract when it began offering a new package that separated channels normally available on basic cable -- including ESPN -- into smaller segments that allowed customers to choose among groups of channels like sports, entertainment and children's programs.
"ESPN is at the forefront of embracing innovative ways to deliver high-quality content and value to consumers on multiple platforms, but that must be done in compliance with our agreements," an ESPN spokesman told The New York Times at that time. An ESPN spokeswoman had no comment for this article.
Disney's contracts with TV distributors require the TV operators to place ESPN on their "most widely adopted" package of channels, usually the basic package of channels each offers. According to a person with knowledge of those contracts, TV distributors are required to pay penalties if packages without ESPN pass certain subscriber levels.
This article is commentary by an independent contributor. At the time of publication, the author held positions in DIS, CMCSA, MSFT and CBS.








