Major sports leagues earn BILLIONS of dollars every year. That money comes directly from YOUR cable bill.

Could ESPN Weather A Growth In Cord Cutting?

Flickr photo by Alyssa & ColinLast week, I posited that ESPN might lose out on millions if a service such as Aereo prompts non-sports fans to cancel their pay TV accounts in large numbers. But is that actually true, given how ESPN’s subscriber fees keep growing every year?

Consider this article, which suggests that ESPN’s deal with Time Warner Cable will pay the network $5.40 per subscriber per month, starting in August of 2013, and that this fee will increase at a rate 6.5% per year. On the average, ESPN currently receives $5.06 per month from each of the 100 million or so people that pay for cable and have ESPN in their packages. We can expect that number to climb, but how far can it climb before the backlash begins?

Some would say the backlash is beginning now, as more households start living without cable. This Nielsen report shows the list of “Zero-TV” homes rising from just over 2 million in 2007 to just over 5 million in 2013. In spite of this, however, the number of pay TV customers has remained fairly constant, and most people that ditch cable are merely switching to satellite or fiber TV services.

What happens, though, if the number of homes without pay TV does start decreasing significantly? Let’s extrapolate some of the numbers we have and find out, shall we?

Let’s say that, starting in August of this year, ESPN does start getting an average of $5.40 per sub per month from all sources, and that this sub fee goes up 6.5% every 12 months. Let’s also say that pay TV plans with ESPN decrease by 1 million in that first 12-month period, and that the number of people who drop pay TV increases by 30% every 12 months. Here’s how the numbers break down:

Period

ESPN Sub Fee

Subscriber Loss (in millions)
Total Subscribers (in millions)
12-Month Revenue (in millions)
Revenue Change
8/2013-7/2014
$5.40
N/A
100
$6,480
N/A
8/2014-7/2015
$5.75
1.00
99
$6,831
5.42%
8/2015-7/2016
$6.12
1.30
97.7
$7,175
5.04%
8/2016-7/2017
$6.51
1.69
96.01
$7,500
4.53%
8/2017-7/2018
$6.93
2.19
93.82
$7,802
4.03%
8/2018-7/2019
$7.38
2.84
90.98
$8,052
3.27%
8/2019-7/2020
$7.85
3.69
87.29
$8,222
2.05%
8/2020-7/2021
$8.36
4.79
82.50
$8,276
0.66%

Well. ESPN’s revenues aren’t exactly decreasing year over year, are they? At this rate, the only number cord-cutting is really impacting is the rate at which ESPN’s revenue grows. That’s still a concern for Wall Street, of course; if The Walt Disney Company starts giving the appearance that its growth rate is slowing, the company’s stock will look far less attractive to investors and fund managers. Still, in this scenario, ESPN’s flagship channel will continue to make more money year over year through the rest of the decade, so ESPN’s bottom line isn’t in much danger, and the network could throw down that $1-billion-per-year bid on its next NBA contract rather confidently.

What if, however, we were to increase the year-over-year subscriber loss rate from 30% to 50%?

Period

ESPN Sub Fee

Subscriber Loss (in millions)
Total Subscribers (in millions)
12-Month Revenue (in millions)
Revenue Change
8/2013-7/2014
$5.40
N/A
100
$6,480
N/A
8/2014-7/2015
$5.75
1.00
99
$6,831
5.42%
8/2015-7/2016
$6.12
1.50
97.5
$7,160
4.82%
8/2016-7/2017
$6.51
2.25
95.25
$7,440
3.91%
8/2017-7/2018
$6.93
3.37
91.88
$7,640
2.69%
8/2018-7/2019
$7.38
5.05
86.83
$7,689
0.64%
8/2019-7/2020
$7.85
7.57
79.26
$7,466
-2.90%
8/2020-7/2021
$8.36
11.35
67.91
$6,812
-8.76%

Now things start getting a bit dicey over the long-term. After 6 years, ESPN’s revenue would finally begin to decrease, and that would have a huge impact on the network’s next contracts with the National Football League and Major League Baseball, it’s two biggest properties. Those leagues certainly wouldn’t accept less money for their next round of TV rights deals, and that’s largely because the growth of ESPN caused the price of those deals to skyrocket. What happens if ESPN no longer has the cash to keep sending those prices upward?

We’ll probably have to wait a lot longer that six years before we find out. There is little evidence to suggest that the cord-cutting trend will cut this deeply into the cable TV market this decade, and unless online services like Netflix, Hulu Plus, Aereo, and others cause more significant changes in viewing habits for non-sports fans, it’s far more likely that competition among pay TV services will keep prices low enough that most U.S. households will continue to pay for TV for quite some time. The arrival of Fox Sports 1 looks like a much bigger concern for ESPN than the arrival of Aereo, at least in the short term. As expensive as it’s getting, the “Worldwide Leader In Sports” is still a long, long way from pricing itself out of the market.

2 Responses to Could ESPN Weather A Growth In Cord Cutting?

  1. I love watching live sports, and can afford cable, but I am a cord-cutter out of principle. I will watch live sports at friend’s houses or at a sports bar (it’s more fun to view games at these venues anyways). Because of the internet, pro-sports leagues can easily sell their content directly to their real customer (ex: NBA League Pass, which is currently a phantom product because of local/national blackouts), but the current model clearly allows them to make more money from non-customers and customers. We need a model where the customer pays for the content they want. The leagues know they would walk away with less money if they had to compete in a truly free market, so change will not come easily. I think Congress is going to need to get involved one day. This young man will have a grey beard when it occurs, but I think it will happen.

  2. I would pay $100/year for a full ESPN channel on Roku or Apple TV, as I am sure many others would. I won’t pay $1,000/year for cable/satellite just to get ESPN. I suspect Disney has already figured this out and will, as soon as is practicable, begin offering such a service on one of the other or both platforms, with a guarantee minimum. It would be a real boon for one of them if it got an exclusive deal and it will be a real blow to the cable/satellite TV industry, who will then lose subscribers in droves. But Disney and its ESPN division will just keep racking up the profits.

Leave a Reply


     

Site created by Tenth Key Digital Media.