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Bob Iger Didn’t Say Much About ESPN That We Didn’t Already Know

Oh Bother...On Monday, Disney CEO Bob Iger told some Comcast-employed blowhards that ESPN could, at some point down the road, be sold directly to customers outside of the cable bundle. Here’s the bulk of what Iger actually said:

“I have very bullish feelings about ESPN [in the] long term, but I’m a realist in terms of the disruption in the business. I happen to believe that if we end up seeing more erosion in terms of the so-called multi-channel bundle, quality will win out, and popularity will win out, and while the business model may face some challenges over the next few years, I think [in the] long term ESPN, because of the strength of its brand and everything else that I said, will be fine. They have pricing leverage, too.

“I think it’s impossible in the media business today to really look ten years out, because it’s changing so fast, and I think while we could make predictions, I wouldn’t necessarily make them with conviction. Five years out, I don’t think you see significant change. I think eventually, ESPN becomes a business that is sold directly to the consumer, where there’s an engagement that ESPN will know who their consumers are, will use that information to customize their product, to enable personalization, to essentially engage in a much more effective way, and also to offer advertisers a lot more value as well. That’s longer term. I think there’s an inevitability to that, but I don’t think it’s right around the corner.” 

Naturally, the internet reacted to these quotes in the calm, rational manner you would expect…

Actual screen shot of Cord Cutters News

While other sites are good at hyperbole, this site prefers to operate in the real world, in which ESPN and ESPN2 are still in 92.9 million homes and still collecting well more than half a billion dollars per month in carriage fees. Let’s take a closer look at why ESPN is still a long way from becoming a stand-alone service.

1.) ESPN’s annual carriage fee income isn’t dropping precipitously for a while.

While ESPN’s monthly subscriber numbers are dropping, its annual carriage fee income is still expected to increase for at least another year or two, largely because its asking price keeps climbing more than subscribers drop the channel. Here again is a protection of ESPN’s potential subscriber and carriage fee numbers over the next five years, based on numbers from its peak in 2011:

ESPN subscriber projections through 2020

 

Bob Iger would probably call these numbers pessimistic, but either way, they still show that ESPN is due to make more than $7 billion per year in carriage fees through 2018 — more than enough to pay all its rights fees and still remain profitable. Costs will be cut along the way, of course, but ESPN remains perfectly viable within the traditional cable bundle for a few more years.

That brings us to the other reason Iger might be optimistic about ESPN’s future prospects:

2.) ESPN is already separating itself from the cable bundle.

You want ESPN and ESPN2? You can get it through Sling TV for $20 a month. You can get all the other ESPN channels (ESPNU, ESPNEWS, etc.) for another $5. Yes, Sling TV has some kinks to work out and will experience a lot of customer churn until they do, but that doesn’t change the fact that you can absolutely get ESPN without cable.

When Apple’s streaming TV service launches later this year, you should be able to get ESPN and Fox Sports 1 together in a small bundle for about $30 a month. That offers a slightly more robust option to those who are tired of traditional cable TV but still want sports.

What’s more, Apple and Sling won’t be the only players in the over-the-top video market. Other companies will jump into this game as well. It’s entirely possible that by 2020, ESPN will still be in a lot more than 43 million homes, thanks largely to OTT video, and letting other companies handle distribution while ESPN continues to rake in carriage fees sure beats the hell out of building your own distribution and billing system, doesn’t it?

This would explain Bob Iger’s optimism in the face of a changing video market. Perhaps he believes that Apple’s entry into the OTT market is going impact the Comcasts and Time Warner Cables of the world far more than it will impact ESPN, and he could very well be right. We’ll have to wait and see how that plays out. In the meantime, the fact that Bob Iger understands that ESPN will eventually have to connect with its customers and give them reasons to stay subscribed actually bodes well for the network’s future.

Of course, the other danger facing ESPN is the possibility that pro sports leagues will eventually go it alone and use their own OTT distribution to stream games online. That’s still even further down the road, as all five pro sports leagues in the U.S. have deals with sports networks into the next decade, and individual teams in baseball, basketball, and hockey have big-money deals in place with regional sports networks that block local teams from streaming packages. Plus, if the TV money is still pouring in, there’s no real reason for leagues to change their strategy and go it alone. Bob Iger is surely counting on that, too.

2 Responses to Bob Iger Didn’t Say Much About ESPN That We Didn’t Already Know

  1. The marketing aspect of a separate ESPN subscription is the one thing left out of the discussion. There are multiple questions:

    1. Will people be willing to go to one provider, like Sling, or Apple TV, to get ESPN separately, or will they want their sub on their own terms? I think the latter, despite the fact that it does create infrastructure issues, as you cite. And Sling has some 1 million sub limit before contracts get reset and they’ll have to renegotiate a higher fee to carry ESPN, etc., so I don’t think there’s a serious hope for a cable company by proxy via the Internet.

    2. Will people want a “sports bundle” like ESPN, plus the ancillary carriers, and pay extra? This is where the numbers get fuzzy. Assuming the 35% of 117 million households would pay for a separate ESPN, as per the poll you mentioned, that gives a figure of 40 million potential subscribers, as a future ceiling.

    ESPN is looking at about 6 billion dollars in costs per year(?). So, what’s the break even price point in the latter half of the decade? Let’s say with rounding, $14.99/month, so $20 is a reasonable price point, but that’s only one “bundler”. You’ve got everyone else, Fox, NBC, Turner, CBS, all wanting some too. With sports spread around so many networks, a reasonable sports-only package, either streaming, on TV, or combined, would be about $60-70/month, in order to satisfy the contracts & revenue “requirements” of the leagues, etc.. This also assumes that entertainment/reality-TV operators, like Discovery, will just fold their tents, and not fight hard for their piece of the pie. The sports carriers will have to go all-online to make this happen.

    Then, will that figure pass muster in households, especially when a household looks at its entertaiment/Netflix budget at $13/month? Or will people say, “the sports industry needs to make do with less, and split this up, I don’t want to pay hundreds of dollars on what I don’t watch, and what’s on broadcast and OTT is enough for me”? Again, I think the latter, as customers are tired of bundles, in general, given economic realities. I think you’re optimistic in terms of the amount of money TV customers are going to be willing to keep flowing into sports, even in the medium-term.

    3. Will the leagues strike out on their own to do OTT? They’re already starting to do so, with the NFL streaming a game this year, and the NHL joining MLBAM. I think they’ll end up streaming as much as contractually possible, especially for games only broadcasted regionally, as those local contracts expire (before the national ones do). This alternative helps with question 2, as the leagues & conferences can split the difference between the two alternatives, by offering low-priced streaming of only events a given customer is interested in, thus maximizing their revenue versus the second alternative above.

    Finally, I think your numbers are optimistic, rather than pessimistic. As ESPN gets grabby with their remaining customers, the anger will grow quickly. I also believe that the ESPN brand is toxic in households, outside of the “man of the house”, and will have to do a lot of personal brand building with customers. Just shoving another Yankees-Sox game down people’s throats isn’t going to help. So, I don’t think the hyperbole on other sites is totally unwarranted. The history of industries in this country are filled with stories of an avalanche effect, where alternatives start slow, reach a tipping point, customers bail quickly, and old industries are buried.


     

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