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How Much Is Cord Cutting Really Impacting ESPN?

cordcutSome statistics just beg you to examine how positive they really are.

Take, for example, this interesting tidbit published on Cord Cutters News:

A recent report from the Evercore ISI investment firm showed cable companies lost over 35,000 subscriber every month in the first quarter of 2015. The only bright spot for paid TV is Telco TV providers, like CenturyLink and Verizon, which added customers; however, even accounting for that, the industry as a whole lost over 13,000 subscribers every month in the first quarter 2015. 

This statistic was framed as being bad news for cable companies, and to be fair, losing customers is generally a bad thing for any business. Let’s a take a closer look at the more relevant number — 13,000 subscribers per month ditching pay TV entirely. Over the course of a year, that adds up to 156,000 homes dropping traditional pay TV all together.

According to Nielsen, there are 116.4 million homes with televisions in them. More than 83% of those homes have some sort of pay TV service, which adds up to roughly 96.6 million. Out of those 96.6 million homes, 156,000 of them will cut the cord this year. That’s approximately 0.16% of all pay TV customers. That’s not a very large number. Yes, more people say they’re dissatisfied with cable and plan to cut the cord soon, but so far this year, not many have followed through on that.

What’s more, Sling TV has reportedly added at least 250,000 customers since launching in January — which makes you wonder how many of those 39,000 people that dropped traditional cable decided to go with Sling TV to get their ESPN fix for less.

This might explain why many networks don’t seem particularly concerned with the cord cutting trend. They’re slowly finding ways around traditional pay TV outlets and working themselves into new Internet TV services. This trend will continue in the next couple of years as Sony’s Playstation Vue service slowly comes online and Apple finally launches its Internet TV service.

This is not to say, however, that cord shaving — i.e., reducing how many channels you pay for — has had no impact on ESPN. Since the network’s peak in 2011, more than 5.7 million homes have dropped ESPN and ESPN2 from their pay TV subscriptions. That’s nearly 1.5 million homes per year, which certainly seems like a problem… until you remember that the carriage fee ESPN receives from pay TV carriers increases 6.5% per year. So even if ESPN loses 2% of its customer base every year, its carriage fee income still increases year over year, because the remaining customers end up paying more. Plus, when customers drop cable for a service like Sling TV, ESPN ends up getting more per customer than they would from big cable companies.

(This is the main reason I’ve decided to start using SNL Kagan’s estimated carriage fee for ESPN, which Clay Travis published here last May, on this site’s numbers page, rather than the number divined from this report, which suggests the lowest price a most-favored-nation cable company would pay for ESPN and not a national average.)

Over the long haul, this cycle is not sustainable, especially when you consider the primary reason most people cut the cord in the first place:

coststoomuch

Eventually, cable’s asking price will reach a level too high for too many pay TV customers, and many more of them will become former customers. That’s not good news for ESPN. One recent report suggested that only 35.7% of pay TV subscribers would keep ESPN in an a la carte lineup. Add that to the rising cost of broadcast rights for major sports — including that shiny new NBA TV deal, which has ESPN on the hook for more than $13 billion — and you can begin to see why some Wall Street analysts are beginning to feel bearish on ESPN’s long-term future.

The short term remains a different story, though, as ESPN and ESPN2 alone are still collecting more than $700 million per month in carriage fees. Plus, the most radical change coming to the TV industry in the next few years could be merely Apple’s entry into it, and ESPN’s parent company, Disney, has a historically great relationship with Apple. A significant growth in cord cutting might only mean customers switching from traditional cable and satellite to online services like Apple’s — a pump Netflix, Hulu, and Amazon have been priming for years. That will impact old school cable companies far more than networks like ESPN.

The boys in Bristol do appear to be cutting costs — dumping high-dollar talent and reducing full-site crews at some games, for example. Bill Simmons’ $5 million-a-year contract, however, is a small drop in a very large bucket. ESPN isn’t anywhere near feeling the pain yet, and the next Monday Night Football and Major League Baseball contracts don’t come up for bid until the start of the next decade. This is a much longer game than most pundits expect.

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