As A Streaming Future Looms, ESPN Is Damned If It Does, Damned If It Doesn't

[Mike]

So for years we've examined how executives at ESPN completely whiffed at seeing the cord cutting revolution coming, and personified the industry's denial that a massive market ®evolution was taking place. As viewers were beginning to drift away from traditional cable and erode revenues, ESPN executives were busy doubling down on bloated sports contracts and expensive Sportscenter set redesigns. Only once ESPN lost 10 million viewers in just a few years did executives finally acknowledge that cord cutting was a problem, though they subsequently have tried to downplay the threat at every opportunity.



The question now is how to fix that problem. ESPN's first step was to try and save costs by firing oodles of on-air talent, but not the executives that failed to navigate this sea change. That has since been followed by ESPN-owner Disney recently proclaiming it would be offering two direct to consumer streaming platforms -- one stocked with Disney and Pixar fare, and the other being a direct to consumer ESPN product. During a recent earnings call, Disney CEO Bob Iger verbalized the company's slow epiphany in the face of cord cutting:

"We’ve got this unbelievably passionate base of Disney consumers worldwide that we’ve never had the opportunity to connect with directly other than through the parks,” Iger said. “It’s high time we got into the business to accomplish that.”



Iger acknowledged that the decision to act was spurred by the disruption in the traditional TV eco-system that has been rocking ESPN for the past few years. But Disney’s blue-chip brands give them a leg up in taking a radical new approach to reaching consumers.



“It’s not just a defensive movie, it’s an offensive move,” Iger said.

Granted it's not really playing offense when you only react after worries about cord cutting and ratings slides causes a $22 billion valuation hit in just a few days, something Disney experienced last year. Still, it's good to see Disney pull its head out of the sand and embrace the idea of giving consumers what they want, even if the move is painfully belated and under-cooked. The problem for ESPN specifically, as many have been quick to point out, is that the company is still stuck between a rock and a hard place in terms of navigating the transition to streaming -- even if it does everything right (which it won't).



There's plenty of reasons for that, the biggest being that streaming simply can't be as profitable as the long-standing practice of forcing cable TV customers on to bloated bundles filled with channels (like ESPN) that they may not want. ESPN currently makes $7.21 for each cable TV subscriber, many of which pay for ESPN begrudgingly. One survey found that 56% of ESPN viewers would ditch the channel if it meant saving that money off of their monthly bill. Fear of losing those customers was one of the reason ESPN sued Verizon when the company tried to take ESPN out of its core TV bundle.



And while ESPN may now be technically doing the right thing in finally offering a direct-to-consumer streaming product, such an offering will only aid to expedite viewer defections, while ESPN's sports licensing costs remain the same:

"A streaming service, while it might attract sports fans who have cut the cord, won’t solve ESPN’s profit problems. Instead it will exacerbate them. Why? Because ESPN will continue to lose the millions upon millions of cable subscribers who pay for it but never watch it. Losing $7.21 from each non-watcher is going to be a revenue killer. There is no possible way the universe of sports fans who want ESPN can make up that revenue, even if they’re charged more for a streaming service."

Traditionally, many cable and broadcast companies have tried to give the impression of adaptation by launching a streaming service, then saddling it with all manner of caveats to prevent existing, traditional cable TV customers from downgrading to the cheaper, more flexible streaming option. This really never works, but it looks like the path Iger and Disney are going to follow when it comes to ESPN's latest streaming venture:

"To make matters worse, Disney appears to be planning a streaming service that even the most rabid sports fan will be reluctant to pay for. All the good stuff — big-time college football, professional basketball, the Monday night National Football League game — will remain exclusively on ESPN’s cable channels. The streaming service will get, well, other things. It’s pretty clear that Iger is still trying to protect Disney’s legacy cable business, and that his move to the internet is not exactly a wholehearted embrace."

In other words, ESPN's epiphany and transition isn't quite as profound as many are suggesting, and ESPN still somehow believes it can control the rate of evolution; a fool's errand. Many industry insiders also have told me over the years that ESPN's contracts with many cable providers state that should ESPN offer its own streaming services, cable providers will no longer be bound by restrictions forcing them to include ESPN in their core lineups, which will only accelerate the number of skinny bundle options without ESPN.



It's a damned if you do and damned if you don't scenario for ESPN, and even if ESPN does all the right things here and offers a truly compelling streaming platform customers really enjoy -- there's simply no getting around the fact that this transition is still going to really hurt.



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Originally Published: Wed, 16 Aug 2017 18:59:00 PDT
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