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Analyst: ESPN Not Ready to Go Direct-to-Consumer

24 Dec, 2015 By: Erik Gruenwedel

ESPN, one of pay-TV’s marquee channels, is not prepared to ditch the cable bundle and sell itself directly to consumers, according to BTIG Research analyst Richard Greenfield.

With the traditional channel bundle under siege from over-the-top video services such as Netflix, Amazon Prime Instant Video and cord-cutters seeking alternative (i.e. less-expensive) access to home entertainment, pay-TV channels HBO and Showtime have launched direct-to-consumer options.

Walt Disney-owned ESPN has long generated among the highest retransmission fees (about $7 per pay-TV subscriber) and affiliate advertising from multichannel video program distributors. Indeed, Disney’s media unit, which includes ESPN, generated 50% of the media giant’s total profits in 2013.

That reliance on the cable bundle, however, does not transition well in the direct-to-consumer business model, according to Greenfield.

“We believe it would not make economic sense for ESPN to go direct-to-consumer,” the analyst said in a Dec. 21 .

He contends the sports network, unlike HBO and Showtime, has benefited over the years being a cable channel most subscribers pay for whether they want to or not.

Disney, in a Nov. 5 regulatory filing, disclosed ESPN had lost 7 million subscribers since the same filing in 2013 — including 3 million subs jettisoned in the past 12 months. The loss represented about $42 million in monthly revenue. ESPN ended the fiscal year (ended Oct. 3) with an estimated 92 million subscribers. ESPN 2 also lost 7 million subs.

Without the safety net of 90+ million basic cable subs, ESPN would have to significantly up its monthly fee as a standalone service.

“ESPN is one of the biggest beneficiaries of the bundle [business model]. Essentially, every home in America that wants multichannel television is basically forced to take ESPN, along with all the other pay-TV networks,” Greenfield said.

Disney CEO Bob Iger believes ESPN is a viable OTT video service — an option the executive said remains premature in light of the resilience of the traditional cable bundle business model.

“The bundle delivers great value to ESPN and will continue to do so,” Iger told CNBC in August. “The bundle is not going away. It’s still the dominant form of television viewing in the home.”

Iger said ESPN would do well in any distribution model, including Internet-based skinny bundles and direct-to-consumer.

“We have invested over the years in the strength of its brand. And that gives ESPN the ability to essentially manage through whatever disruption is going on.”

With price and the lack of long-term subscriber contracts a major selling point, OTT video’s month-to-month business model does not lend itself to subs — especially those interested in seasonal sports programming — being tied down for long-term contracts. 

Greenfield questioned why a football fan would subscribe to ESPN for more than 17 weeks a year. He said the same criteria holds for HBO Now, which he said could face subscriber attrition with the season end of “Game of Thrones.”

“That on-off [subscriber] is why Netflix is launching so much original programming all throughout the year. [OTT video] needs to keep giving you a reason not to cancel,” the analyst said. “It’s very hard to fathom how any of these basic cable networks [are] going to flourish in the direct-to-consumer world.”  

About the Author: Erik Gruenwedel

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