Source: ESPN
In a move that's quickly becoming commonplace, The Walt Disney Company's (DIS 0.18%) ESPN announced its intention to offer a streaming, Internet-only service next year. Following similar announcements by HBO, CBS, and Showtime, the company hopes to tap into the cord-cutting subset that's abandoned pay-TV. And while I've been rather ambivalent about the potential for these channels to encourage more cable-cutters, essentially leading to "the death of cable companies," ESPN is different.
When it comes to pay-TV companies, live events -- particularly sports -- are a powerful moat against the trend of cable cutting. To date, there hasn't been a good way for cord cutters and unbundlers to watch sports without a pay-TV package. Therefore, ESPN as the nexus of all things sporting related is the most powerful channel in the unbundling battle. And, as a result, the channel enjoys premium pricing, costing cable subscribers over $6 per month; the median cost per channel is only $0.14.
Will this lead to a pay-TV exodus?
The issue here is cost. If the other channels are any indication, ESPN will show deference to its relationship with pay-TV providers and price the stand-alone streaming service higher than the $6 per month pay-TV subscribers enjoy. And that makes sense; right now the best business move for programmers is to continue to work within the existing structure and to not anger pay-TV providers.
Simply put, in the event ESPN charges less than $6 per month, Comcast (CMCSA -0.37%), Time Warner Cable (NYSE: TWC), Dish Networks, and DirecTV could see this as a threat to their business model rather than a targeted play for existing unbundlers. If that happens, a contentious relationship could form with pay-TV providers pushing back against ESPN's current prices and future increases. And that's important for ESPN, according to SNL Kagan the network is estimated to cost $8.37 per month by 2018 -- an increase of 8.5% annually from today.
Even at higher prices, this is still a threat
That said, even if ESPN prices its service higher than $6 per month it could still be negative for pay-TV providers. According to industry veteran Jeff Kagan, nearly 30% of all cable subscribers are sports fans. And while that's still a minority, it is a very-large minority and generally very loyal to sports programming. In the past ESPN has been able to convince pay-TV providers to essentially stomach increased programming costs from the NBA, NFL, and MLB, and pass those along to cable subscribers.
The issue for providers is what happens if ESPN prices its streaming service more than $6 per month and a significant portion of subscribers decide to cut the cord. This means that ESPN's value to the end consumer is worth more than the $6 programmers are paying; essentially these subscribers were paying large cable bills for one channel. Or at least the value proposition dropped once ESPN was available as an unbundled service.
Pay-TV providers have this issue for hundreds of channels
This is the issue for pay-TV providers; on one hand they have to balance programmers seeking to raise prices to pay for programming costs and increase their profit and on the other they must balance subscribers increasingly reticent to pay them. Now providers must worry about each station choosing to offer a streaming service, essentially cutting them out of the process.
Comcast is in the process of acquiring a Time Warner Cable in order to more effectively deal with programming increases. As a combined entity they have more power to negotiate programming increases rather than compete against one another. However, if ESPN and other channels are able to establish solid subscriber numbers outside of the current pay-TV structure, this merger essentially becomes moot and pay-TV will continue its march toward a slow, long-term death.
