Image source: CBS.
No television network comes close to the amount ESPN charges pay-TV operators to carry its network. The average cable subscriber with ESPN in the bundle pays over $7 per month just for ESPN. That makes it the crown jewel of Disney's (DIS 1.66%) media networks division.
But CBS (CBS +0.00%) laid out a case for why it ought to receive more than ESPN for its network as it negotiates with new distribution partners using internet streaming versus traditional cable delivery. Speaking at the Nomura Media, Telecom, & Internet conference earlier this month, CBS's COO Joe Ianniello made his case.
What CBS brings to the table
CBS is the most watched television network in America. "In advertising, nobody gets paid more than us because we have the most eyeballs," Ianniello told the audience at the Nomura conference.
That seems fair. If CBS is able to get your ad in front of more people, it should get paid more per commercial.
But Ianniello goes on to ask, "Why wouldn't that philosophy, or theory, translate over to a new business model that's being formed? ... If you deliver half the audience that I deliver, or you deliver half the returns that I generate, and you got paid more money than me, I'm not too happy about that."
By Ianniello's reasoning, since CBS is the No. 1 network on television, it's the reason most people will sign up for a skinny bundle. Not ESPN. Not TNT. Not Disney Channel. CBS gets more eyeballs; therefore, it must be the reason people are signing up.
To test the validity of that assertion, CBS launched its own over-the-top service, CBS All Access. Subscribers are able to stream CBS broadcasts (except NFL games), and they also have access to nearly the entire back catalog of CBS shows to watch on demand. CBS charges $5.99 per month, and in the first 22 months it's racked up 1 million subscribers
Ianniello says those results validate the market. While $5.99 is still less than ESPN's carriage fee, it's still significantly higher than CBS's standard retransmission rate with traditional distributors. CBS is willing to provide additional content (as it does with CBS All Access) for more compensation, but it's been unwilling to sign agreements for much less.
What ESPN has to say
Disney CEO Bob Iger might find some flaws in Ianniello's reasoning. Just because CBS reaches a larger audience than ESPN doesn't make it more valuable and doesn't mean it produces a larger return than ESPN.
"We know from what we have seen, particularly in the last year, that the inclusion of Disney products, particularly ESPN, on these OTT [over-the-top] services is quite meaningful," Iger told analysts during Disney's third-quarter earnings call. He specifically calls out Sony's (SNE 0.48%) PlayStation Vue. "Sony certainly had that experience when it launched Sony Vue without ESPN, and then it included it later after the launch and it saw its subs go up substantially."
Part of the reason Vue subscribers increased substantially after adding ESPN is that Sony took the service nationwide less than two weeks after signing a deal with Disney. By comparison, Sony was willing to launch nationwide without access to CBS in most markets. That's quite telling of the value Sony places on ESPN and Disney networks compared to CBS.
While CBS attracts a broad audience, ESPN and other Disney networks attract a passionate niche audience, which ultimately proves more valuable to video distributors than CBS. Additionally, Disney's ability to bundle those networks together strengthens its pricing power, while CBS only has its main network and a few smaller cable networks.
In all likelihood, CBS will never be able to charge distributors as much as ESPN. But the launch of new streaming services provides an opportunity for CBS to increase the value of what it includes in the bundle, providing a service more like All Access, which presents an opportunity for it to increase its retransmission rates.
