Live sports are the cornerstone of the pay-TV bundle, but sports fans have an increasing number of options for watching their favorite teams without subscribing to traditional pay TV. Not only is Walt Disney (DIS -1.01%) adding more content to its ESPN+ service every quarter, Sinclair (SBGI -4.32%) is planning to launch stand-alone streaming services for the regional sports networks (RSNs) it operates.
If consumers can stream sports without a pay-TV subscription, does the cable bundle stand a chance of surviving?
Image source: Getty Images.
Breaking through the subscriber floor
In a note to investors late last year, MoffettNathanson analyst Craig Moffett said only nonsports households are cutting the cord. "There are 53 million households who describe themselves as regular sports and news viewers that we are assuming, all things equal, to be the bedrock floor of the pay TV world," he wrote.
These households stay subscribed to pay TV, because it's the only way they can watch their local sports teams. It's the only way they can catch Monday Night Football or SportsCenter.
Presently, sports fans are subsidized by nonfans. Pay-TV distributors pay Disney about $10 per month per subscriber for its ESPN family of channels. Likewise, Sinclair collects more than $5 per month for most of its RSNs.
But as nonfans cut the cord, the price for those sports networks will climb. Sports rights remain tremendously expensive, and those costs will get passed on to the consumer in one way or another.
But as the percentage of cable subscribers who are sports fans grows closer to 100%, the viability of a streaming alternative also grows. If subscribers have to pay more anyway, Disney or Sinclair could theoretically generate more money by going direct to consumer. Sports fans may be able to save money by cutting out all the cable channels they don't watch, and the media networks could generate more revenue by charging more than they do for pay-TV distribution while owning all the viewer data and commercial time.
As these streaming services become more viable, the subscriber floor described by Moffett will crash, and cord-cutting could accelerate. ESPN and Sinclair are already preparing for such a world, negotiating streaming rights as part of their contract renewals with sports leagues.
What it means for media companies
Television media companies have a vested interest in maintaining the cable bundle. That includes Disney and Sinclair. That said, practically every media company is preparing for a world where streaming is the primary means of living room entertainment.
As the pay-TV subscriber pool shrinks, smaller media companies may struggle to survive as they don't generate enough revenue from distribution to support their content costs. Therefore, the industry could see even further consolidation. Smaller media companies will either be acquired by the big ones or picked over for parts after declaring bankruptcy.
The big media companies will push their direct-to-consumer streaming services and may look to add even more content over time in order to draw in subscribers and justify price increases. Acquisition targets will complement their existing subscriber bases as many attempt to round out their services with content for everyone.
What about pay-TV companies?
The cable companies have practically become indifferent to whether subscribers want their video services or not. Comcast (CMCSA -5.82%) is fully on board with its subscribers streaming as long as they use Comcast's internet service. It's more interested in selling them wireless phone service than pay TV these days. The same could be said of Charter, although it's been less aggressive in streaming (likely because it doesn't own a media company as Comcast does).
It's the stand-alone pay-TV services that are in trouble -- the biggest being the satellite TV providers, Dish Network and DirecTV, of which AT&T still owns 70%. Dish is working to diversify with its wireless business, including Boost Mobile. And 2022 could be the year the two satellite TV businesses merge. But consolidating may only be a temporary fix to boost profitability without solving the real issue that cable is dying and streaming sports could be the nail in the coffin.
It starts now
Sinclair is planning to launch its direct-to-consumer sports streaming service this year. With 21 regional sports networks in its arsenal, it covers a substantial percentage of the 53 million sports fans who still subscribe to traditional pay TV.
The company thinks it will steal away just 1.3 million pay-TV subscribers, but that may be conservative considering it has a competing interest in maintaining those pay-TV subscriptions for its broader media business. It could attract much more as pay-TV prices continue to rise. Investors across the media industry should pay close attention to how the new streaming sports option affects the pay-TV landscape.
