For the sports fans turned off by the cable bundle, your prayers have finally been answered. DISH Network (NASDAQ:DISH) announced this week that it will stream ESPN, ESPN 2, and 10 other channels to you over the Internet for just $20 per month.
The mini-bundle includes channels from Walt Disney (NYSE:DIS), Time Warner (NYSE:TWX), Scripps Networks, and A&E. While the over-the-top service, dubbed Sling TV, is rather tempting for would-be cord-cutters and cord nevers, it doesn't look like a huge threat to existing pay-TV services such as Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), or DISH itself.
Content is king
ESPN is the holy grail of the cable bundle, and pay-TV operators pay heavily for it. Last year, the average monthly cost per subscriber for just ESPN was estimated at $6.04. That number is expected to increase to $8.37 in 2018.
Time Warner's TNT and TBS are also among the most expensive channels, costing pay-TV providers $2.20 per subscriber each month in 2014. Overall, the monthly cost of content for DISH's Sling TV is likely about $13 per subscriber. That leaves it with just $7 per subscriber to provide the streaming service and turn a profit. The profit margins on Sling TV are going to be thinner than what DISH Network investors are used to.
The terms of the content agreements are also extremely favorable for Disney and the other content owners. The target audience for Sling TV is the subset of people who never signed up for cable or have already cut the cord. Of course, there will be some cannibalization of cable subscribers, but an escape clause allows at least ESPN to exit the bundle if the service hits too many subscribers.
That's the big catch. ESPN is the linchpin of Sling TV, and Disney gets to decide how many people are allowed to watch the sports channel over the top. If it takes too many viewers away from cable -- Disney's big money maker -- the plug gets pulled and the whole experiment falls apart. However, if broadband-only households can be persuaded to sign up for Sling TV in large numbers, it's a big win for Disney, Time Warner, and DISH.
For the most part, the interests of Comcast and Time Warner Cable are aligned with those of Disney and Time Warner when it comes to over-the-top services such as Sling TV. Time Warner might offer HBO over-the-top this year, but it doesn't plan on undercutting the price cable subscribers pay. Likewise, ESPN is looking to offer select sporting events over-the-top without a cable subscription, but it plans to make the service complementary to its cable networks.
DISH doesn't offer Internet service
Even if a few subscribers cut the cord in favor of Sling TV, Comcast and Time Warner Cable own the Internet service needed to access the new offering. The cable companies should be able to raise their rates on those users without much friction since streaming HD broadcasts might require more bandwidth for some subscribers, and others will need to end their bundled contract and sign a new one for just Internet service.
Comcast has increased its average high-speed Internet bill in the past even as it lost video subscribers. In 2012, the number of Comcast high-speed Internet service subscribers grew by 6.7%, while revenue from the segment grew 9.2%. In 2013, subscribers increased 6.5% and revenue increased 8.3%. However, the average video subscriber pays nearly twice as much than the average high-speed Internet user.
Comcast also worked with Netflix to provide interconnections between Comcast's network and its content delivery network to boost speeds. Of course, Comcast charged Netflix a few dollars for the privilege, and if Sling TV starts shoving a bunch of data into Comcast's or Time Warner's network, they're capable of doing the same thing. That would help offset lost video subscriber revenue as well.
A cord-cutters dream
Count me in among those who will be tempted to cut the cord for Sling TV. While it doesn't have everything cable subscribers love to watch -- no AMC, no FX, no Hallmark Channel -- it offers four of the top seven prime-time cable channels and two of the most popular daytime cable channels.
Still, there are safeguards in place to make sure cord-cutting doesn't get out of control. Because Disney and Time Warner are just as interested in preserving the cable bundle as the cable operators, Comcast and Time Warner Cable investors shouldn't feel threatened by Sling TV.
Adam Levy owns shares of Apple. The Motley Fool recommends AMC Networks, Apple, Google (A shares), Google (C shares), Netflix, Scripps Networks Interactive, and Walt Disney. The Motley Fool owns shares of AMC Networks, Apple, Google (A shares), Google (C shares), Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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