Live sports remain some of the most popular programming on cable. Despite the big numbers that events like the FIFA World Cup and College Football Championship draw in ratings, ESPN is seeing the impact of cord cutting and cord shaving on its business. That's why Walt Disney (NYSE:DIS) CEO Bob Iger was recently compelled to say ESPN could be sold directly to consumers one day. That day is still at least five years out, he said on CNBC.
It's a business model popularized by Netflix and taken up by old-media stalwarts like Time Warner and CBS, who've released HBO, Showtime, and CBS as over-the-top streaming services. But ESPN makes so much from cable subscriptions that it would be a bit more risky for the company to go over the top compared to what's currently available.
In 2011, cable and satellite companies beamed ESPN into over 100 million American households -- nearly every pay-TV subscriber had it in their package. In July of this year, that number fell under 93 million. In just the last year, ESPN has lost 3.2 million subscribers.
Not all of those losses are from cord cutters. The trend of cord shaving -- where consumers select smaller cable bundles without lots of sports programming -- has had a much bigger impact on its business. ESPN's business model relies on getting most cable subscribers to pay for its networks, regardless of whether they watched them or not.
With more consumers selecting bundles that don't include ESPN, ESPN is seeing its subscribers concentrate more toward households that actually watch its networks. That will ease the transition if ESPN moves to an a la carte model.
Comparatively, HBO and Showtime offer their channels a la carte already as an add-on to any cable subscription. The move to over-the-top streaming didn't carry as much risk of losing subscribers because anyone receiving those channels already intends to watch them. The case is similar with Netflix, which most viewers subscribe to very similarly to HBO and Showtime -- i.e., as if it were a premium network.
Why ESPN would work a la carte
ESPN is one of the few networks that could survive in an a la carte TV world. Its exclusive rights to broadcast events like the BCS playoffs, Monday Night Football, certain NBA games and playoffs, and the FIFA World Cup make it a must-subscribe for many sports fans. That's provided the company with lots of pricing leverage, and it now charges the average subscriber $6.61 per month for its flagship network. The next closest network doesn't even charge $2 per subscriber.
A recent survey by DigitalSmiths found that 35.7% of cable subscribers would buy ESPN a la carte. A recent Reuters/Ipsos poll found that 40% would be willing to pay $10 per month for ESPN. But basic math tells us ESPN would have to charge more than $15 per month to maintain its current revenue.
But going online could provide an added benefit that HBO, Showtime, and Netflix don't have access to. Since sports are watched live and have natural breaks in the action, ESPN is able to show commercials. The shift to online video ads from television ad spending is just getting underway, but within five years, we should see a significant shift in ad spending as it catches up with time spent viewing videos online.
ESPN could use targeting data to produce higher average ad prices online than it sees from television broadcasts. That could help make up for lower revenue from subscriptions.
The infrastructure is already there
ESPN has built out its streaming infrastructure over the last decade, starting with ESPN360.com, which eventually became WatchESPN. It offered American cricket fans the chance to stream the Cricket World Cup this winter without the need for a cable subscription, so it has the payment processing and customer service infrastructure experience from that.
ESPN has already negotiated robust streaming rights with the NBA and MLS in recent contract renewals. Watch for ESPN to obtain even more exclusive streaming rights from other leagues going forward. With those in hand, ESPN will be able to go a la carte whenever it makes financial sense.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of 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.