When DISH Network unveiled its Sling TV streaming service at the 2015 Consumer Electronics Show, one of the key features was the inclusion of Walt Disney's (NYSE:DIS) ESPN.
This made the $20 a month streaming service the only way to get the popular sports network without a traditional wired cable TV subscription. It's possible that the ESPN channels will be offered on other pure-digital streaming services in the future. But for now, Sling remains the only way for people to get them wherever they live in the United States without paying for cable or satellite.
Sling is also the closest you can come to buying stand-alone ESPN service. Disney's CEO says that might be the case for the foreseeable future.
What was said?
Disney CEO Robert Iger appeared on CNBC's Squawk Box recently. During the interview, he told the host that he sees ESPN as a media property that could ultimately be sold directly to consumers, but he does not see that happening in the next five years.
"If we end up seeing more erosion in the so-called multichannel [cable and satellite TV] bundle, quality will win out," he said. "While the business model may face challenges over the next few years, long term for ESPN ... they'll be fine. They have pricing leverage, too," Iger said. "Disney [Channel] is another ... brand and product that could be sold directly to the customer."
What's at stake here?
ESPN is in a tricky position because it relies on the fees it receives from cable companies. Though it would almost certainly attract a significant user base as a stand-alone network, it's hard to imagine that this revenue would make up for the amount it would lose if cable companies stopped forcing their customers to receive the network.
As of 2014, ESPN received around $6 per cable subscriber according to data from SNL Kagan, as reported by The Wall Street Journal. That's the most for any network, by a lot. Its sister-network, ESPN2, also appears on the top 10 list at No. 7, costing $0.74 per subscriber.
Those prices are also expected to "increase 36% by 2018" according to SNL Kagan.
The risk for ESPN is that the cable bundle breaks down and the industry moves to an a la carte model or a skinny bundle, one where not getting the sports network is a choice. If ESPN loses half the cable universe, it would have to charge its remaining customers twice as much to remain in the same place.
Why is ESPN waiting?
HBO and Showtime, which are both offering stand-alone services, have always been premium channels requiring an extra fee from cable subscribers. While these brands risked angering their cable partners by creating stand-alone options, the cable companies are not likely to walk away from the revenue produced by selling the two networks.
ESPN is in a wholly different position. It has the sweetest deal imaginable. Cable companies are afraid to drop the service because it's popular with a large number of customers. Because of that, they force all users to pay for it, generating a windfall for Disney.
The only way ESPN is likely to become a stand-alone service is when the cable industry has radically changed and the current model of bundling goes away. That day may be coming, but it's not here yet, so it would be crazy for Iger and Disney to change anything.
In five years, the cable world may well be very different. If so, then it's easy enough for Disney to take its popular programming and make ESPN a stand-alone service. Until that happens, the company profits enormously from the status quo, so it should maintain it for as long as it remains viable.
Daniel Kline has no position in any stocks mentioned. He watches the channel, but would not pay for ESPN as a stand-alone. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of 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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