As ESPN eyes standalone streaming service, don't write the obit on cable TV just yet

Eric Prisbellby:Eric Prisbell05/26/23

EricPrisbell

ESPN’s move toward creating a standalone, subscription-based streaming service for its flagship network marks the latest indication that the migration of live sports to streaming platforms is accelerating.

But TV industry veterans caution: Don’t write the obituary on cable TV just yet. 

Assessing what the future landscape will look like entails weighing a confluence of factors, including the pace of the cord-cutting movement, the evolving viewing habits of fans across demographics and the price consumers are willing to pay for yet another streaming service. While the winds of change continue to blow in the direction of streaming platforms, both cable TV and direct-to-consumer services are expected to co-exist for years to come as destinations for live sports content. 

“What really drives the products are the fan and the consumer,” Craig Sloan, chief operating officer at Playfly Sports, told On3. “So, how badly someone wants it is going to make people create technology, create new pathways for content and rights. It’s not vice versa. And, ultimately, the reason why it isn’t this [cable TV] demise is because there are people who still believe in the multi-channel universe and aren’t ready to just go to individual subscriptions only for their content. The very nature of that means that there’ll be two environments for years to come.

“How many years? It’s a good question.”

One TV industry source said, “The cable bundle is going to be here for, I think, quite some time. Sometimes everybody takes a doomsday approach to everything – ‘This is going to be catastrophic. This is going to happen quickly.’ And I don’t think it’s happening quickly.”

Interest in exactly when ESPN will launch a standalone platform for its flagship network is heightened on the heels of last week’s Wall Street Journal report that ESPN is now “actively preparing” to introduce the service in the coming years. The timeline remains fluid, although The New York Post’s Andrew Marchand reported that either 2025 or 2026 is the most likely target date.

The news, long viewed as an inevitability, is the latest manifestation of the cable TV cord-cutting trend that has been occurring for years, especially among younger consumers. The movement last year was more pronounced than expected and now, for the first time ever, less than half of U.S. adults say they have a monthly cable or satellite TV subscription. As John Kosner, who led digital media at ESPN from 2003-2017 and is now president of media consulting firm Kosner Media, has told On3, the entire sports media industry this decade is engaged in a consequential transition period.

Model will continue to be profitable into future

Disney, the parent company of ESPN, has a front-row seat for this evolution. Some 74 million TV homes still get ESPN through the traditional cable bundle. Cable carriers currently pay $9.42 per subscriber each month to ESPN, the highest for any cable TV network. ESPN has long been viewed as significantly carrying the weight for the traditional cable bundle because so many loyal sports fans remain tethered to the networks. 

Whenever it launches the subscription streaming service in the coming years, ESPN will importantly also keep its network offered on traditional linear TV. What’s the significance of keeping its hand in both jars?

There is still financial value in the traditional cable TV bundle. 

“The underlying assumption is that many consumers will continue to see value in bundling networks via linear and connected TVs, so the model will continue to prove profitable for ESPN into the future,” Matt Balvanz, senior vice president for analytics and innovation at Navigate, a leading data-driven consulting firm in sports & entertainment, told On3. “Diversification is also very beneficial since different platforms attract different generations of sports fans and can provide them content in very different ways. As long as ESPN continues to innovate and tailor their programming to their audiences, their future will be bright.”

In 2010, ESPN was in 100 million homes and charged cable distributors $4.39 per subscriber per month in affiliate fees, according to S&P Global Market Intelligence. This affiliate revenue contributed to an overall operating revenue of just over $7 billion that year. By the end of this year, Justin Beitler, the director, media rights consulting at Octagon, said ESPN is projected to be down to 67 million subscribers but will still generate an overall operating revenue of $10.4 billion. 

“So, despite losing subscribers, the value of live sports has allowed ESPN to continue to command increasing affiliate fees per month from distributors, which has allowed them to continue to grow revenue,” Beitler said. “The other part of ESPN remaining on linear is the viewership and associated ad dollars generated by that viewership. Casual fans, who might not be willing to subscribe to a standalone ESPN, can still tune into the linear channel to catch a key game if it happens to pique their interest.”

Neal Pilson, the former longtime CBS Sports president, told On3 that many industry stakeholders believe the linear cable audience will bottom out below 50 million yet “remain a viable carrier of programming. Even at $7 per subscription per month – compared to the $9.42 they [ESPN] are getting now. That’s a huge revenue generator for Disney.”

‘Ecosystem has life in it’

Sloan believes the diminishing number of households that watch ESPN through a traditional cable package hasn’t reached a floor yet. But as it continues to drop, he cautioned that it may even “rise a little bit again.” That would account for viewers who may be exhausted from managing so many streaming subscriptions and seeking a more streamlined so-called re-bundling approach. 

The linear TV model will continue to be a revenue driver for ESPN, Sloan said, adding that “the ecosystem still has life in it from a consumer perspective and an advertising perspective. I don’t want to sound like the antiquated person that’s not seeing where it’s going. Actually, I do see this change happening, this evolution happening. But there is also a real, growing sentiment around the availability of the content, the reach component coming back up again, [that] is the component that’s also being factored in. So, reducing the amount of ways [linear and DTC] that you can get there seems illogical to me today.”

A veteran TV source added “streaming services are here to stay, but they don’t have the reach of over-the-air television and/or cable yet. And ESPN is still getting $9-plus per subscriber on the cable side. They still get a shitload of money on that side. And that’s why they can’t start putting all the games on ESPN+. Because guess what will happen to the cable operators? They’ll say, ‘[Expletive] you. We’re not going to pay you the money anymore.'”

To that point, Beitler said ESPN and Disney have thus far fought off cratering subscriber numbers by increasing monthly subscription fees at a higher rate. If the rate of subscriber losses either meets or passes the rate of subscription fee increases, he said, it makes the decision of when to launch the standalone a lot easier. 

“Based on the data, that may be happening now,” Beitler added. “To be clear, this isn’t just a switch ESPN can flip. ESPN is making $9.42 per subscriber each month [from] distributors because of the content that is exclusive to its linear network, namely NFL and NBA. To make this all work, it needs buy-in from both the distributors – who will undoubtedly be seeking cuts to sub fees that they are paying based on exclusivity – along with the sports properties themselves.”

Is there a tipping point?

When ESPN does its standalone service, it will be competing directly with the cable bundle that it is a part of. That will likely require renegotiating terms with cable providers and a complex calculus by ESPN.

“Okay, how many subs are we really going to get on the standalone?” one TV source said. “How much is it going to cost us on the other end, and is it worth it? If this is the future, we’ve got to prepare for it even if it may cost us a few dollars on the other end.”

The current ESPN+ streaming platform, which was launched in 2018, carries content that largely cannot be found on the flagship network. It costs $9.99 per month and currently has some 25.3 million subscribers. Once that platform eclipses 40 million subscribers, Balvanz believes, that’s when we’ll see more inventory, if not all inventory, mirrored on both the linear and streaming networks. 

This would probably reach a “tipping point” when TV linear household bundle subscriptions dip to 60 million, he said, so collectively, at that point, ESPN would be reaching some 100 million households and will have “likely innovated their way towards more scaled and profitable business on the streaming side, which has been a challenge to date.”

It remains to be seen if the streaming version of the flagship network would simply be offered as part of the current ESPN+ platform, albeit at a higher price point. Or will it be offered as a separate platform altogether?

The number of ESPN households includes some cable bundle subscribers who never watch the network. A smaller number of consumers will likely sign up for an ESPN streaming platform, which means the price will need to rise. Industry experts believe the price could approach $30 per month, if not more.

Question of ‘when,’ not ‘if’

Because ESPN plans to continue with both a linear network as well as a streaming platform, Balvanz does not believe existing media rights deals with college conferences will need to be significantly revamped.

He believes the linear TV model will plateau at around 60 million households after the cord-cutting growth stabilizes, which means a 20% decline in potential revenue from subscriptions and advertising. Balvanz added that the loss in revenue there can likely be made up in other areas, such as more targeted advertising, e-commerce integration and streaming initiatives.

If a conference’s games are available on both linear and digital, Beitler said, leagues will need to have confidence that the viewership coming via the streaming app is being reliably and accurately captured by Nielsen. As long as media rights don’t shift exclusively to digital, he added, he believes the current arrangements don’t need to change significantly.

Streaming platforms are amassing impressive portfolios of live sports content. Amazon pays the NFL $1 billion annually for Thursday Night Football and has secured deals to showcase the New York Yankees and WNBAApple TV+, meantime, has secured a 10-year, $2.5 billion deal for Major League Soccer games and is spending $85 million annually for Friday night MLB games. YouTube is reportedly paying the NFL $2 billion annually for its Sunday Ticket package. And Peacock, owned by NBCUniversal, will exclusively stream a prime-time NFL wild-card weekend playoff game next season. 

And now ESPN has put the wheels in motion. Citing anonymous sources familiar with the matter, the WSJ’s report that ESPN is actively preparing for the shift included detailing a project underway that carries an internal code name of “Flagship.”

This aligns with other recent signals.

During Disney’s first-quarter earnings call, CEO Bob Iger said, “If you’re asking me, is the shift inevitable, the answer is yes. But I’m not going to give you any sense of when that could be, because we have to do it, obviously, at a time that really makes sense for the bottom line. And we’re just not there yet. And that’s not just about how many subscribers we could get, it’s also about what is the pricing power of ESPN, which obviously ties to the menu of sports that they’ve licensed.”

Additionally, ESPN Chairman Jimmy Pitaro recently told Bloomberg, “We’re going to get to a point where we take our entire network, our flagship programming, and make it available to direct to consumer. That is a ‘when’, not an ‘if.'”

It’s coming. The only question is how soon. More and more, Pilson’s prediction to On3 last year looks on point, when the former CBS Sports executive said streaming would have a material impact on sports packages in the latter half of this decade, “when maybe we’re all in the streaming business.” 

Until then, expect live sports to co-exist in two worlds: linear TV and streaming. 

As the technology and platforms continue to evolve, Sloan said there may be only one absolute: “The things that we know for certain are: Death, taxes and that people will watch live sports. Ultimately, at the end of the day, people will be there.”