The Math Behind ESPN's Fear of Verizon's Skinny Bundles
ESPN filed suit against Verizon Communications on Monday over the pay TV carrier's attempt to cut down the size of cable bundles. Verizon is offering its FiOS customers a "Custom TV" option with a $55 base package of channels that allows a choice of two small bundles from a menu of seven. ESPN and ESPN2 are lumped with 10 additional networks in a sports channel pack next to alternative packs for viewers who prefer pop culture or children's programming. The Disney-owned network says this breaks the terms of its contracts with Verizon. The carrier says it's giving the people what they want.
Whatever the legal merits, the offering from Verizon signals a willingness to try new business models. No network benefits more from the status quo than ESPN, which has built a $7.5 billion revenue pipeline from the monthly subscriber fees that carriers pay programmers. That system depends on millions of customers who pay for ESPN but don't watch it. And no one really knows what the pay TV business would look like without these customers.
Here is one back-of-the-envelope measure of the problem for ESPN and other cable channels:
ESPN is currently in 94.3 million households, according to estimates from Nielsen. Providers such as Verizon pay, on average, $6.61 per household, per month, for the right to carry the network, according to industry analyst SNL Kagan. That's $623 million in monthly revenue for ESPN. Here is how that compares to five popular cable networks (one each from additional Verizon channel packs):
One way to gauge the number of households that might want to pay for a network as a stand-alone offering is to look at quarterly cumulative numbers from Nielsen. This is a measure of how many households, out of a pay TV universe of 116.4 million, tuned into a given network for at least six minutes during an average week. According to a Nielsen report provided by Brad Adgate of Horizon Media, 27.6 million homes spent at least six minutes with ESPN in an average week from Dec. 29, 2014, to March 29, 2015. If we take that as the number of customers willing to pay for ESPN outside a bundle, the network would need to charge them each $22.58 per month to match its current revenue from subscriber fees. This kind of market will almost certainly never exist, but it's a useful way of looking at the hurdle for cable networks. Here is the same math for the rest of our sample group:
ESPN has unusual strength in the market because its programming is hard to replace. A viewer looking for a particular NBA playoff game or college football bowl probably wants to see it live and is not about to settle for a comparable alternative. Reality TV or romantic comedy viewers are usually more flexible. This the power of live sports. People who want to see them really want to see them. ESPN and rival sports networks use these viewers as leverage with carriers to pry money from non-sports customers. In a post-bundle world, they'd have to find a way to replace this subsidy.