Have We Reached Peak ESPN?
The most valuable media property on earth may be getting a little less valuable. It’s not that people are markedly less interested in watching sports, the main product that ESPN has on offer. It’s that the product is getting more expensive, while the complex means of paying for it that the cable TV industry has knitted together over the past few decades is beginning to unravel.
This is from Shalini Ramachandran and Joe Flint, writing in Friday's Wall Street Journal:
The company, majority owned by Walt Disney Co., has lost 3.2 million subscribers in a little over a year, according to Nielsen data, as people have “cut the cord” by dropping their cable-TV subscriptions or downgraded to cheaper, slimmed-down TV packages devoid of expensive sports channels like ESPN.
At the same time, the prices ESPN pays for the rights to show games are ballooning. Rivals including 21st Century Fox Inc.’s Fox Sports and Comcast Corp.’s NBC are aggressively pursuing sports properties to feed their own outlets, which is also driving up prices.
You can see the squeeze in the segment operating income that Disney reports for its cable networks, which comes mainly from ESPN. The trajectory is surely even more pronounced for ESPN alone, as Disney has said in recent quarters that its other cable operations -- the Disney Channels and ABC Family -- have been showing gains in operating income:
Another thing you can see from the chart is that ESPN makes a ton of money. The Disney cable networks’ operating income of $6.4 billion in 2014 was slightly more than Time Warner’s, 60 percent bigger than Viacom’s, and more than double that of CBS. With other parts of the company doing quite well lately, thank you, Disney’s overall earnings are still rising and its reign as the world’s dominant media company shows no signs of ending.
But this ESPN thing is interesting. ESPN is the king of the cable bundle, leading both in prime-time ratings and in the carriage fees that cable providers hand over -- about $6.61 per subscriber per month, according to SNL Kagan. Its carriage-fee advantage is huge, as illustrated by this Bloomberg Businessweek graphic:
Also, because viewers are much more likely to watch sports live, rather than recording it or catching it later on a streaming service as with so much other TV programming, ESPN also enjoys a favored relationship with advertisers.
That last attraction remains. Live sports events retain a unique position in an increasingly fragmented media landscape. But other media companies know that too, which is why the price of sports rights keeps going up. Meanwhile, ESPN is caught between trying to follow its audience as it migrates away from cable TV and holding together the cable bundle that is the source of so much of its profit.
ESPN has been battling in court with Verizon, which in April began offering a slimmed-down Custom TV service that allows subscribers to opt out of paying for sports channels. There are surely many other such confrontations to come. Meanwhile, if ESPN tries to follow the example of HBO and offer a streaming service to people who don’t subscribe to cable, the Journal reports that “some pay-TV operators have the contractual right to boot ESPN out of their most widely-sold channel packages and sell it a la carte.”
I wrote approvingly a couple of weeks ago about author Michael Wolff’s argument that television can survive the digital onslaught more or less intact. For ESPN, though, the cable TV landscape of the past decade or so has been perhaps the best of all possible worlds. Even if it survives more or less intact, it will still be diminished.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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