Cable vs. Streaming, How Does ESPN Navigate The Future?

There’s no longer a question of whether cord cutting — people abandoning their cable and satellite subscriptions — is occurring or whether it’s accelerating into the future, both are taking place. For years I wrote about the looming challenges of cord cutting for the sports and media industries on this website — with many in the sports media industry ridiculing these opinions, which I’ve now been proven correct on — and the challenges of cord cutting remain. But an intriguing subplot has emerged which is probably the most interesting in all of sports business right now — can ESPN transition from a cable business to a streaming business?

This is of paramount interest because of the rapid acceleration of cord cutting. Indeed, yesterday “The Hollywood Reporter” published a forecast that before long there would be more people who don’t subscribe to cable and satellite bundles than do subscribe to cable and satellite bundles.

If these projections look familiar to long time Outkick readers it’s because they’re pretty close to the numbers I laid out in 2016, nearly three years ago, for subscriber attrition forecast at ESPN.

This is from my article on cord cutting back in 2016:

“So if we’re very conservative and project that ESPN continues to lose 3 million subscribers a year — well below the rate that they are currently losing subscribers — then the household numbers would look like this over the next five years:

2017: 86 million subscribers

2018: 83 million subscribers

2019: 80 million subscribers

2020: 77 million subscribers

2021: 74 million subscribers

At 74 million subscribers — Outkick’s projection for 2021 based on the past five years of subscriber losses — ESPN would be bringing in just over $6.2 billion a year in yearly subscriber fees at $7 a month. At $8 a month, assuming the subscriber costs per month keep climbing, that’s $7.1 billion in subscriber revenue. Both of those numbers are less than the yearly rights fees cost in 2017. (Remember that these yearly rights fee costs will keep rising in the years ahead too).”

Three years later this forecast has all pretty much come true. (If anything, my numbers may be too conservative in the years ahead).

ESPN executives aren’t dumb, they’ve seen these challenges coming to their business — in conjunction with their fixed costs albatross for rights fees in the decades ahead — and they’ve elected to combat the cord cutting threat by moving into the streaming business with ESPN+.

But the big challenge is this — all the best ESPN sporting events air on ESPN, ESPN2, ESPNU and the existing cable and satellite channels.

In other words, you don’t get Monday Night Football on ESPN+, you only get it with a cable and satellite subscription. Contractually ESPN isn’t permitted to put its top programming on a direct to consumer streaming service because then the cable and satellite cord cutting acceleration would probably move even faster.

So how is ESPN’s attempt to advance into the streaming future going?

Well, not that well.

According to media stock analyst Rich Greenfield the growth of ESPN+ has slowed substantially, checking in at just 2.4 million subscribers despite the substantial spending spree ESPN has embarked upon for the UFC and soccer streaming rights. You can see that growth chart below. (These numbers also include the rollover of ESPN Insider, which raised the subscription numbers substantially).

Even assuming all of these 2.4 million subscribers pay full freight for the service — which is certainly not true — we’re just talking about roughly $170 million a year in total ESPN+ revenue. Putting that into perspective, that’s less than ESPN pays the NFL for two Monday Night Football games.

These numbers also square with the top end growth so far that we’ve seen for sports specific offerings. Roughly two million people subscribe to the WWE Network and roughly two million people subscribe for NFL Sunday Ticket.

When it comes to sports, streaming has been a tough sell so far, even for companies like the WWE and the NFL which have incredibly massive fan bases. (ESPN is also competing with some direct to consumer streaming options, like DAZN, which don’t have to worry about cannibalizing their existing cable and satellite based business when they acquire streaming rights).

So why does this challenge matter?

Well, I’ve written quite a bit about the challenge ESPN faces as a cable and satellite channel. Namely that it has a huge amount of fixed programming costs at the same time that its cable and satellite subscribers are plunging off a cliff.

But now in addition to the challenge in its cable and satellite business, ESPN is facing a brand new challenge – -they’re trying to embrace the streaming future as a part of a huge Disney directive to combat Netflix.

Which ESPN’s now caught in an additional intractable position right now — they are rapidly losing their cable and satellite business revenue (and profit) while simultaneously attempting to transition to a streaming sports company. Right now the result is they are losing substantial money on their streaming service while slowly bleeding out their profits in cable and satellite.

So how in the world does this end up working out?

I have no earthly idea.

What ESPN really needs is the ability to put all of the content they’ve purchased on one killer streaming app, which they can sell direct to consumers. But they aren’t contractually allowed to do this because then the cable and satellite companies will drop them from their cable and satellite bundles, costing the company billions of dollars.

This a fascinating and huge problem.

What Disney wants, clearly, is for everyone to keep their cable and satellite subscriptions and also subscribe to ESPN+.

But that’s not happening very often at all.

Instead people are choosing not to subscribe to ESPN+ and cutting their cable and satellite cords, meaning the company is investing heavily in streaming content — which it loses money on — while also simultaneously losing its profits in the cable and satellite space.

That, my friends, is a bad combo.

It’s also a unique combo because sports, unlike other entertainment options, doesn’t retain much value after it airs live. That is, very few people go back and watch a sporting event after it has aired live. If you haven’t ever watched, say, “Friends” “Game of Thrones” or “The Office” you might well see an episode and decide to catch up with the entire series, allowing the show to retain value for decades. But people don’t suddenly decide to stream the 2015 New England Patriots season and go back and watch it all from beginning to end.

This means that unlike most of TV entertainment, which features a ton of valuable movie and TV show catalogs, sports is pretty much only valuable when it airs live. Once the live event game airs, people move on to the next live event game. In this, sports are like news. All people care about with both is what’s happening now. No one goes back and watches an old news program or an old sports program.

This is why Reed Hastings, the CEO of Netflix, has argued that the future of TV is sports and news, everything else, he believes, will be streamed.

So how does this fit in a larger context with ESPN’s corporate parent, Disney. Well, yesterday Disney announced its second quarter earnings and Wall Street reacted harshly to the company missing estimates. (As I write the company’s stock price is down somewhere in the neighborhood of $8 a share, roughly 5%). The primary reason for the company’s missed estimates is the massive cost involved in preparing Disney+ for release. Disney+ will launch in mid-November and it’s Disney’s attempt to combat Netflix in the streaming space.

During its second quarter earnings announcement Disney announced they would be creating a new bundle of streaming services — Disney+, ESPN+ and Hulu — all combined together for $12.99 a month, which is one less dollar than Netflix costs. (You guys know I hate to brag, but this is exactly what I predicted would happen back in May.)

The concept of this new streaming bundle — which Disney hopes will combat the decline of the old cable and satellite bundle — is Disney+ will be for kids and the family, ESPN+ will be for sports fans, and Hulu will be for adults. But, and this is key, Disney+ and Hulu are entertainment offerings, which will feature all the best entertainment options available from Disney and Hulu. But ESPN+ won’t feature the best ESPN offerings at all, it will mostly feature the ESPN programming that isn’t popular enough to be on their networks.

Now to their credit ESPN is cognizant of the need to spend on original content to feature on ESPN+ in order to drive up subscriber numbers. The challenge is this — they are essentially competing with their existing cable and satellite business for this streaming content. In other words, sports is watched live. So if ESPN puts something on ESPN+ or on ESPN, they can’t monetize it on both platforms. This is fundamentally a different business model than, say, what happens with “Frozen 2” at Disney.

If you have kids you know that kids watch the same episodes and shows over and over again. (The launch of “Descendants 3” in my house was like Woodstock). So Disney will have the chance to make money off “Frozen 2” in the movie theater and then also get parents to subscribe to the service so their kids can watch the movie over and over again. For the rest of time, Disney owns this content and will be able to make money off it.

My grandkids will probably end up watching the Frozen franchise one day. Just like they’ll watch “Peter Pan” and “Snow White.”

But that doesn’t happen with sports. It’s mostly disposable content, you watch a game and then immediately move on to the next one.

So unlike with “Frozen 2 where Disney can use that content across a variety of programs, a sporting event can only air one place and it only matters for a few hours and then it’s mostly gone forever. Everything is disposable and the archive of your content doesn’t retain much value. What’s more, Disney/ESPN doesn’t own the content, the leagues do, they just rent it.

This all means that for Disney sports is a completely different business model than entertainment. ESPN+ really isn’t the same thing at all as Disney+ or Hulu.

It also means ESPN faces incredible challenges to its business right now.

The only way ESPN may be able to win in streaming is by destroying its own existing business in cable and satellite. And given the contracts they’ve signed and the guaranteed money they are spending for sporting rights in the future, that may not even be possible. In fact, it’s probably far more likely that ESPN loses in both cable and satellite and streaming universe than they win in both (or either).

And if that loss happens it has far reaching impact not just in sports media, but for the teams, owners, players, and conferences, all of whom will be dealing with a fundamentally different business model in the decades ahead than they’ve dealt with since the advent of cable.

In streaming people pay for what they want, there are virtually no free rides.

And if you aren’t paying attention to ESPN’s move into streaming, you are missing the biggest story in all of sports.

Written by Clay Travis

OutKick founder, host and author. He's presently banned from appearing on both CNN and ESPN because he’s too honest for both.