Will ESPN+ Save ESPN's Business Or Hasten Its Demise?

Today ESPN launched a new direct to consumer product, ESPN+, which retails for $4.99 a month and features content you probably don't want to watch because it wasn't good enough to air on ESPN, ESPN2, ESPNU, ESPNNews, ESPN Classic, the SEC Network, or the Longhorn Network, yes, it still exists. That's the dirty little secret of this new ESPN digital offering, it only includes programming that will never air on all of ESPN's cable networks.

Worse than that, for those of you asking, "Well, why doesn't ESPN just put all the games on this same app and charge for that?" They aren't allowed to do that under their existing carriage deals for cable and satellite television. In other words, the DirecTV's and Comcasts of the world will only agree to carry ESPN's programming on cable and satellite -- and pay them $8 a month for it -- if ESPN guarantees the best games will only air on cable and satellite television and not stream anywhere else. (That's why you have to go through such a cumbersome process to stream the games online, because you have to verify you have a cable or satellite subscription to watch cable or satellite aired games online).

So unlike, for example, HBO, which, because it's a premium channel, can offer a direct to consumer streaming option without violating existing cable and satellite deals, ESPN can't do this. It's stuck with the good games on cable and satellite and the crappy games, which weren't good enough for cable and satellite, on its $4.99 a month plan.

If you're curious about what sort of offerings the network had today, here's a screenshot from media analyst Rich Greenfield.

Are these games you'd have to see? I don't think so.

I'm not going to rip on ESPN for offering a direct to consumer product because I do believe the launch of a straight to digital product is the future, I just don't think ESPN will win that future. Or at least it shouldn't if other companies make smart strategic decisions. That's because ESPN faces a classic challenge for any dominant company in the midst of an industry that is rapidly evolving.

Disney, the parent company of ESPN, is trying to become Netflix and this ESPN app is Disney's attempt to become the sports Netflix. The challenge Disney and ESPN face is that unlike Netflix they have a tremendously successful cable business that is likely to be crippled or destroyed by direct streaming offerings. So Disney and ESPN are trying to thread a very difficult needle, maintain their existing business success on cable while simultaneously growing a digital business so that at some point in the future, and I'm guessing that future is sooner than you think, ESPN can suddenly execute a shift -- like Netflix did when it went from renting physical DVDs to digital streaming -- and survive the collapsing cable business by leaping to a direct to consumer streaming business.

The problem is this -- generally speaking there are no halfway successes in the modern American marketplace. You either dominate or you die. (And most companies die). What does it take to dominate? A maniacal focus on a business that happens to hit at the exact right time. All Netflix cares about is streaming. Disney and ESPN care about streaming, but they make their money on cable. So I don't see how ESPN wins this battle or Disney defeats Netflix.

From 1979 to 2011 ESPN's created the greatest business in the history of world media, growing from zero cable and satellite subscribers to 100 million. But since 2011 ESPN has lost 14 million cable and satellite subscribers. The reason why ESPN's business has been so brilliant is because most people who pay for cable and satellite have no idea that, for instance, they are paying $8 a month for ESPN. When you add in ESPN2 and all the other channels, everyone who has a cable or satellite subscription is paying more for ESPN than they are for Netflix or HBO.

But unlike Netflix or HBO, ESPN's subscriber costs of over $10 a month to every cable and satellite customer is buried in your cable and satellite bills. Even wilder, the vast majority of cable and satellite subscribers don't even watch ESPN or know what they're paying them. So thanks to the cable and satellite bundle and their buried channel costs ESPN is making over a hundred dollars a year off your Aunt Gladys or Grandma Ruth who won't watch the channel in an entire year.

From a business perspective, ESPN's business model, which is truly the greatest in the history of media, is absolutely brilliant. How many other companies make billions of dollars without consumers having any idea they are paying billions for it? (About 25% of ESPN's revenue comes from advertising, which is directly connected to ratings. The other 75% is subscriber fees.) What does ESPN do with all that money? It pays billions of dollars for sports rights. That is, it effectively rents games from the leagues and puts them on its networks.

That business was fantastic for nearly two generations, but since 2011 ESPN has lost 14 million subscribers and Netflix, which was a fraction of the size of Disney in 2011, has surged to over 100 million streaming subscribers and is now nearly the same market cap as Disney. Along the way Netflix has brilliantly pivoted from a company that used to rent the old shows and movies of other companies -- think "Breaking Bad"-- to producing its own original content -- think "House of Cards," "Stranger Things" or "Narcos."

Netflix is now spending billions of dollars on TV shows and movies which never air in theaters and star the likes of Will Smith and Adam Sandler.

Netflix's mantra is simple, "It's the content, stupid!"

What Netflix has proven is that people will pay for great, original content and, unlike ESPN, Netflix can take advantage of owning that content forever. Even better, Netflix has the proprietary data to see what its subscribers are watching and can greenlight new movies or shows based popular creators and stars that it already knows are beloved by its subscribers. That's how Netflix just signed Shonda Rhimes for over a hundred million dollars and just spent $300 million -- $300 million! -- for a TV producer named Ryan Murphy who most of you have probably never heard of.

It's buying up the best content creators in the country and paying them salaries that no one else in media can match.

So how does ESPN+, which would like to lead to ESPN becoming the Netflix of sports, fit into the current market?

Not very well.

Let me break down several thoughts here that are fascinating to me and explain why.

1. Look at the ESPN+ offerings, ESPN is renting all of the content it's trying to sell to you.

Worse than that, these are all the games that aren't popular enough to put on cable and satellite.

Maybe there's a market for a hard core niche of Ivy League basketball fans who absolutely have to watch their teams play, but is that a business that is worth billions of dollars?

No way.

Sure, a few of the offerings are original -- like the 30 for 30 series -- but if you loved those documentaries wouldn't you just buy them? What's more, isn't it more likely that leagues will look at ESPN+ and instead of planning to partner with ESPN in the future with their games that they'll just start their own apps and sell their games direct to their own fans? Unless ESPN signs money losing deals which the leagues don't believe they can replicate, why would leagues continue to rent their games to the network when they can go direct to consumer themselves? (Indeed, one reason Netflix started to make its own content was for this very reason. Because it couldn't rent any longer).

Think of it this way, ESPN is the middle man here. What happens to most middle men in our modern marketplace? They get squeezed or go bankrupt. Maybe, possibly, ESPN can make a small amount as the producer of these games in the years ahead, but I fail to see how it's anything approaching the margins of the cable and satellite business.

If I'm right -- and so is Netflix -- and, "It's the content (that you own) stupid!"

What does ESPN actually own?

Which brings us to prong two.

2. What matters is original content and ESPN has virtually no original content.

The fascinating thing about this is Disney CEO Bob Iger knows that content is king. It's why he bought Pixar, Marvel, and the Star Wars movies so that Disney could control the future of all of these characters. It's why he's buying the Fox assets too.

So why is ESPN's offering without any original content of any value? Put simply, it isn't.

ESPN isn't like Netflix, it's Blockbuster Video.

How did Blockbuster make its money? By renting out other people's movie content.

Isn't that exactly what ESPN does in sports? It pays a massive amount to rent games from the NBA, the NFL, Major League Baseball and other league partners and, hopefully, it makes money off its ability to sell advertising and maintain subscriber revenues based on those ratings.

But as soon as those games air, the leagues retain the rights.

So ESPN is Blockbuster Video.

Worse, just like Blockbuster had the physical infrastructure of all of their stores, ESPN has the costs and existing infrastructure of a television network in an era when those fixed costs make no sense. How many Blockbuster Video stores still exist? What happened to all their employees? They went elsewhere because they weren't necessary.

Even worse than the high costs for physical infrastructure -- which ESPN keeps increasing when they build studios in New York City and Bristol -- ESPN's original content is mostly worthless. By "original content" I mean shows that you watch that ESPN owns forever. No original daily ESPN show other than PTI regularly draws more than 500,000 daily viewers.

Those are tiny numbers.

Yes, WokeCenter AM, ESPN's new morning television show is a ratings disaster, but it's also an incredibly expensive ratings disaster.

Three people talking about sports isn't necessarily a bad business model for a show -- or a unique one -- but it doesn't make much sense on TV when those three people make nearly $15 million each and are appearing from a studio that cost tens of millions to build. I'm far from a business guru, but what I always look at is cost relative to profitability. That is, how long does it take me to make money on what I'm creating?

The result? The fixed costs of everything that Outkick does are minimal.

It will take $25 million, at least, in revenue before WokeCenter AM makes a dollar.

What kind of sense does that make? I wouldn't be able to sleep at night if I invested $25 million in anything and had to make back $25 million before I made a dollar. That's an awful investment.

Especially when a digital company could probably make the entire show for $500k.

3. ESPN's distribution advantages are collapsing. 

Distribution advantages are collapsing for all cable networks, not just ESPN. There used to be a time when ESPN could put anything on television and people would watch it just because it was on and it was better than the other options. Because all you had to compete with were the other shows on cable and broadcast TV.

ESPN's business won, initially, because it had more highlights than your local sportscast.

Sure, you might be willing to play a DVD or VCR instead of watching TV, but that was comparatively cumbersome, it was easier just to lay down on the couch and put the television on a station you liked. Older viewers still may do that, but when was the last time you sat down on your couch and just put it on a station and watched whatever they put in front of you?

Now every single show that's ever existed is probably available to you on your television -- if you even have a traditional television -- and you might also have Netflix, YouTube, Amazon Prime and maybe the WWE Network in your house. (We have all four here.)

Every morning my three year old sits down on the couch after breakfast and asks me to put a show on for him.

Then he picks any show that he's ever watched at any point in his life and expects me to be able to immediately find it for him. And then hold the remote and skip all the commercials if we're watching off the DVR. His interests vary -- while simultaneously also remaining consistent for months on an end like most toddlers -- so pretty much every morning we typically watch the Power Rangers -- one of the episodes he likes best, he tells me no, no, no, and finally yes when he recognizes the episode he wants on the screen -- or the new Spiderman movie.

Do you think a kid used to growing up watching exactly what he wants when he wants it -- as all my kids have grown up -- is ever going to put on a network and watch what has already been selected for him by a programmer? No way. The future has totally changed.

So WokeCenter AM's ratings are tanking, but even if they weren't tanking the future for network cable programming is bleak.

Highlights, the reason you and I came to love SportsCenter, are dead on television. They've all migrated online. Bleacher Report's Instagram account gets over two million unique viewers of each highlight package it posts online. That's over ten times the audience WokeCenter AM had last Wednesday. And while you can quibble with the different ratings metrics here, TV ratings are a per minute number, not total unique viewership like many online metrics, I don't think there's any doubt that viewership for highlights, especially among anyone under forty, has migrated online or to mobile devices.

And it raises a pretty fascinating larger question -- will any sports cable show not directly connected to the games themselves -- that is not airing before or after a major sporting event -- ever produce substantial ratings in the years ahead? I hope so, but I'm not sure. I still think there is still room for success on sports cable networks, but I think it has to be accompanied by a robust digital presence packed with bite-size shareable content.

And the bigger point here is that distribution isn't an advantage anymore.

I can have as much impact doing Outkick on Periscope, from a digital and social perspective, as AM WokeCenter can.

This distribution advantage used to be ESPN's golden goose. Leagues might not like the terms of their deals, but they had to deal with them if they wanted their games to air on cable television.

Now?

Why does any league with a substantial number of fans need ESPN? They can go direct to consumer themselves.

4. What would you do if you were ESPN and you were launching a digital only product?

It's all about the original content.

I'd have every smart person at my network trying to figure out how to create the "House of Cards" for ESPN. Something so great and original that people would pay for it online. If that show was a hit, I'd make more shows that were hits.

I'd rather invest $25 million on a great original show than spend $25 million on WokeCenter AM.

I'd also buy something that people love and you already know they will pay for. That way I would own the content in perpetuity.

Why not make a big swing and buy the WWE, taking over the WWE Network too, roll in the ESPN proprietary content as part of ESPN+ and charge $15 a month for WWE and ESPN? The WWE Network already has two million subscribers, boom, you start off ESPN+ with a bang.

If you aren't willing to make that kind of investment, which honestly fits in with what Disney CEO Bob Iger did with Pixar, Marvel and Star Wars, why not put all the ESPN radio podcasts, for instance, behind the ESPN+ paywall? Sure, some people would be upset, but consumers are going to have to pay for content they love in the future. Why not start now before they get used to the idea that podcasts will always be free?

The vast majority of money that you make on ESPN radio, at least right now, comes from live airing on terrestrial radio. So why not monetize your podcast audiences by requiring an ESPN+ subscription to listen to them? Sure, it may make radio talent unhappy, but why should podcasts be free?

That's original content that you know people like, why let Apple control your future on the podcast network when you can put it behind a paywall and monetize it?

I'd also do original sports opinion programming just for ESPN+ and make it edgier and more niche. Honestly, The Undefeated and The Ringer and 538 should have probably all been behind a paywall at ESPN+. You don't have to worry about massive audiences behind a paywall, you just need to find enough people who love a product and are willing to pay for it.

We have several thousand Outkick VIP subscribers. By the end of 2018, after we've done Outkick the Weekend, my hope is that we can be rapidly building Outkick VIP towards a million dollars in revenue. That's direct monetization of an audience that loves what we do here.

Sure, they're a small subset of the overall audience that listens to Outkick on radio, watches on Periscope and Facebook and will read this article, but that's a pretty damn good business for me.

If it works for me, why couldn't it work for ESPN?

I think if ESPN+ is ever going to succeed, they have to provide compelling original content that they own. Otherwise ESPN is fighting a two fronted business war, trying to maintain its cable and satellite model while also building a streaming online platform with content that isn't good enough for cable and satellite. I just don't see how that two fronted business works, because you're trying to straddle two rapidly divergent businesses, old media on TV and new media online.

If that sounds somewhat familiar in sports media it is, it's the same thing Sports Illustrated tried to do with written content -- protect the print magazine while growing digital online too.

How did that work out?

The SI print magazine is down to bimonthly -- and slowly dying -- and the SI website, if it didn't have the swimsuit issue, would be close to worthless.

Unless it makes major investments in original content, I think ESPN is the next Blockbuster Video and the next SI.

ESPN+, if it's going to succeed in this market, has to be great.

Right now it's just a much worse version of an ESPN television channel.

That's not going to work.