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ESPN and the Culture of Cord Cutting

For the first time since its beginning, ESPN has to take a hard look at long-term survival in a changing mediascape.

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Dwindling audience. Skyrocketing Costs.  Loss of revenue.   Uncertain future.

Not exactly the kind of problems that the leaders of the most powerful sports network are used to dealing with. But reality - in the form of financial setbacks - are encroaching on the media mountaintop that ESPN has claimed as its own for almost three decades.

It feels as if ESPN has been printing money out of Bristol forever, except now their revenue streams are beginning to show some wear and tear. Recent events are making their bosses at Disney nervous, and the repercussions could eventually be felt throughout every major sports organization that ESPN touches.

Cord cutters, those who are leaving the traditional pay-tv services for alternative internet or wireless services, have caused uncertainty among all content providers, but they could be hitting ESPN the hardest. It has the World Wide Leader lashing out at any and all who appear to be attacking their cash cow of monthly subscription fees.

The ESPN empire was built on the premise that live sports programing attracts a coveted audience, one that is DVR-proof and valuable to advertisers. Get enough high profile events (Monday Night Football, College Football, NBA, MLB), and cable providers will pay handsomely to tap into the loyal, and lucrative, sports fan demographic.

The business model of monthly subscription fees from everyone who has basic cable, combined with advertising revenue has made ESPN billions.

According to media analyst SNL Kagan, ESPN collects $6.04 per month per subscriber, more than three times the amount the next cable channel collects.

The beauty of this for ESPN comes in the fact that while 20%-25% of the subscribers are watching them, the vast majority of their income comes from subscribers who don't know the difference between the Texas Longhorns and the Texas Rangers.

The fee doesn't count the other ESPN channels or their regional networks (SEC and LHN). Add all the monthly fees up and ESPN was collecting almost $700 million a month before selling a single advertisement.

Not anymore.

According to the Wall Street journal ESPN has seen a 7% decline in subscribers since 2011.

The most fearsome part of the trend for ESPN is that it is picking up speed. Over 3 million subscribers jumped ship in 2014. That's a hit of almost $250 million a year to the ESPN bottom line.

Meanwhile ESPN has billions tied up in rights fees for another decade. The network is paying the NFL $1.9 billion a year for Monday Night Football. Just last year the price for the NBA went from $485 million to $1.47 billion a year beginning in 2016. They are paying $608 million a year for the College Football playoff, to say nothing about what they are paying for the regular season games or the regional networks (SEC, LHN).

Staying on basic cable is a priority for ESPN, which is why they recently filed a breach of contract suit against Verizon.

Verizon is offering its "Custom TV" package as "a la carte lite." For $65, customers would receive a core package of 35 channels - including the four major broadcast channels and cable networks such as AMC, CNN, PBS, Hallmark, etc. You then have the ability to pick two of seven packages, such as Lifestyle, News, Entertainment and Sports.

Verizon would still give ESPN $6.00 per month, just for fewer subscribers. ESPN contends that their contract does not allow Verizon to move the channel off their basic tier. Should Verizon win this battle, other providers will no doubt follow their lead and begin to offer similar packages - and that scares the hell out of Disney.

Staying on the basic cable tier is a priority for the moment for ESPN, but the bigger problem is where those who are cutting the cord are heading.

Entertainment dollars are moving to online services such as Netflix, Hulu and Amazon Prime.  And since most of the dollars moving away from ESPN aren't even aware that the channel exists, there isn't a whole lot they can do about the bleeding.

According to one survey, 28% of all TV viewing is now done through digital streaming.

The survey also showed that 41% of TV viewers supplement their watching with three streaming services. 81.6% of the respondents would prefer to pick their own channels. Millennials, obviously a prime target audience for EPSN, appear to be leading the movement away from cable.

Surveys indicate that the typical pay-tv viewer watches 17 channels. Customizing an a la carte list could get expensive, especially for the sports fan.

According to a recent report in Variety, ESPN ranks 20th among channels viewers would be willing to pay for.

One option for content providers is to produce a standalone streaming service separate from their cable deals. Other cable channels have done this (HBO Now, CBS All-Access, Showtime), but that probably isn't an option for ESPN.  If ESPN tries to chase after the cord cutters by offering a streaming service to those who don't subscribe to cable, it would be cutting off its nose to spite its face.

According to the Wall Street Journal, should ESPN make such a move, many of the pay-tv providers have the right to take them off the basic cable tier and move them to a premium level - and probably undercut the price that ESPN would be charging for its standalone streaming.

If ESPN loses their court battle, they could decide to simply become a direct provider altogether. Several estimates peg the cost for ESPN at $36-$38 dollars a month in order to make up for the loss of the "silent majority" of basic cable subscribers.

While Disney studies the options, there are reports that they have ordered ESPN to make budget cuts of $350 million over the next two years.

Perhaps ESPN gave a preview of things to come last college basketball season.  Announcers called 47 games from the studio in Bristol, saving travel expenses.

How Disney and ESPN respond to the changing media landscape will cause ripples throughout sports. Just this summer, NBA teams went after free agents using projected salary caps based on the new TV deal.

The next test for ESPN is negotiations for Big 10 media rights. The leagues football and basketball contracts with ESPN/ABC and CBS expire after the 2016-17 seasons.  The Big 10 is the only Power 5 conference that will be open for bidding for almost a decade.

This time, ESPN is expected to have a major competitor at the negotiating table. FOX will make a push for Big 10 media rights. The network would love to have the league as the cornerstone for its fledgling Fox Sports 1 network.

They already have a solid relationship with the Big 10 since FOX owns 51% of the Big 10 Network. They can offer the Big 10 more national coverage through its broadcast network on Saturdays, while ESPN has mainly shown the Big 10 regionally on ABC.

There is no doubt that FOX would give the Big 10 an enhanced national venue. The network built its base from the start by using the NFL as a massive promotional platform. Joe Buck and Troy Aikman plugging the Big 10 Game of the Week during an NFL contest would be very attractive to the league.

Then there is the money.

Right now the Big 10 has a 10-year $1 billion contract with ESPN/ABC for football and basketball, and a 6-year $72 million pact with CBS for basketball. They want, and will get a sizable increase.

Just how far ESPN is willing to go to keep a Power 5 conference off of its major competitor remains to be seen. The Big 10 could even negotiate a contract that involves both ESPN and FOX.

What about the Big 12 and possible expansion? Conference Commissioner Bob Bowlsby has said that the current contract calls for a proportional increase should the league add two teams to get to 12.

Obviously ESPN's budget for rights fees is not about to go down. Meanwhile, fed by rising cable prices, the pressure caused by cord cutters will continue. SNL Kagan estimates that the wholesale cost per network on cable and satellite providers will increase 18% by 2018. That would mean that ESPN would cost $8.37 per month.

How Disney decides to address the slow death of the cable subscription business model that made ESPN the Biggest SOB in the valley will fundamentally change how we watch sports. I imagine that Collegiate athletic directors across the Power 5 Conferences, dealing with expanded budgets of their own, are anxiously awaiting the outcome as well.