ESPN’s Big Red Warning Sign

ESPN has been slowly and (somewhat) quietly investing in live Internet streaming of its sports events. Recently, that quiet broke with a series of interviews, notably in the WSJ this week. As the interviews highlight, and I find impressive, ESPN from an operational perspective treats its “WatchESPN” Internet app as on par, or nearly so, with its pay TV subscribers. The HQ control room in Bristol, CT, has parallel video feeds and trackers, and a specialized app for Damon Phillips, the head of WatchESPN, to manage the usage tally. The company put in the effort to recruit engineers to Bristol, CT, just outside of Hartford and nearly 2 hours from midtown Manhattan’s financial tech hotspot and even further from its tech startup centres.

However, ESPN continues to follow the HBO model: make the content available online, but only to those who already subscribe via pay TV.

It has never been surprising that cable TV providers, essentially regional distributors, have fought fiercely to keep content from being distributed without geographic boundaries – although it has created an entire industry of VPN providers. It is surprising that the actual content owners, like HBO, which produces more and more original content, and ESPN, which gets direct rights to sports events, would self-restrict!

A key insight into ESPN’s mindset, and a great big red warning sign, is provided by ESPN’s President, John Skipper. Despite shrinking pay TV subscriptions, growing “cord-cutters” but even more (in the article’s terms), “cord-nevers”, Skipper calls the losses “marginal… as long as the system doesn’t break up, [ESPN] is in a fine position.”

At least Skipper recognizes how much he depends on the pay TV system as a whole. But he is incapable of seeing that the system itself is showing foundational cracks. The reason for that, of course, is self-interest.

Most network owners, including ESPN, say the risk of cannibalizing their pay-TV businesses is too great to offer stand-alone online subscription services. It isn’t clear they could charge enough to be as profitable as deals with pay-TV providers.” [emphasis mine]

And there’s the rub. ESPN wants to maintain its current revenue stream and structure, while also getting whatever new marginal revenue it can from online subscribers. But it is unwilling to cannibalize its existing business to do so. This is a classic pre-cannibalization and pre-disruption (to overuse a heavily overused term) stance. It reminds one of the newspapers, along with many other industries that are disappearing or have disappeared.

A fundamental industry shift occurs when new models exist to bring previous services to customers at a lower price point with greater convenience. ESPN sees online as just an alternative to pay TV, one that will eventually catch up in terms of revenue per subscriber/viewing; the reality is a completely different model,  one that will draw customers away from pay TV for reasons of convenience and lower cost.

ESPN will either restructure itself to work with the lower revenue per viewing model, either by having greater viewings per event or lower costs to maintain margins… or someone else will do it in their place. Today, it is mostly pirate sites. Eventually a legitimate business will come along that will trounce ESPN.

Either you cannibalize yourself, or others will do it to you.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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