Placing ESPN On Sports Tier Would Harm Pay-TV Ecosystem: Analyst

Placing the family of ESPN networks on a sports tier would not only be pricey for fans, but for the pay TV industry as well.

Those were among the conclusions drawn by Needham analyst Laura Martin in her “Future of TV” report.

Martin said that research shows that if the sports giant were unbundled from the rest of the pay TV industry’s programming packages, only 20% of subscribers would purchase the networks. She estimated ESPN’s combined annual revenue at some $10.2 billion, based on affiliate fees of $7.2 billion (100 million households at $6 per month) and ad revenue of $3 billion.

If only one in five households – “super fan homes,” she labeled them – purchased the ESPN suite of services, there would have to be a five-fold jump from current monthly fees of $6 to some $30 in order for the programmer to maintain its aforementioned annualized revenue level. The steep hike would be needed to offset the drop in ad revenue, which would result from having a much smaller potential audience to draw from.  

In turn, that could result, Martin contends, in many ESPN subscribers punting on their entertainment packages to the detriment of the pay-TV universe overall.

"If sports leave the bundle, we estimate that many of the 20 million households that are heavy sports viewers today would disconnect the remaining entertainment bundle, thereby further pressuring ecosystem profits," Martin said, who estimated the industry would lose $13 billion in annual revenue from unbundling, $10 billion on the subscription side.

Any move toward a la would prove even more costly for consumers who would access to far less content than under the present package system.

"Unbundling dwarfs any other risk to the TV ecosystem, as we calculate that 50% of total TV ecosystem revenue (about $70 billion) would evaporate and fewer than 20 channels would survive in an à la carte world, where consumers are required to bear 100% of the cost of the channel," said Martin. "Today, advertisers bear about 50% of TV content costs."

What’s the answer, then, to the problems of rising programming costs? While she didn’t necessarily furnish specifics, bundling remains Martin’s preferred option.  

“These are complicated questions, but our answer is to find a negotiated solution that allows the bundle to grow, not shrink. A key skill set of every participant in the TV ecosystem is negotiating skills,” according to Martin. “The rights deals signed today can fill a room with paper. We think the best solution to this hard problem is to find a negotiated compromise that allows both content and distribution to win and the bundle to stay intact, or grow. We can find no math where unbundling is the best economic answer.”