WSJ Story On How The Watch ESPN App Will Determine The Future Of Cable/Sat TV

[Tugg Speedman]

The link has tons of interesting graphics/video/charts/audio and is much better formatted than below.  I recommend clicking through if you can.

http://online.wsj.com/news/articles/SB10001424052702304603704579326781949947414?KEYWORDS=espn

ESPN's Internet Rollout Tests Television Cash Cow
Sports Channel Seeks to Profit From Demand for Online Video Without Pushing Away Pay-TV Customers

BRISTOL, Conn.—In the control room of ESPN's headquarters, a row of screens shows video feeds going out to cable providers for each of its television channels. But a growing part of ESPN's future lies across the room, where a similar setup tracks transmissions to the Internet.

On a recent Saturday, technicians were busy streaming several dozen games, some at the same time as they were on television and others that weren't televised at all. Damon Phillips, in charge of the service, used a tablet computer to monitor how many people were watching online.

"I'm obsessed with this," he said, pointing to the usage tally, which he starts checking at 5:30 a.m. while on his exercise bike. "I look at it all day long."

The app, called WatchESPN, is part of an aggressive push by ESPN into online services as pay television matures. ESPN pioneered sports TV on that medium and for three decades rode a steady rise in U.S. cable and satellite TV subscriptions. These now have leveled off and appear to be contracting. ESPN is at the forefront of the TV industry's efforts to expand into Internet distribution.

The company, which generates about 40% of majority owner Walt Disney Co.'s operating profits, sees the app as a way to cash in on growing demand for online video. But with its TV offerings still lucrative, ESPN is walking a fine line, trying to avoid doing anything that might encourage customers to drop their pay-TV subscriptions.

It is a challenge others in the business also are wrestling with. ESPN's strategy is to allow only pay-television subscribers to stream games that air on ESPN TV channels.

The sports network has devised a complex business model. Although the app is delivered over the Internet, ESPN collects money for the app from pay-TV providers such as cable companies, which pay for the right to offer it to their customers. For ESPN, a second revenue stream comes from advertising on the app.

The WatchESPN app also includes a strictly online channel, called ESPN 3, that shows lower-profile sports such as rugby, polo and small-college athletics. For that, in most markets, users don't need to be pay-TV subscribers.

The dual strategy results from years of experimentation and debate inside ESPN, and in the industry more broadly, over how to deal with the saturation of the pay-TV industry and thirst for online video. Time Warner Inc. TWX +0.24% 's HBO, for instance, has said it might offer a version of its HBO Go app to Internet users for a subscription fee, depending how the pay-TV industry evolves, though for now HBO plans to continue limiting access to subscribers who pay for the premium channel.

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. Revenue from mobile advertising, while growing, isn't nearly enough to replace TV ad dollars. Media companies also would have to take on customer-service responsibilities now handled for them by cable and satellite companies.

Yet content providers face the reality of weakening pay-TV subscriptions. ESPN lost roughly 1.5 million subscribers between September 2011 and September 2013, according to Nielsen data provided by the company. Part was from dropped pay-TV subscriptions and part from downgrades to lower-cost packages not including ESPN. The company says the changes haven't affected its TV ratings materially.
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ESPN President John Skipper calls the losses "marginal," given that the sports network reaches into 98.4 million households. Still, he doesn't dismiss the threat.

"Pressure on the system provides peril for ESPN," Mr. Skipper said in an interview. "But ESPN, as long as the system doesn't break up, is in fine position." He said WatchESPN makes pay-TV subscriptions more valuable.

Several hurdles lie in ESPN's online path. Professional sports leagues, which already collect huge sums for TV rights, see an opportunity in the next decade from selling their digital rights or offering games via their own streaming-video services. For ESPN, acquiring streaming rights is complicated and becoming more costly.

Introducing WSJD, the Journal's new home for tech news, analysis and product reviews.

Pay-TV providers such as cable companies, for their part, are likely to push back as ESPN, which is already the most expensive cable-TV network, raises its prices to offer WatchESPN.

Limiting the online viewing of TV channels to pay-TV subscribers, a strategy also pursued by most other TV-channel owners, carries risks. Besides excluding customers who have "cut the cord," it excludes "cord nevers": sports fans, mostly younger, who have never subscribed to a cable or satellite service.

And if operators such as cable companies pass on to subscribers the fees ESPN charges them, the higher cost could prompt more to disconnect. Some pay-TV executives say rising prices are a major reason customers bow out.

Mr. Skipper, a 59-year-old former Spin magazine executive who took the helm of ESPN in 2012, acknowledged a "dissonance" between its instinct to disseminate its content as widely as possible and the usage restrictions designed to safeguard the core television business. "There's no denying there's a certain element of protection and defense," he said.
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Though the company has internally considered a stand-alone broadband offering, "it's not close yet."

As for what ESPN's endgame is, Mr. Skipper said the company plans a lot of online experimentation, but its priority is to protect pay-TV profits: "Our calculation right now is we're going to ride this. We're going to ride it as long as it makes sense."

ESPN still has growth opportunities in TV, Mr. Skipper added, including a new college sports network it is launching this year with the Southeastern Conference and expansion in Latin America.

ESPN first tried online distribution in the early 2000s, well before most other networks. Leading the effort was Sean Bratches, who dealt with cable and satellite companies. Known for his vast cuff link collection and coordinated ties and pocket handkerchiefs, Mr. Bratches cut an unlikely figure for a technology innovator.

He came up with an unorthodox initial business model for ESPN: It would charge the providers of high-speed Internet service a per-subscriber fee to make sports available online to their customers.

The idea faced opposition internally from executives who wanted a more traditional Web approach of giving away content while making money on ads. Mr. Bratches argued that ESPN could extend to the Internet its cable model of earning money from both ads and subscriptions. He prevailed, and in 2001 ESPN launched its first broadband service.

It struggled to gain traction. Some Internet-service providers balked, not used to paying for content. ESPN executives blamed the rough start also on their website's clunky design and lack of live events. To lift usage, they started putting online some games airing on their flagship TV channel.

But by 2010, when ESPN began a round of contract renewals with pay-TV distributors such as cable companies, the industry's subscriber growth had slowed sharply. Both sides worried that making TV content available online could encourage more pay-TV subscribers to disconnect. In negotiations with Time Warner Cable, TWC -0.63% ESPN hashed out a deal to combat that with the limit on online access.

The result was the WatchESPN app. Its simple design, which grew out of a paper sketch by Mr. Skipper, allowed tablet and smartphone users to tap on-screen boxes to play ESPN channels. It launched on mobile devices in April 2011.

The earlier broadband service, by then named ESPN 3, could be accessed through the new app, but phased out televised games. It has charted a new course as a place for thousands of events that the company has the rights to but that don't make it to TV, such as cricket and collegiate gymnastics. ESPN has enlisted some colleges to handle production of their own events, to expand offerings while keeping costs down.

Though ESPN 3 can be accessed without a pay-TV subscription in most markets, the company is careful not to market it as a product for cord cutters.

"We want to be conscientious that we don't overplay our hand," Mr. Bratches said in an interview at his New York office, stuffed with all manner of sports paraphernalia: books on Jerry West and Muhammad Ali, football helmets, a bowling pin, a punching bag and baseball bats.

The WatchESPN app has been downloaded 25 million times. Its viewership remains far below television's. Some 26 million people watched college football's national championship game Jan. 6 on television, but just 773,000 saw it online with WatchESPN.

Still, as ESPN has renewed deals with cable and satellite operators, it has cited the app as a justification for rate increases. Its flagship channel is already by far TV's costliest, at $5.54 a month, according to market researcher SNL Kagan.

Access to the app raises the price. Time Warner Cable and Verizon Communications Inc. VZ +0.38% 's FiOS service, which offer the app to their subscribers, pay ESPN 19 cents more per subscriber each month than does Dish Network Corp. DISH +0.14% , which doesn't support the app, according to papers from a court case involving ESPN and Dish last year. Dish is currently in negotiations with ESPN for a contract renewal.

DirecTV has balked so far at ESPN's asking price for streaming video access, said a person familiar with the matter. However it is likely to negotiate for those rights when its contract with ESPN expires at the end of this year.

Getting software engineers to move to ESPN offices in the sleepy Connecticut town of Bristol wasn't easy. A key hire last year was Ryan Spoon, an eBay Inc. alum and former venture capitalist, who has hired veterans of major Silicon Valley companies.

Now a team of ESPN engineers is developing algorithms to link online programming options to users' tastes and affinity for certain teams, sports or cities. ESPN executives have taken product advice from the likes of Apple Inc. AAPL +0.81% Chief Executive Tim Cook, a fan of the Auburn Tigers, and Google Inc. GOOG +0.05% Chief Business Officer Nikesh Arora, a fan of cricket.

In ESPN's control room, balloons on an overhead screen track how heavily WatchESPN is being used around the country, while analysts monitor bandwidth usage to make sure the video streams don't hiccup en route to users.

Getting streaming rights can be problematic. ESPN has had the right to televise Monday Night Football since 2006 and struck a deal with the National Football League in 2010 that allowed streaming of the game to desktop, laptop and tablet computers. Yet ESPN can't stream it to smartphones.

Mobile-phone rights to the Monday game weren't on the table when ESPN last renewed its deal with the NFL. Verizon owns the streaming rights to Monday night, Sunday night and Thursday night NFL games, and has just agreed to a four-year contract extension that will also allow people to watch Sunday afternoon home-market games on mobile phones.

ESPN keeps having to pay leagues more. In the contract it negotiated with the NFL in 2011, the network agreed to pay an average of $1.9 billion a year, up 58% from before. And last year, ESPN and Major League Baseball reached an eight-year deal that, at $700 million a year, was double the earlier price. Streaming rights were a factor in the increase, said a person familiar with the matter.

ESPN is working on perfecting sales of ads for the app. It says it sold app ads to some 200 brands in 2013. But these haven't been enough to fill every available ad break.

Partly that is because the technology to serve up ads into the app isn't yet very advanced and can't always find spots of the proper length to insert. When TV viewers see commercials, app users are sometimes shown filler material.

ESPN is talking to broadband providers about other Internet products, such as an ultra-high-definition version of its TV channels that would be offered only to people who upgrade to faster tiers of broadband.

"We innovate with the consumer in mind and with the philosophical default that we are going to adopt new things," Mr. Skipper said. "We are not going to resist."

[Tugg Speedman]

I don't mean to upset Chicos here ...

Cable/Sat TV seems to be suffering from the same fate that Blockbuster video stories did ... their product is way too expensive and technology is offering a much cheaper alternative.  At some point Watch ESPN, HBOgo or someone else will cut loose from Pay TV and offer their content on the net for a fraction of what it costs via Cable/Sat (because you have to buy a 100 channels via a basic package for $90/month to get it) .  When one goes, their will be a tidal wave to follow.  Cable/Sat will have to offer ala-carte pricing (pay $1 or $2 a month per channel only for the channels you want) which will destroy their profitability.

Everyone will get their content via the net and for $50 for apple TV or $35 for Chromecast they will watch it on the big TV in the living room.

Its coming and it cannot be stopped

[ChicosBailBonds]

I don't mean to upset Chicos here ...

Cable/Sat TV seems to be suffering from the same fate that Blockbuster video stories did ... their product is way too expensive and technology is offering a much cheaper alternative.  At some point Watch ESPN, HBOgo or someone else will cut loose from Pay TV and offer their content on the net for a fraction of what it costs via Cable/Sat (because you have to buy a 100 channels via a basic package for $90/month to get it) .  When one goes, their will be a tidal wave to follow.  Cable/Sat will have to offer ala-carte pricing (pay $1 or $2 a month per channel only for the channels you want) which will destroy their profitability.

Everyone will get their content via the net and for $50 for apple TV or $35 for Chromecast they will watch it on the big TV in the living room.

Its coming and it cannot be stopped

You're not upsetting me, you just don't have your facts straight.    Too many of you don't and haven't for years....it's like you want something to happen and then opine it is happening now.

First off, satellite hasn't declined....cable yes.  Satellite still growing, Telco still growing.  That error is repeated here and in the media so often it is staggering.  Can people not look at quarterly earnings reports?

Secondly, why do you think the product is expensive?  It's because of folks like ESPN that demand over $6 per subscriber PER MONTH for one channel.  I would suggest you re-read the article a few more times, and I would concentrate on a few key areas.  Let's take a company like Comcast and their 24 million subscribers.  Let's assume the average of 85% of their subscribers have ESPN (whether they like it or not).  That's $1.5B a year from Comcast alone.  Now add in all the rest.  For one channel.  Now, take it a la carte, and when Comcast, DISH, DTV, AT&T say by taking it a la carte it trips a clause that says you no longer get $6, you no longer get 85%....the money goes away, which means they have to get it online.  Except, online and a la carte, it's not bundled it so instead of getting that $6 from 85% of all those television subs, now you have to get $15 or $20 or $25 per month from 1/3 of them.  

Finally, will it happen eventually...I've never said it wouldn't, but to whom it happens is the key. HBO is a possibility, ESPN is going to be really really really tough.  They need guaranteed revenues to pay for those rights.  They have a REALLY REALLY big deal coming up with a certain provider right now.  Trust me, to get the deals they want, there are protections built in both ways for a reason.

I've known Damon Phillips who runs ESPN3 for a decade.  Co worker of mine in the past, played football at Stanford.  Smart guy, as is Skipper and many others I know over there.  They will test and continue to test, and for some they will make decisions that benefit them because they can't get the carriage they want.  For most, I chuckle at the pricing comments because they are the drivers of it and if they think people are upset at paying $65 a month today to get ESPN and 150 other channels, wait until they pay $20 or $25 a month just for ESPN on a network (broadband) that may or may not have a cap on it and may have excess charges for usage.  

Good luck

[ChicosBailBonds]

By the way Berg, we would welcome this is a heartbeat as I've said time and time again.  I would love to be able to sell ESPN separately and not have to pay all that money to them for customers that don't want it or don't watch it.

Would our revenues go down?  Yup.  Would our expenses go way down?  Yup.  Cable, Satellite, Telco charge what they do (like any sound business) based on their cost of goods and other expenses so they can make a profit.  When your cost of goods (programming in this case) is over $10 billion a year, well that means you best be bringing in something north of that to cover those costs.  Same reason why ESPN wants over $6 for their channel, because they keep saying yes to the NFL, MLB, NCAA, SEC, etc demands for their contracts.  They have to be covered.

[Benny B]

Finally, will it happen eventually...I've never said it wouldn't, but to whom it happens is the key. HBO is a possibility, ESPN is going to be really really really tough.  They need guaranteed revenues to pay for those rights.  They have a REALLY REALLY big deal coming up with a certain provider right now.  Trust me, to get the deals they want, there are protections built in both ways for a reason.

The real meat to this issue that everyone seems to be overlooking is the people at the center of the decision... e.g. Skipper, et al, and the role that they're playing as an inhibitor or innovator.  Consider this, these honchos (and their predecessors) have signed Lord-knows-how-many of these rights deals over the past few years when the cord-cutting "movement" was merely a concept.  The problem is that these contracts last into the new world order where cord-cutting will be a pervasive reality.

These smart guys (Skipper et al) are smart enough to know that ESPN's current business model must adapt or it will not survive in the future, but they can't simply abandon the current business model to be a first-mover because it would be financially devastating, and Mickey doesn't take too kindly to those who screw him over.

<a href="http://media.mtvnservices.com/mgid:arc:video:southparkstudios.com:192eb12c-ed01-11e0-aca6-0026b9414f30" target="_blank" rel="noopener noreferrer" class="bbc_link bbc_flash_disabled new_win">http://media.mtvnservices.com/mgid:arc:video:southparkstudios.com:192eb12c-ed01-11e0-aca6-0026b9414f30</a>

So you have a scenario where on one end of the spectrum you have long-term stability at the cost of short-term failure and on the other side is short-term profitability at the cost of losing your "worldwide leader" moniker within a matter of years.

It's a delicate balancing act whose outcome relies upon whether the smart guys can dismantle the house of cards cords (ha ha) one by one and rebuild it before the whole thing caves in on itself.  On the surface, we see the snail-paced implementation of HBO GO, WatchESPN, etc. while Hulu & Netflix are redlining their engines (which is nearly the polar opposite scenario but with the same consequences)... yet behind the scenes, you have a bunch of C-Suiters trying to decide between a legacy as an innovator or covering their own ass.

[jesmu84]

The real meat to this issue that everyone seems to be overlooking is the people at the center of the decision... e.g. Skipper, et al, and the role that they're playing as an inhibitor or innovator.  Consider this, these honchos (and their predecessors) have signed Lord-knows-how-many of these rights deals over the past few years when the cord-cutting "movement" was merely a concept.  The problem is that these contracts last into the new world order where cord-cutting will be a pervasive reality.

These smart guys (Skipper et al) are smart enough to know that ESPN's current business model must adapt or it will not survive in the future, but they can't simply abandon the current business model to be a first-mover because it would be financially devastating, and Mickey doesn't take too kindly to those who screw him over.

<a href="http://media.mtvnservices.com/mgid:arc:video:southparkstudios.com:192eb12c-ed01-11e0-aca6-0026b9414f30" target="_blank" rel="noopener noreferrer" class="bbc_link bbc_flash_disabled new_win">http://media.mtvnservices.com/mgid:arc:video:southparkstudios.com:192eb12c-ed01-11e0-aca6-0026b9414f30</a>

So you have a scenario where on one end of the spectrum you have long-term stability at the cost of short-term failure and on the other side is short-term profitability at the cost of losing your "worldwide leader" moniker within a matter of years.

It's a delicate balancing act whose outcome relies upon whether the smart guys can dismantle the house of cards cords (ha ha) one by one and rebuild it before the whole thing caves in on itself.  On the surface, we see the snail-paced implementation of HBO GO, WatchESPN, etc. while Hulu & Netflix are redlining their engines (which is nearly the polar opposite scenario but with the same consequences)... yet behind the scenes, you have a bunch of C-Suiters trying to decide between a legacy as an innovator or covering their own ass.

Ha. Not that I don't agree with you, but how many examples can you cite in our nation's history that says any corporation or large money-making entity has ever chosen long-term success over short-term profit/thinking. Make the money you can now and dump the problem on the future generations. It's the REAL American way!

[Tugg Speedman]

Ha. Not that I don't agree with you, but how many examples can you cite in our nation's history that says any corporation or large money-making entity has ever chosen long-term success over short-term profit/thinking. Make the money you can now and dump the problem on the future generations. It's the REAL American way!

Correct ... if ESPN and the other dinosaurs don't move fast enough, they risk someone else taking the business away from them.

And, yes, the bet is they will not move fast enough as that is what big companies do very well, fail to adapt to changing environments. 

[ChicosBailBonds]

As one ESPN exec told me at the BCS Championship game, (paraphrasing)....'yeah what a great idea it would be to push everything over to streaming services that are largely consumed by millenials who have no money, don't care for sports proportionally, think stuff should be free except for their $6 latte, have not one ounce of guilt stealing stuff they don't want to pay for....what a great way to pay for our sports rights we're on the hook for the next 15 years....give me the cyanide capsule now'

[akmarq]

As one ESPN exec told me at the BCS Championship game, (paraphrasing)....'yeah what a great idea it would be to push everything over to streaming services that are largely consumed by millenials who have no money, don't care for sports proportionally, think stuff should be free except for their $6 latte, have not one ounce of guilt stealing stuff they don't want to pay for....what a great way to pay for our sports rights we're on the hook for the next 15 years....give me the cyanide capsule now'

(paraphrasing) "Let's market this stuff to an age group we just acknowledged doesn't have money for it and then be mad when they figure out how to get it for free! Then we can blame them for the terrible contract the NFL talked us into!"

[ChicosBailBonds]

The real meat to this issue that everyone seems to be overlooking is the people at the center of the decision... e.g. Skipper, et al, and the role that they're playing as an inhibitor or innovator.  Consider this, these honchos (and their predecessors) have signed Lord-knows-how-many of these rights deals over the past few years when the cord-cutting "movement" was merely a concept.  The problem is that these contracts last into the new world order where cord-cutting will be a pervasive reality.

These smart guys (Skipper et al) are smart enough to know that ESPN's current business model must adapt or it will not survive in the future, but they can't simply abandon the current business model to be a first-mover because it would be financially devastating, and Mickey doesn't take too kindly to those who screw him over.

<a href="http://media.mtvnservices.com/mgid:arc:video:southparkstudios.com:192eb12c-ed01-11e0-aca6-0026b9414f30" target="_blank" rel="noopener noreferrer" class="bbc_link bbc_flash_disabled new_win">http://media.mtvnservices.com/mgid:arc:video:southparkstudios.com:192eb12c-ed01-11e0-aca6-0026b9414f30</a>

So you have a scenario where on one end of the spectrum you have long-term stability at the cost of short-term failure and on the other side is short-term profitability at the cost of losing your "worldwide leader" moniker within a matter of years.

It's a delicate balancing act whose outcome relies upon whether the smart guys can dismantle the house of cards cords (ha ha) one by one and rebuild it before the whole thing caves in on itself.  On the surface, we see the snail-paced implementation of HBO GO, WatchESPN, etc. while Hulu & Netflix are redlining their engines (which is nearly the polar opposite scenario but with the same consequences)... yet behind the scenes, you have a bunch of C-Suiters trying to decide between a legacy as an innovator or covering their own ass.

They also know they can't get the money they want outside of what they are doing.  This is why the SEC deal they are about to do with TELEVISION PROVIDERS is so big to them.  It's #1 on their hit list.

They are on the hook for billions and billions over the next 15 years.  They can't get the money from another source without triggering a collapse in their current streams.  That's their dilemma, and the irony of it is that many of these guys are doing it to themselves.  When Fox or CBS or ABC sells the rights to shows to HULU or Netflix for pennies on the dollar, but charges tv distributors 20X that to carry it a week before you can get it on those services....well what happens?  Some people say goodbye to TV and hello to Netflix.  OK, and by doing that what just happened?  The dollars you were getting from Time Warner, you just traded that in for dimes from Netflix.  Guess what, you do that too much and you go out of business.  Or, your deal with Netflix, etc now becomes equivalent where they are now paying you dollars as well.

The fine balance they have tried to strike is having their cake and eating it too.  They are trying to maximize revenue on first run programming by exacting billions of dollars from television providers and then getting millions on the secondary market with OTT (Netflix, etc).  That's all fine and dandy, but when you viewers start shifting, you trade dollars for dimes.  That's their conundrum and they created it....they can fix it....at their own peril.

Until then, if they want more subscribers, don't charge as much money which in turn means television providers don't have to charge as much money.  Econ 101.  Problem is, they are overspending beyond belief for rights fees, the addition of FS1 is only going to add to the problem and they can't make up the revenues in an a la carte model.  They just can't right now.  I've had at least 5 to 10 ESPN execs tell me this, but the proof is in their actions not their words.

You don't see them offering the SEC Network a la carte that will launch in August...right?  How about Longhorn Network?  Nope. 

At the end of the day, they got themselves into this bind, the magic bullet that people think is out there fundamentally can't support it as much as people want to believe in fairy tales.  Not today...someday maybe, but not today.  They cannot give up 85% distribution to customers (many of which could give a rip about sports) and maek the revenues equivalent through an a la carte system...the price elasticity doesn't hold.  It can work without question for very low cost channels, but the dilemma there is low cost channels are typically channels no one watches so they suffer the flip side on eyeballs.

Some day...perhaps.  For some networks, sooner than others. 

[ChicosBailBonds]

Their trick is to keep getting that $6.5 billion they currently get (which is growing due to rate increases for their programming) to pay for their rights.  A la carte isn't going to do that for them....not enough scale at the current amount they are paid, so that means charging a bunch more, which only drives down marginal subscribers....vicious cycle.

[ChicosBailBonds]

Ha. Not that I don't agree with you, but how many examples can you cite in our nation's history that says any US Gov't \ State Gov't corporation or large money-making entity has ever chosen long-term success over short-term profit/thinking. Make the money you program created today will ultimately be and dumped the problem on the future generations. It's the REAL American way!

FIFY

At least corporations are held responsible and can go out of business....unfortunately the gov't can't.

[ChicosBailBonds]

Correct ... if ESPN and the other dinosaurs don't move fast enough, they risk someone else taking the business away from them.

And, yes, the bet is they will not move fast enough as that is what big companies do very well, fail to adapt to changing environments. 

They OWN the rights.  Who is going to take away the NFL from ESPN, they own the rights.  Etc, etc, etc.  I don't know why this is lost on so many.  They own the asset for many many years to come. This is a situation where the hamburger stand on the corner is charging $2 a burger so a new one opens up across the street and sells burgers for $1 and draws away customers.  They own the rights, no one else can broadcast the rights to the content they own.

[Tugg Speedman]

As one ESPN exec told me at the BCS Championship game, (paraphrasing)....'yeah what a great idea it would be to push everything over to streaming services that are largely consumed by millenials who have no money, don't care for sports proportionally, think stuff should be free except for their $6 latte, have not one ounce of guilt stealing stuff they don't want to pay for....what a great way to pay for our sports rights we're on the hook for the next 15 years....give me the cyanide capsule now'

Great quote because it is all true ... and yes he should take the Cyanide capsule now ... this is his new business plan, not going back the other way so get used to it.

* The internet destroyed the music industry even though it had rights and content

* It destroyed the newspaper industry even though it had rights and content

* It is currently destroying the movie/scripted TV industry even thought they have rights and content.

* Cable/Sat TV, the primary delivery mechanism of Live (sports) and original (HBO) programming, you're next.

[Tugg Speedman]

They OWN the rights.  Who is going to take away the NFL from ESPN, they own the rights.  Etc, etc, etc.  I don't know why this is lost on so many.  They own the asset for many many years to come. This is a situation where the hamburger stand on the corner is charging $2 a burger so a new one opens up across the street and sells burgers for $1 and draws away customers.  They own the rights, no one else can broadcast the rights to the content they own.

Same thing was said about the music industry

Same thing was said about the newspaper industry

Same thing is being said about live TV/scripted TV

AFL/USFL/XFL ... we always try new football leagues.  Someone MIGHT try one with streaming.  Yes, no money, but if it takes hold, eats away at ESPN/NFL.

My Point is ESPN/networks paid way too much for the live sports.  Consumers push-back and the net/streaming is how they do it.

They also know they can't get the money they want outside of what they are doing.  This is why the SEC deal they are about to do with TELEVISION PROVIDERS is so big to them.  It's #1 on their hit list.

They are on the hook for billions and billions over the next 15 years.  They can't get the money from another source without triggering a collapse in their current streams.  That's their dilemma, and the irony of it is that many of these guys are doing it to themselves.  When Fox or CBS or ABC sells the rights to shows to HULU or Netflix for pennies on the dollar, but charges tv distributors 20X that to carry it a week before you can get it on those services....well what happens?  Some people say goodbye to TV and hello to Netflix.  OK, and by doing that what just happened?  The dollars you were getting from Time Warner, you just traded that in for dimes from Netflix.  Guess what, you do that too much and you go out of business.  Or, your deal with Netflix, etc now becomes equivalent where they are now paying you dollars as well.

The fine balance they have tried to strike is having their cake and eating it too.  They are trying to maximize revenue on first run programming by exacting billions of dollars from television providers and then getting millions on the secondary market with OTT (Netflix, etc).  That's all fine and dandy, but when you viewers start shifting, you trade dollars for dimes.  That's their conundrum and they created it....they can fix it....at their own peril.

Until then, if they want more subscribers, don't charge as much money which in turn means television providers don't have to charge as much money.  Econ 101.  Problem is, they are overspending beyond belief for rights fees, the addition of FS1 is only going to add to the problem and they can't make up the revenues in an a la carte model.  They just can't right now.  I've had at least 5 to 10 ESPN execs tell me this, but the proof is in their actions not their words.

You don't see them offering the SEC Network a la carte that will launch in August...right?  How about Longhorn Network?  Nope.  

At the end of the day, they got themselves into this bind, the magic bullet that people think is out there fundamentally can't support it as much as people want to believe in fairy tales.  Not today...someday maybe, but not today.  They cannot give up 85% distribution to customers (many of which could give a rip about sports) and maek the revenues equivalent through an a la carte system...the price elasticity doesn't hold.  It can work without question for very low cost channels, but the dilemma there is low cost channels are typically channels no one watches so they suffer the flip side on eyeballs.

Some day...perhaps.  For some networks, sooner than others.  

100% correct, these guys are doing it to themselves.  Now they cannot push forward with WatchESPN because they boxed themselves in.  Someone else will, get the first mover advantage, and take it away from them.

[jesmu84]

They also know they can't get the money they want outside of what they are doing.  This is why the SEC deal they are about to do with TELEVISION PROVIDERS is so big to them.  It's #1 on their hit list.

They are on the hook for billions and billions over the next 15 years.  They can't get the money from another source without triggering a collapse in their current streams.  That's their dilemma, and the irony of it is that many of these guys are doing it to themselves.  When Fox or CBS or ABC sells the rights to shows to HULU or Netflix for pennies on the dollar, but charges tv distributors 20X that to carry it a week before you can get it on those services....well what happens?  Some people say goodbye to TV and hello to Netflix.  OK, and by doing that what just happened?  The dollars you were getting from Time Warner, you just traded that in for dimes from Netflix.  Guess what, you do that too much and you go out of business.  Or, your deal with Netflix, etc now becomes equivalent where they are now paying you dollars as well.

The fine balance they have tried to strike is having their cake and eating it too.  They are trying to maximize revenue on first run programming by exacting billions of dollars from television providers and then getting millions on the secondary market with OTT (Netflix, etc).  That's all fine and dandy, but when you viewers start shifting, you trade dollars for dimes.  That's their conundrum and they created it....they can fix it....at their own peril.

Until then, if they want more subscribers, don't charge as much money which in turn means television providers don't have to charge as much money.  Econ 101.  Problem is, they are overspending beyond belief for rights fees, the addition of FS1 is only going to add to the problem and they can't make up the revenues in an a la carte model.  They just can't right now.  I've had at least 5 to 10 ESPN execs tell me this, but the proof is in their actions not their words.

You don't see them offering the SEC Network a la carte that will launch in August...right?  How about Longhorn Network?  Nope. 

At the end of the day, they got themselves into this bind, the magic bullet that people think is out there fundamentally can't support it as much as people want to believe in fairy tales.  Not today...someday maybe, but not today.  They cannot give up 85% distribution to customers (many of which could give a rip about sports) and maek the revenues equivalent through an a la carte system...the price elasticity doesn't hold.  It can work without question for very low cost channels, but the dilemma there is low cost channels are typically channels no one watches so they suffer the flip side on eyeballs.

Some day...perhaps.  For some networks, sooner than others. 

so basically, we're looking at another bursting and, just like always, joe 6-pack will be footing the bill in some way.

[jesmu84]

FIFY

At least corporations are held responsible and can go out of business....unfortunately the gov't can't.

Oh, I 100% agree the gov't does it. But don't act like corporations don't get rid of all the bad, and, generally, executives/management get out with tons. The banking crisis hurt a lot of wall street executives? Or did it hurt middle/low class laborers who had their retirement funds tied up with those firms?

Sure corporations can declare bankruptcy. And they get "punished." I wonder why the law says that individuals who declare bankruptcy can't get rid of their student loan debt. Who wrote those rules I wonder... (speaking of another bubble that's going to burst..)

[ChicosBailBonds]

(paraphrasing) "Let's market this stuff to an age group we just acknowledged doesn't have money for it and then be mad when they figure out how to get it for free! Then we can blame them for the terrible contract the NFL talked us into!"

I largely agree with you and that's the irony in all of this.  The mobility \ TV Everywhere concept sounds fine on paper and provides freedom and all kinds of other stuff, until you cut your throat with it with unintended consequences.  Some of these guys are just learning this now.

This is also why I indicated a few months ago some of the anti-piracy stuff coming down the pipeline and what the Feds are going to do is going to get a lot of people screaming at the top of their lungs NSA style. 

It is what it is, but even the Feds are feeling it from their wealthy campaign donors so if the campaign donors are saying money is being stolen through websites, etc, the hammer is coming.  Going to be fun ride.

[ChicosBailBonds]

Great quote because it is all true ... and yes he should take the Cyanide capsule now ... this is his new business plan, not going back the other way so get used to it.

* The internet destroyed the music industry even though it had rights and content  Incorrect.  Music has always had massive distribution in record stores, radio, etc.  If you want to watch Duck Dynasty, YOU MUST GO TO AMC.  If you want to buy an Eagles album, you could go to ANY record store, Target, Walmart, etc.

* It destroyed the newspaper industry even though it had rights and content.  Incorrect.  The newspaper industry does not have rights to report the news, the weather, etc.  It is ubiquitous. 

* It is currently destroying the movie/scripted TV industry even thought they have rights and content.  I wish I even understood what you are talking about here.

* Cable/Sat TV, the primary delivery mechanism of Live (sports) and original (HBO) programming, you're next.   Could be, but you continue to have so many facts wrong about this that its hard to understand where you are coming from.  Will the model change...sure.  When...who knows.  How much, that's the big question.  Will it become like music in the next 5 years....no.  What will the result be?  Things like Marquette games may not be on the air any longer (not worth spending money to produce and broadcast games when you can't get anyone to watch them in an a la carte world).  Fun times.

[ChicosBailBonds]

so basically, we're looking at another bursting and, just like always, joe 6-pack will be footing the bill in some way.

Joe 6 pack wants all this stuff and thinks it doesn't cost anything.  That's a big part of the problem.  If Joe 6 pack wants all these Marquette games on TV, it costs money.  If he wants True Detective, Game of Thrones, Walking Dead, etc created, cost money.  I suppose Joe 6 pack can ultimately demand player salaries come down, thus tv contracts can come down, rights fees can drop, etc, etc.  Or that actors take a pay cut, unions making the shows, etc.  On down the line. 

Lots of costs.   And yes, Joe 6 Pack will pay for that content.  Or we can go to a system with just a few choices, pay a lot less and you get what you get.

Now, I need to go pay my $226 cell phone bill that I just got....and bitch about those costs since adding my teenage son to the plan and his data usage.  Damn bastards.   

[ChicosBailBonds]

Same thing was said about the music industry

Same thing was said about the newspaper industry

Same thing is being said about live TV/scripted TV

AFL/USFL/XFL ... we always try new football leagues.  Someone MIGHT try one with streaming.  Yes, no money, but if it takes hold, eats away at ESPN/NFL.

My Point is ESPN/networks paid way too much for the live sports.  Consumers push-back and the net/streaming is how they do it.

100% correct, these guys are doing it to themselves.  Now they cannot push forward with WatchESPN because they boxed themselves in.  Someone else will, get the first mover advantage, and take it away from them.

I've answered this already, your examples are fundamentally flawed in so many ways.  Exactly what is someone else going to take away from them if they don't own it to take away?  Not sure AFL, USFL, XFL are such good examples, especially considering they floundered so badly on television how would they do streaming to an a la carte audience....crickets.

[ChicosBailBonds]

Timing is wonderful

http://images.burrellesluce.com/image/3570XN/3570XN_28589

[jesmu84]

Joe 6 pack wants all this stuff and thinks it doesn't cost anything.  That's a big part of the problem.  If Joe 6 pack wants all these Marquette games on TV, it costs money.  If he wants True Detective, Game of Thrones, Walking Dead, etc created, cost money.  I suppose Joe 6 pack can ultimately demand player salaries come down, thus tv contracts can come down, rights fees can drop, etc, etc.  Or that actors take a pay cut, unions making the shows, etc.  On down the line. 

Lots of costs.   And yes, Joe 6 Pack will pay for that content.  Or we can go to a system with just a few choices, pay a lot less and you get what you get.

Now, I need to go pay my $226 cell phone bill that I just got....and bitch about those costs since adding my teenage son to the plan and his data usage.  Damn bastards.   

Agreed. And personally, either money at the top needs to come down or money at the bottom needs to come up. What will happen when the low-end is no longer able to afford (assuming they can afford it now...) what the top-end is selling? Everyone suffers. Gotta nip this in the bud sooner rather than later.

Yes, you could bitch about your phone bill if the company you are dealing with is screwing you in some way. There are necessary costs and then just a bunch of waste and excess that might not need to be there. If you aren't constantly questioning your payments and looking into the companies where you're spending your money, you're going to get screwed at some point because as much as they say they care about the consumer, they care about making money.

[Tugg Speedman]

Let me try and say the same thing this way ...

What internet/website does it removes middle-men distributors from the process.  It allows the creators of content/original products to get paid directly from the users of that content/original product.  This allows Joe-sixpack to pay less for his product which is why he loves it.

First was music, as you point out it was highly distributive (buy an eagles record anywhere) and that made it the easiest to cut out the middle-men (goodbye record stories and record departments in Wal-mart).  That's why they went first.

Then came newspapers.  Today all a newspapers is its best few dozen decent reporters and columnists.  The middle men of distribution became redundant and unnecessary.  Good bye newspapers, they are now glorified blogs.

Right now its Brick & Mortar stores.  They are the distributors between the creators of original product and the consumer.  They are in trouble as this article shows (WSJ, Jan 16).

http://online.wsj.com/news/articles/SB10001424052702304419104579325100372435802

See Best Buy's Stock (BBY) see Sear's stocks (SHLD), see JC Penny (JCP) ... it a race to see who goes out of business first.  Cutting out the middle-man (department stores) makes products cheaper.  The model of brick & mortar retailing is in serious trouble.

Netflix offering scripted TV shows/movies for a fraction of the cost (as you noted above).  The middle-men of networks and movie theaters are being cut out and it lowers the cost.

I'm arguing the next middle-man to get cut out will be Cable/Sat. The producers of content will sell it via the net (WatchESPN, HBOgo) for less.  

Eventually even WatchESPN will go too.  So, who produces MU basketball?  MUTV, the costs are collapsing and the kids can do it was well as ESPN/Fox, with Homer/Mac doing the game.  MU/BE can sell it directly on the net cutting out the middle-man.  They get less per view but a much larger margin per viewer.

Now I understand that the middle-man (ESPN, Fox) has paid huge fees for the rights to these games.  They are going to get squeezed, and when they do, their middle-men (Cable/Sat) will be cut out.  

This is nothing but the new millennium business model.  The only safe job is the producer of original content that cannot be duplicated (i.e., a basketball team or conference), or a product that cannot be duplicated like a Telsa or an iPhone. That is worth something, actually a lot.  All the people/jobs that stand between that content/original product and the consumer are at risk. (why do you think car dealers are at war with Telsa?  Because they don's sell them via a dealer network showing that car dealers are unnecessary and they worries them ... a lot)

Every industry has this problem.

[ChicosBailBonds]

Let me try and say the same thing this way ...

What internet/website does it removes middle-men distributors from the process.  It allows the creators of content/original products to get paid directly from the users of that content/original product.  This allows Joe-sixpack to pay less for his product which is why he loves it.

First was music, as you point out it was highly distributive (buy an eagles record anywhere) and that made it the easiest to cut out the middle-men (goodbye record stories and record departments in Wal-mart).  That's why they went first.

Then came newspapers.  Today all a newspapers is its best few dozen decent reporters and columnists.  The middle men of distribution became redundant and unnecessary.  Good bye newspapers, they are not glorified blogs.

Right now its Brick & Mortar stores.  They are the distributors between the creators of original product and the consumer.  They are in trouble as this article shows (WSJ, Jan 16).

http://online.wsj.com/news/articles/SB10001424052702304419104579325100372435802

See Best Buy's Stock (BBY) see Sear's stocks (SHLD), see JC Penny (JCP) ... it a race to see who goes out of business first.  Cutting out the middle-man (department stores) makes products cheaper.  The model of brick & mortar retailing is in serious trouble.

Netflix offering scripted TV shows/movies for a fraction of the cost (as you noted above).  The middle-men of networks and movie theaters are being cut out and it lowers the cost.

I'm arguing the next middle-man to get cut out will be Cable/Sat. The producers of content will sell it via the net (WatchESPN, HBOgo) for less.  

Eventually even WatchESPN will go too.  So, who produces MU basketball?  MUTV, the costs are collapsing and the kids can do it was well as ESPN/Fox, with Homer/Mac doing the game.  MU/BE can sell it directly on the net cutting out the middle-man.  They get less per view but a much larger margin per viewer.

Now I understand that the middle-man (ESPN, Fox) has paid huge fees for the rights to these games.  They are going to get squeezed, and when they do, their middle-men (Cable/Sat) will be cut out.  

This is nothing but the new millennium business model.  The only safe job is the producer of original content (i.e., a basketball team or conference) that cannot be duplicated (or a product that cannot be duplicated like a Telsa or a iPhone).  That is worth something, actually a lot.  All the people/jobs that stand between that content/original product and the consumer are at risk. (why do you think car dealers are at war with Telsa, because they don's sell them via a dealer network showing that car dealers are unnecessary and they worries them ... a lot)

Every industry has this problem.

That's all fair and good.  Here's the problem....what you are really saying is get rid of the middleman for a different middleman.  Right?  Get rid of cable so I can buy it "direct" from the producer of the content.  Two things, that producer (A) doesn't own the delivery system to get it there (B) is in no control of the pricing of that delivery system (be it from Net Neutrality or data caps, etc)  (C) relies on the middleman to sell, service, bundle all these other channels (sometimes he has his own bundle) to consumers in a mass way.

So let's say all these current distributors go away. OK, you're now going to get ESPN through what?  Internet or some broadband mechanism.  Who owns those pipes?  You're paying them.  When your ESPN goes down...who you calling?  ESPN call center?  Hmm, doesn't exist today.  Or maybe you call your ISP, maybe it's a network issue?  Hmm.  Sounds like fun times for the customer and a lot of expense that doesn't exist today.

Your car dealer example, like the others, apples to pencils comparison.  You keep going back to hard goods, widget examples and that is fundamentally flawed.  Sure, Tesla (a HIGH PRICED UNIQUE vehicle) can do well with low volume, high priced sales.  No brainer.  A television network, cannot.  Just as Chevrolet (GM) cannot...they need mass distribution and they need a pipe for which to do so.  A network needs massive eyeballs for advertising revenue and subscription fees to pay for and\or create all that programming you want.  You want FS1 to carry Marquette games, well they pay the Big East a crapload of money to do so, but they can spread those costs out to many other components of their business because they have 90 million homes paying for it.  Now they sell it direct, do you think they are going to spend crazy money on smaller conferences or anything that isn't a slam dunk?  Not a chance in hell.

Or another way of saying it, that $11 billion ESPN relies on each and every year, they need to get it from somewhere.  They can get it from the 100 million homes they are currently in, each one they are paid on from that television provider.  OR, they can try to sell it direct (eliminate that middleman) and get what?  40 million homes?  50 million homes?  What about the guys in the sticks with DSL?  At 50 million homes they have to charge double to get the same revenue.  BUT, now they have to also have their own customer service departments, call centers, technicians....ah, costs they don't have at all now.  Which means they have to charge a LOT more than double.