Last August, this headline from the Washington Post shook the college sports world:
Now admittedly, the headline is a bit more hyperbolic than the article is, but it paints a picture of a company trying to navigate the future world with a diminishing subscriber base. The article cites the lawsuit ESPN filed against Verizon (that I wrote about in April 2015) and the implications the decision would have on Disney.
In short, Verizon tried to create a “skinny package” that had just basic channels for a lower price that left ESPN, and all sports channels, out of that package. Instead you would have to pay $10 a month for the ala carte sports package. Essentially it was saying the people who want sports should pay for sports. This is the antithesis of ESPN’s carriage rate dependent business model, so ESPN sued.
So, that leads us to this week. On Tuesday ESPN and Verizon announced they had reached a settlement. The terms were undisclosed but anybody reading between the lines can see a clear loss for Disney and ESPN. Essentially, Verizon changed its skinny package that was a low base, but included a bunch of $10 category add ons, to now it is 2 $65 “Essential Packages”. Both include the basics and locals, but one includes channels like A&E, Fox News, Discovery, TLC, Spike, History, Lifetime, Oxygen, Hallmark with more movie and variety channels, while the other includes a sports heavy package. The good news for everybody is we all get the shopping channels, so you really can’t make a bad choice.
So ESPN claims it is happy with the new packages and Verizon claims the lawsuit had nothing to do with them changing their skinny package mostly based on ala carte, to a 2 separate, higher priced, but more robust offerings. Both ESPN and Verizon are being misleading with those statements. In the end, Verizon threw ESPN a bone and tied their channels to a bunch of other basic channels. This forced them to raise the price of the original skinny package to $65 so they could include ESPN and all the sports channels, but Verizon got what it wanted all along – the ability to offer a extensive, basic package that didn’t include any sports channels. Look at these two packages. If you don’t like or need sports, its a no brainer which one is a full package of the best channels, especially for a family. While the Sports Essentials Package is great for a sports lover, it is a pretty sparse lineup for the ones who don’t worship sports and you can clearly see the expense of sports with the non sports option offering almost 20 more channels total.
This is what Verizon (and the rest of the cable industry) wanted. This particular fight isn’t about offering the customer a cheaper package, this was about regaining leverage over ESPN in an era where big carriage rate cable channels are losing their luster as the industry shifts to a new online reality. Due to ESPN’s business model of relying on carriage rates over advertising, nobody is having a harder time transitioning to this new ad/ratings based online reality than ESPN, as we have seen them cut back drastically this year. This settlement was about saving face for ESPN. If you look at those two packages, and look at that first one, it is clear ESPN is now ala carte. If ESPN wants back on the basic package, they can now talk about reeling in those carriage rates and this will apply to all of their channels including conference networks. This is the leverage Verizon wanted, no matter the friendly spin coming from the PR statements. They get to offer an affordable Essentials Package without ESPN and sports channels. It wouldn’t be a stretch to assume other companies will be rolling out similar packages in the wake of this settlement.
Unfortunately for ESPN, Tuesday still had about 16 hours left to deliver bad news when this headline dropped later in the day:
The relevant information (highlight mine):
Revenue for the media networks unit, Disney’s largest business division that runs ABC, ESPN and other TV networks, was flat at $5.8 billion. The unit’s cable networks business saw its revenue decline 2% to $4 billion but operating income rise 12% due to higher affiliate fees ESPN collected from pay-TV companies.
But ESPN’s higher affiliate revenue derived from rising rates, not improved ratings. Mirroring the trend it saw last year, its subscriber base fell again during the quarter. [highlight bgcolor=”#DDFF99″ txtcolor=”#000″]ESPN’s ratings have been a concern for investors, contributing to Disney’s falling stock price for much of last year. [/highlight]After the first quarter, Disney chairman and CEO Robert Iger said ESPN’s ratings were on the rebound. And ESPN also settled its year-long lawsuit with Verizon over Verizon’s new TV channel bundling program that left out ESPN from a base package option.
Now, obviously ESPN is going to spin this as a positive, but as a wise man once said, “You don’t need a weatherman to know which way the wind blows.” The last sentence I quoted from the article above, and as I alluded to last April, the lawsuit with Verizon would determine if ESPN could be sold outside of the basic package. As you can see in the two options above, one is a very good deal for the non sports lover. This is really all the cable industry wanted. They didn’t want to make life hard for sports fans, but they also wanted to offer a more complete lineup at much lower prices by leaving the sports channels out for those who have little interest in watching sports. Judging by ESPN’s ratings, a very small percentage of the 90 million people forced to subsidize their channel actually watch it. My guess is an HBO pay channel model or pay per view future for ESPN is closer than you think. I ended my article about the impending lawsuit 13 months ago with the words, “game on” but I think this is a more fitting conclusion: