My wish for 2011 is to see ESPN do something that would make cable and satellite television providers soil their trousers.
This might seem like a pipe dream, given how the Worldwide Leader thrives off the current cable TV carriage system. ESPN is projected to earn a jaw-dropping $5.27 billion in cable subscriber fees in 2010, compared to only $1.48 billion in advertising income. Those subscriber fees allow ESPN throw huge sums of money at pro leagues and college conferences, thus making its family of networks even more valuable to pay-TV subscribers. You want college football? ESPN practically owns it. College basketball? Up until the NCAA Tournament, ESPN has the bulk of it. Monday Night Football? The NBA? Major League Baseball? Tennis? Golf? The FIFA World Cup? Select Premier League matches? Yep, all on ESPN. They’ve got it, you want it, and the cable companies are happy to give it to you — so long as you’re willing to fund these other 98 channels, most of which you’ll probably never watch.
Even the WWL isn’t immune to current trends, though, and one major trend developing over the next few years is cord cutting. According to SNL Kagan, more than 335,000 customers dropped pay TV service over the last two quarters of 2010. That’s a net loss, as cable companies have lost many more subscribers than that to satellite and IPTV providers. However, nearly every cable, satellite and IPTV service is jacking up its rates in 2011 — partly in response to content providers demanding higher transmission fees. Those fees get passed on to consumers, whose only options are pay up or don’t — and with unemployment still high in the U.S. and services like Netflix and Hulu Plus creating viable alternatives for non-sports fans, “don’t” is becoming an increasingly popular option.
That doesn’t mean much to ESPN this year; those 335,000 customers represent a loss of only $1.3 million a month, and $15.6 million a year seems paltry compared to $5.27 billion. Cord-cutting is trending upward, however, and with non-sports fans growing tired of paying roughly $50 a year for sports channels they don’t want, cable companies are starting to test out sports-free cable packages in order to keep subscribers from defecting. That can’t make anyone in Bristol very happy.
It would seem, then, that ESPN would do well to get ahead of the curve and appeal directly to its core customers. There’s one man who can help them do that. And wouldn’t you know it? He’s on the board of directors of ESPN’s parent company.
Consider if you will — Apple spent years dismissing its first-generation Apple TV set-top box as a “hobby.” That all changed this year, however, as the Cupertino giant introduced a new Apple TV that’s much more competitive with rival set-top boxes from Roku and Boxee. Even with a limited number of features, Apple TV sold a million units in the 3 months since its introduction. Plus, since Apple TV utilizes the same operating system as the iPhone and iPad, an app store for Apple TV seems inevitable.
What could possibly be a more killer app for Apple TV than ESPN? And who possibly offer ESPN a more enticing deal than the CEO of a corporation that has, at last count, $51 billion in cash in the bank?
Imagine Jobs going to the rest of the Disney board with a simple idea: let’s make a complete ESPN app that will be the new centerpiece of Apple TV. It will include live streaming video of all ESPN channels, plus all the live and on-demand games on ESPN3. It will also incorporate ESPN radio broadcasts, audio and video podcasts, columnists, fantasy sports games and contests, and full integration with iPhones, iPods and iPads.
How much? $9.99 a month, with a twist — Apple will give the WWL a guaranteed payment for the first 10 million subscribers, up front, for the first five years. That’s roughly $1.2 billion a year. After that, Apple keeps only $1/month per subscriber. In exchange, Apple gets some exclusive rights, meaning no complete ESPN packages for Roku, Boxee, blu-ray players or Android phones.
You think there aren’t 10 million sports fans in America willing to dump cable TV if they could get a box that serves up ESPN and Netflix for a combined $20/month? Apple TVs would fly the shelves. What’s more, every other content provider would see the mass defections from cable to Apple TV and get their own apps ready for that box in a hurry, because that’s where the eyeballs are moving.
The other board members, of course, would remain skeptical of this plan. All they see here is one of their prize possessions cannibalizing its core business. At that point, Jobs would remind them that if a sports fan drops his cable service in favor of the ESPN app on Apple TV, ESPN would actually come out ahead — $4.40/month in carriage fees lost, $9.95/month in subscription fees gained. If your core business is going to get cannibalized, you might as well be the one to do it, right?
Then another board member would suggest that cable companies would revolt. But would cable companies actually cut off their customers from ESPN if they knew those customers would just cancel their TV service and use Apple TV instead?
Well, there’s the catch. In most cases, the cable companies are also the Internet Service Providers. Sure, some telcos offer fiber Internet service in many major cities, but guess what? They’re trying to sell pay TV packages, too. Those companies can easily do some dirty deeds on their networks and make ESPN on Apple TV look far worse than ESPN on their own TV services. The FCC might have something to say about that, of course, but this would only make the board even more skittish. Do they really want to put a $6.75 billion-a-year business in the middle of a giant net neutrality fight?
Even a billion-dollar guarantee from Steve Jobs wouldn’t be enough to convince Disney to be this progressive with ESPN. We’ll see an app, of course, but like ESPN3, it will probably be more of a complement to TV networks than a full-service replacement — like FoxSoccer.tv is to Fox Soccer Channel. FoxSoccer.tv is actually a better value than Fox Soccer Plus and would make a great Apple TV app, but it would never replace FSC, which is in 35 million homes and gets $0.16/month for every one of them. That’s a cool $5.6 million a month. In order to make up those numbers, Fox would have to find roughly 374,000 people willing to pay $14.99/month for a full-service TV app. That’s not likely, and besides, why try to replace one income stream with another when you could have both?
That sort of thinking is the reason why sports fans won’t be able to dump their pay TV services just yet. Cable and satellite companies know they can just keep on milking us for every penny, because the sports networks aren’t feeling the effects of the cord-cutting trend just yet. It would take something big — like the full-service ESPN app for Apple TV that I described here — to shake things up. I’d love to see that in 2011. I suspect, though, that I’ll still be wishing for this a year from now. More’s the pity for all of us.