Are TV broadcasters swapping pay TV dollars for streaming pennies?

TV broadcasters are moving to streaming delivery. But are they swapping a business model that guarantees them handsome profits for a streaming business with no guarantees at all?

At the CTV Brand Suitability Summit on Tuesday, November 16, 2021, my podcast partner Will Richmond of VideoNuze asked Michael Nathanson of MoffettNathanson an interesting question. He asked which companies were well-positioned and which were not in the connected TV market. Mr. Nathanson highlighted the traditional TV providers that moving into streaming and posed the question:

“Is this a better business than the one they are leaving?”

For a company like Disney, this is a $100 billion question. By the end of the decade, it is a pretty good bet that virtually all TV viewing will be streamed. Disney realizes this and is investing heavily in establishing its presence in the streaming world, with Disney+, Hulu, and ESPN+. Just before the launch of ESPN+ in 2018, former Disney CEO Bob Iger acknowledged that streaming is the future of ESPN:

“Over time, our intention would be for that app to be the app that people experience ESPN on.”

So, what does Disney have to do to replicate pay TV ESPN revenue online?

ESPN license revenue
Disney’s most valuable pay TV property is ESPN. Four years ago, $9 of every pay TV customer’s monthly subscription went to Disney in licenses fees for ESPN, ESPN2, ESPNU, and SEC Network. Since then, average subscriber fees have increased by 12%.[1] Today, Disney is likely receiving at least $10 a month for the same channels, assuming it won the average fee increase from operators.

How much are those license fees worth? At the end of the second quarter of 2021, there were 74.3 million cable, satellite, and telco TV subscribers in the US and 11 million vMVPD subscribers. At $10 per subscriber per month, Disney earns $10 billion per year in pay TV subscriber fees for the four ESPN channels.

Estrong>ESPN+ subscription revenue
ESPN+ recently raised monthly subscription rates from $5.99 to $6.99 a month. However, many people get it in a bundle with Disney+ and Hulu for $13.99 per month. Taking bundled pricing into account, Disney reports average revenue per unit (ARPU) for ESPN+ is $4.74. Since there are 17.1 million ESPN+ subscribers, Disney earns just under a billion dollars per year from the service.

Over the next few years, more premium sports will begin to appear in ESPN+. For example, starting in 2023, all NFL games that ABC affiliates and ESPN broadcast will also be available to stream live on ESPN+. As more premium sports become available, ESPN+ subscribers will grow. Perhaps by 2025, ESPN+ subscribers will double, to reach 34 million. If that is the case, to replicate the current ESPN pay TV license revenue, each subscriber must pay 5-times more, or $25 a month.

Can Disney persuade 34 million people to pay $25 a month for ESPN?

No revenue guarantees in streaming
The complete revenue picture for ESPN+ is more complex than this analysis portrays. The service receives a share of pay-per-view events provided by UFC, for example. It is also running pre-roll ads against some content.

However, my simplistic analysis illustrates the challenge faced by TV broadcasters in transitioning to streaming. The true cost of ESPN was hidden in the pay TV subscription fee. People that rarely or never used the channel were forced to pay for it. In the streaming world, neither of those conditions will stand. People that aren’t interested in sport can avoid paying for it. And people that are interested in a single sport can cancel their subscription when the season ends.

Mr. Nathanson is right to wonder if broadcasters like Disney are moving to a less lucrative model with streaming. For the first time, consumers get to assess the true value of ESPN to them. There are no guarantees their value assessment of the content will match Disney’s. Moreover, it could be that TV broadcasters are swapping pay TV dollars for streaming pennies!

In Q2 2017, Comcast paid $3.2 billion in license fees. It paid $3.6 billion in Q2 2021. nScreen Media