ESPN parent Walt Disney Co. (NYSE: DIS) surpassed earnings expectations for the last quarter, the company announced yesterday. This was largely due to strong performances from its feature films and theme parks divisions, while operating income fell 3% in its cable networks division -- largely due to ESPN.
In an era of cord-cutting and skinny bundles ESPN is struggling to hold on to its audiences. The network has reportedly lost 12 million subscribers since 2011 though a combination of cord-cutters dropping pay-TV altogether, and slimmed-down channel packages offered by pay-TV providers which no longer include ESPN.
Like most cable networks, ESPN has generated revenue via two approaches: affiliate fees, paid by pay-TV providers for carrying the channel, and advertising. But these are related: If a pay-TV provider no longer carries ESPN or a household cuts the cord, ESPN loses its viewership. And smaller audiences result in less advertising revenue as well.
ESPN laid off more than a hundred staffers last month in an effort to cut costs, but the main cost of running a sports network is rights fees for major sporting events. Here, ESPN is stuck between a rock and hard place. If it pays top dollar for major sporting events then its costs will keep rising -- but if it doesn't pay, it will lose the principal draw for watching the channel.
ESPN is paying higher fees for its new NBA contract, and showed more college basketball games in this quarter, both of which added to its outlays. Still, those games helped with revenue: advertising revenue was up 5% for the quarter and even affiliate revenue rose, despite a loss in subscribers.
The company did point out that new digital technologies have been a relatively small part of the company's business but they are growing, and ESPN planned to target digital distribution aggressively moving forward.
Viewership for ESPN on the Watch Disney app and out-of-home audiences are having an impact, and the network's mobile apps now reach 23 million unique users, who spent 5.2 billion minutes with them through the quarter. Disney's recently acquired BAMTech will also be adding ESPN content via its OTT product later in 2017, and while there was no timeline or current plan to offer an ESPN branded OTT service, the company did not rule it out for the future.
It wasn't so long ago that ESPN was the jewel in the crown of cable programming -- the most expensive channel, commanding 20% increases at every contract extension with pay-TV providers. Certainly cord-cutting and skinny bundles are affecting its business approach, but there's also an argument to be made about sports viewership changing among younger viewers. Given the app-based, on-demand nature of most of their viewing, some are arguing that millennials are more keen to just get highlights and updates rather than sitting through entire games like previous generations. (See Is Sports Programming Losing Its Edge?)
The data on this is not really conclusive yet, especially with the US college basketball tournament (NCAA March Madness) surpassing previous viewing records. But if this is the case, ESPN will need to change not only how it distributes content, but the very nature of its coverage. (See 'March Madness' Helps Trial New Features.)
Unfortunately, companies like Facebook , YouTube Inc. and Snapchat are probably better suited to providing that kind of experience and have brands that are better associated with it as well, than a sports broadcaster.
At the same time, not everyone is a young millennial. There is a risk of forgetting that even though the market may be moving in a particular direction, there is a large base of "traditionalist" TV viewers with whom ESPN has strong affiliations. Developing a strategy that maintains -- or even deepens -- those relationships, while at the same time building products and new relationships with younger viewers on digital platforms, could put ESPN back on top again. That's not easy though: It would require a very carefully balanced approach from the network.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation