I've been writing a lot about Disney (DIS) of late and especially ESPN, which has dominated the news this week. ESPN's subscriber growth contracting has sent a shudder down the spines of all media companies this week, even though many made some recoveries towards the end of yesterday's session.
One of the points I made in my earlier piece was that, even though ESPN technically could move into Over the Top (OTT) any time it wants, as the incumbent there are many reasons holding it back from doing so.
ESPN makes about $10 billion a year in affiliate revenues from its deals with all the cable and satellite companies. Currently, according to SNL Kagan, it's paid about $6.61 per sub per month by the cable and satellite companies.
That's up from about $6.16 a year ago.
And it's going to keep going up in the coming years.
According to this report in Mediapost, ESPN is set to collect an average of $7 a sub starting in 2017 and $8 by the end of the decade.
Let's assume Disney CEO Bob Iger is right that OTT will not really take off in the next five years and that ESPN's subs actually grow (not shrink) to 100 million by the end of the decade. ESPN -- from just its core channel -- is set to collect $9.6 billion in affiliate revenues by the end of the decade.
With presumed increases for its other various networks (ESPN2, ESPNU, SEC Network, etc.), its total affiliate revenues are set to hit $12 billion by the end of the decade.
Turning your back on a dollar today for the chance of a dollar tomorrow is always a difficult proposition.
But as the Mediapost report also points out, ESPN has terms set out in its agreements with all the cable and satellite companies that likely penalize it if it starts to promote a direct-to-consumer service that essentially gives consumers an incentive to drop or reduce their existing cable bundle service.
So, Disney would worry that the moment it throws down and go direct to consumer, essentially it's putting at risk that entire $12 billion a year in affiliate revenues.
Ben Thompson at Stratechery has said, "What's the big deal because rabid sports fans -- maybe 20% of the current ESPN sub base -- would gladly sign up for $30 a month for an ESPN OTT service. If so, that's $6.7 billion in new subscription revenues compared to $12 billion."
And what would happen to ESPN's ad revenues if the service was only going out to 20 million households vs. 94 million?
And would I, paying $30 a month, rise up in revolt if I then had to sit through as many ads as I put up with in the so-called free cable world? I don't get ads on Netflix (NFLX).
Of course, the $12 billion in affiliate revenues wouldn't go away right away once Disney dropped the gauntlet. But you can see from the questions I've posed in the last few paragraphs why it's so hard for a successful company with a super-successful business model to suddenly turn its back on it.
If you were Iger, what would you do? You'd say no big deal. You'd say this transition won't happen as quickly as you think. You would want to see the cable bundle last as long as you possibly can.