Launch of ESPN’s Flagship DTC Service Sets Stage for Mergers, Acquisitions, & Alliances

Launch of ESPN’s Flagship DTC Service Sets Stage for Mergers, Acquisitions, & Alliances

ESPN announced it will make its linear networks available via a new direct-to-consumer streaming offering –aptly named ESPN– this fall. Fans will have the ability to select from a pair of ala carte subscription plans or bundle the service with Disney+ and Hulu inside of an ‘enhanced’ ESPN app.

The move is an attempt by The Walt Disney Company (NYSE: DIS) “to adapt to a digital distribution environment that features no commitments, low switching costs for the consumer, and has [entire content libraries] available in a single convenient location,” media consultant Patrick Crakes said.

The problem is the only way for ESPN, or any other cable network, to become profitable with a streaming service is to cut costs and/or force the consumer to pay a lot for the offering. And no single media company has enough programming to do the latter at a level necessary to maintain programming (and programming costs) as if they were still in the old monopolized system.

“Bundling is the way you get more digital scale and do it at a price that enables strong margins,” Crakes said.

But to re-bundle effectively, media companies must have the requisite assets. Soon Disney will.

Once ESPN DTC “is built, it sets the stage for all sorts of mergers and acquisitions and alliances,” Crakes said. 

It’s not difficult to envision a future landscape where fans can cobble together bundles from a collective of 20+ content services (think: WBD and Fox’s sports programming or DirecTV’s sports package) and service offerings (think: broadband, digital security, or robo-taxis)–each with ESPN DTC at the center of it.

Technically, Disney’s bundling experiment kicked off with the Fubo merger earlier this year (Venu Sports was scrapped before it could off the ground). 

“That crossed the Rubicon for them,” Crakes said. It was DIS publicly saying, “we [need to] build out our digital distribution assets so they can be [packaged] with content and services outside the company, [let’s] bundle what we can internally, and really get aggressive with the strategy.”

There’s no more aggressive move for DIS than taking ESPN direct-to-consumer.

The cable network is “the cornerstone of the pay TV business,” Crakes said. “The biggest brand in the most important content genre…and it still makes most of its money from pay TV bundles.”

ESPN plans to charge fans $29.99/mo. (or $299.99/year) for ‘everything it has to offer’ or $11.99/mo. for a select amount of content. 

Those price points are attractive in the context of DTC sports streaming offerings. NESN commands $29.99/mo. and provides far less programming. 

However, to casual fans or observers, ESPN’s all-in figure likely appears rich. For context, consumers can get the basic tier of Hulu with Live TV, which includes ESPN and 90 other live and local channels, for just ~$50 more/mo. ($81.99). 

In other words, “it’s going to do as well as the other sports-centric DTC offerings have,” Crakes said, which is not particularly. “You’re not going to see massive subscription additions.”

Certainly, not enough to offset the ongoing atrophy in the established pay TV system.

And that’s before the price point inevitably rises.

“Disney has to keep [DTC] from competing with pay TV,” Crakes said.

To do that, the offering likely must cost between $40-$50/mo.

Sports fans will be able to reduce the price of ESPN’s DTC offering by bundling it with other Disney programming. A package with Disney+ and Hulu can be purchased at launch at a special price of $29.99/mo. for the first 12 months (regularly: $35.99/mo. with ads).

But all of that is beside the point. 

DIS “doesn’t necessarily have to sell a bunch of subs in the next couple of years for ESPN DTC to be successful,” Crakes said.

Its larger goal is to begin experimenting with re-bundling content, specifically beyond the Disney portfolio.

“Inside some of the MVPDs, like Spectrum-Charter, customers will likely be able to get ESPN DTC at some kind of discount if they are broadband customers, which is something that was secured with pay TV distributors who are also broadband providers in the Disney resets two years ago,” Crakes said.

Those companies want customers to remain inside their systems and having additional DTC assets to offer at a reduced rate makes them stickier.

So, what does success look like?

“Hopefully, someday, this channel brand will be a key part of several different types of bundles that allow for some recapture of scale at price,” Crakes said. It's probably "paired with other company's DTC assets, including some services, and that gets the company to a good margin. That gets it in a better place.”

But the new system still isn’t going to be as profitable for rights owners as the old natural monopoly was, at least not in the short-term. And that means ESPN is likely going to be buying fewer rights packages and spending less on what it does purchase in the years ahead (perhaps outside of select properties at the top of the value chain).

“It also means the rate of media rights growth probably tapers off for most of the top leagues; in some cases, significantly,” Crakes said. “If the streamers do flip the table over [come] 2030, they’re not going to [do it] for anything other than the NFL. They simply don’t need to.”

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