Last year ESPN lost eight million cable and satellite subscribers, finishing 2021 with around 75 million total subscribers. That eight million subscriber loss, an average of nearly 22,000 people a day, represented 10% of ESPN’s overall subscriber base and accelerated a calamitous decline from over 100 million subscribers just over a decade ago.
The loss of those eight million subscribers will cost the network roughly a billion a year in recurring revenue across all ESPN network properties.
The number, which was released by the company itself just before Thanksgiving in late November of last year, escaped most major media attention, despite representing the largest yearly subscriber loss in ESPN history. I flagged it back then to write about, but waited until now because I was intrigued to compare the interplay between ESPN’s linear cable channel and the ESPN+ streaming service it has also launched, which ESPN is claiming will save the company.
I’ll get to that new streaming service in a moment, but I’ve been writing about ESPN’s major cordcutting issues for years. In fact, back in 2016, six full years ago, I forecast that ESPN would finish 2021 with 75 million subscribers.
At the time I made that forecast almost no one in sports media believed cordcutting was going to be a threat to ESPN’s future business. You can read my article from 2016 here.
Six years later, if anything, ESPN’s future as a standalone cable entity is even more dire. Even if most still haven’t realized it yet. Why? Because streaming isn’t going to save ESPN’s business either, no matter how much bragging to the contrary company executives attempt.
Let me explain the basic math here and show you the problems that are destined to arise for ESPN in future years.
First, let’s start with ESPN’s basic business — ESPN charges every ESPN subscriber around $10 a month in 2022 for a cable and satellite subscription across all ESPN cable properties, with the lion’s share of that cost coming from ESPN itself.
That $10 a month, multiplied by 12, means each and every single one of you reading this right now who has an ESPN subscription is paying the company roughly $120 a year. ESPN also gets money for ESPN2, ESPNU, and the SEC Network, but these are comparatively smaller ventures with much less revenue being produced than ESPN. (According to the most recent SNL Kagan estimates there are roughly 75 million ESPN2 subscribers, 54.9 million ESPNU subscribers and 51.2 million SEC Network subscribers.)
Remember that only a fraction of cable and satellite subscribers even watch ESPN so, honestly, the cable bundle is a great deal for sports fans. Because ESPN, which is by far the most expensive, cable and satellite channel out there, is using all the money they make off non sports fans to buy up sports rights without charging all sports fans full freight to support these games.
If cordcutting hadn’t happened then ESPN would still have 100 million subscribers and they would have done $12 billion in revenue in 2021. But cordcutting has happened in a big way and instead ESPN will do roughly $9 billion in cable and satellite revenue instead. And that $9 billion is heading down in a big way.
How low will it go? We don’t know. There seems to a consensus that sports is helping to set a floor in the number of cable and satellite households out there and that consensus appears to be that around 50 million subscribers is the floor. Assuming that’s right then in the space of about twenty years ESPN’s business will have been cut in half, from 100 million cable and satellite subscribers to 50 million subscribers. That is, what projected to be a $12 billion a year business will become a $6 billion a year business in the next five years.
And, again, that’s assuming the consensus is correct and the subscriber floor is truly 50 million. (The consensus view is that ESPN will lose around 5 million subscribers a year between now and 2030ish, eventually settling at a floor of 50 million subscribers.) What’s important to note is that ESPN would be losing money hand over fist if this, the consensus view, occurs. Because as ESPN’s revenue declines the amount it can afford to pay for sports rights, at least if profitability is the goal, will decline substantially too, meaning the only reason people subscribe to ESPN, for the games, would be even less of a value proposition.
This also raises larger important questions. Namely, why in the world does Disney, ESPN’s parent company, want to own ESPN? Disney’s entire business model is about owning big branded content for life. Your kids watched “Frozen” and your grandkids probably will too. That’s because a movie like “Frozen” retains value forever.
The same is true for the Star Wars films, for the Marvel movies, that’s the entire premise behind Disney+. But sports are different. You watch a game one night, which Disney/ESPN pays to license from the leagues, and then it’s gone forever. Almost no one will ever watch it again. The library of old games just has limited, if any, value. Sports is all about what’s happening now and ESPN doesn’t own that content.
If ESPN owned the UFC, WWE, the NFL, MLB, the NBA, you name it, then their business would be similar to what Disney is doing elsewhere. But right now it isn’t a similar business at all.
With almost all their other rights Disney owns, with ESPN, they rent. So the biggest question is why does Disney even want to own ESPN? The smartest play, honestly, would be to spin ESPN off as a standalone business, potentially to a sports gambling company. But given the drastic declines in sports gambling company values Disney may have missed that window.
Regardless, now you’ve got a rough overview of the basic business model and why it’s in trouble. (The same issues apply for cable and satellite in general, FYI, but many of these cable networks have less to fear because their programming costs are substantially lower.
Take Fox News, CNN or MSNBC, whichever of the news networks you’re interested in. Their news programming cost a pinprick of what ESPN does because no one has exclusive rights to news programming. It doesn’t cost that much to react to the news, there aren’t multi-billion dollar rights fees. Even in a cable marketplace with just 50 million subscribers these networks will still be very profitable.
Less profitable than now? Sure. But they don’t have to pay billions of dollars for the NFL like ESPN does, the news isn’t copyrighted and licensed like sports rights are. So sports are, from a business model, uniquely susceptible to cordcutting.)
So what’s the plan going forward then for Disney?
First, I’m not sure there is much of one. I think ESPN knows they are in trouble in the cable and satellite space and I think they are hoping to ride out a slow decline in their business and bleed out as much profitability as they can in the meantime.
Second, to the extent there is a plan, it’s mostly tied up in a totally outlandish idea that no one with a functional brain should believe. Which is, not surprisingly, why so many in sports media buy it. That idea? That ESPN will just transition from a cable and satellite network to a streaming service, ESPN+, and make money that way instead.
Here’s what Disney CEO Bob Chapek said last week about ESPN’s plans on streaming.
“It (ESPN+) will be the ultimate fan offering. It will appeal to superfans that really love sports, and I think there’s nobody but ESPN who could frankly pull that off.
“We don’t have a lot of specifics when it comes to structure, but we do believe that because sports is so powerful — in fact, in the last quarter, 46 of the top 50 most-viewed programs on linear TV were sports.” Pressed for specifics, Chapek said, “We’re not ready to share the specifics of our models in terms of how it would take for us to reach profitability on that or the impact it would have on our linear business.”
Of course he’s not prepared to do this. Because none of the models work. ESPN’s the Titanic and Chapek is essentially rearranging the deck chairs. Why is streaming not a viable option for ESPN? First, ESPN’s existing cable contracts don’t allow them to move their top programming — the college football playoff, Monday Night Football, and the NBA playoffs for instance — off cable and on to streaming.
That is, you can only stream these big events by first having a cable and satellite subscription. (How many of you reading this right now are frustrated by how often you have to put in your cable subscriptions to stream sports?) So ESPN doesn’t have the contractual rights to put the events that air on ESPN and ESPN2 on to ESPN+.
The cable companies would revolt if they attempted to do so. What would that revolt look like? They’d put ESPN in a premium pricing tier and overnight tens of millions of subscribers would vanish.
The result? ESPN+ only airs programs that don’t air on ESPN’s cable and satellite properties. It’s the appetizer, not the main course. So the first major problem is, ESPN+ can’t carry all the programming that fans want to watch without first destroying the cable and satellite bundle. And even if they could, the second major issue here is ESPN makes far less off ESPN+ subscriptions than they do off ESPN cable and satellite subscriptions.
How much less? Last week ESPN released their ESPN+ subscriber numbers so far through the second quarter of 2022. And those numbers while growing, are a pittance, just 22.3 million subscribers currently have ESPN+. And those subscribers are only paying an average of $4.73 a month. (Many of these “subscribers” aren’t real subscribers either, they are included in rolled up bundled streaming options that are providing ESPN+ at virtually no cost.) And the streaming business in general is still producing a massive deficit, Disney lost nearly a billion dollars in the second quarter on all its streaming offerings.
In years past the growth rate of streaming was exciting enough that investors didn’t care about these losses, they just focused on subscribers. That was the Netflix business success story.
But the problem is Netflix, which announced subscriber declines last month, appears to have reached the full extent of its addressable streaming audience. And they did it far sooner than anyone expected. So will Disney+. Which is why Disney stock is trading lower today than it was five years ago in 2017.
Streaming, in other words, was supposed to be the life raft that saved the cable and satellite business. The idea was that just as companies like ESPN were about to go under water, ESPN would just step from cable to streaming, which would be a new, reliable boat. The business would be fine.
But increasingly it’s looking like there are two sinking boats instead of one, both cable and streaming are taking on water. And all you’re doing as you attempt to step from one boat to the other is changing your view as you go down.
Worse than that, the shift to streaming may be hastening the decline in the cable business too because consumers only have so much money to spend on entertainment and in attempting to get them to sign up for streaming you are trading a profitable business for an unprofitable business. All the streaming services, instead of being life rafts for sinking cable businesses, are actually making both boats sink faster.
Now let me explain the basic math on streaming the models that Disney CEO Bob Chapek says he isn’t ready to share yet.
Right now ESPN makes roughly $5 a month on its average ESPN+ customer. That equates to roughly $1.3 billion a year in revenue. Which sounds like a lot. Until you realize that’s less than 1/8th the revenue ESPN produces off the ESPN channel by itself. In fact, ESPN+ makes less than half of what ESPN pays for Monday Night Football every year under its new deal. (Monday Night Football costs ESPN $2.7 billion a year). Indeed, ESPN makes less on ESPN+ than it pays the NBA every year. (The NBA makes $1.4 billion a year and is going to want a massive increase in its new deal which is up soon.) It’s likely that streaming revenue for ESPN represents substantially less than 1/10th the revenue produced by subscriber fees and advertising dollars across all ESPN cable properties.
So if you combine ESPN’s sports properties both cable and satellite and streaming revenue, it’s likely the company is doing somewhere around $13 billion in sports revenue a year right now. (That’s $9 billion a year in cable and satellite, $2.5 billion a year in advertising and $1.3 billion a year in streaming).
Let’s say your goal is just to maintain that $13 billion revenue in the years ahead just to avoid a calamitous loss. How do you do that? Well, you know you can’t increase cable and satellite subscribers — in fact, you’re probably going to lose five million subscribers a year there — so your best bet is just to slow that decline as bets you can. That leaves streaming to make up the difference in lost revenue.
But streaming at Disney is losing nearly a billion dollars a quarter.
Okay, you say, but let’s just pretend every single sporting event available on the ESPN channels now was instead available on ESPN+, that you could actually offer that killer sports fan app that CEO Bob Chapek described last week. Well, how do you get to that $13 billion in total revenue? Here’s where the numbers become terrifying on streaming and why Disney isn’t sharing any of them as it relates to ESPN. History has shown us that hard core sports fans willing to pay for a streaming service are a relatively small market.
Do you know how many people pay yearly for NFL Sunday Ticket on DirecTV? Around two million households. Do you know how many people were willing to pay for WWE? A few million. The NFL and WWE have passionate, dedicated audiences obsessed with their products and most people elect not to sign up when they have to pay for it monthly in a direct to consumer model. In fact, no individual sport has been able to get ten million monthly streaming subscribers for its sports.
Not the NBA, not MLB, not the NFL, not the UFC, none of them. (Right now Disney is effectively giving away ESPN+ so don’t get distracted by their “subscriber” numbers. Most of these people aren’t real as evidenced by the revenue being produced, which is less than half what cable gets.)
Remember, right now ESPN benefits off a ton of cable and satellite subscribers who never watch the channel as part of their 75 million subscribers. In fact, the vast majority of the people paying for ESPN now never watch the channel. So what’s the total addressable market of people willing to pay for ESPN+ on a monthly basis to get you to $13 billion in revenue?
What does the math look like? Despite Bob Chapek’s comments above about not being ready to share their models, it isn’t that complicated. If you want to get to $13 billion a year just from streaming you need 130 million subscribers at an average of $100 a year.
Well, that number is impossible to hit because it’s 30 million more than ESPN had in its peak of 100 million cable subscribers a decade ago. If you couldn’t even hit that number in the cable model ten years ago you have no hope of hitting it today.
What about 65 million subscribers at an average cost of $200 a year? I don’t see that either. Remember, you have to average $200 a year, which means you’d need far more subscribers than 65 million since a huge percentage of people would be seasonal subscribers. That is, some people would subscribe for football and then cut their streaming subscriptions when football season was over. Others would subscribe for less popular sports and then cut their subscriptions when that season is over.
Thirty million subscribers at $450 a year? How many people can afford to pay nearly $40 a month just for ESPN? Especially when you consider ESPN has never had any program on cable ever produce thirty million viewers. The simple truth is this, the audience isn’t there to get to $13 billion a year in revenue just from streaming. And it never will be either.
My point here, and the one Chapek acknowledged by refusing to share the numbers, is it’s virtually impossible for ESPN+ to ever come close to producing the revenue that ESPN does now from cable and satellite subscriptions.
So what does that mean? In the years ahead ESPN, at least if it isn’t purchased by someone like Amazon or Apple who can handle the losses thanks to offsets elsewhere, is going to have to give up top sports rights. (Why would Amazon or Apple buy ESPN when they can just buy the rights instead of ESPN? Maybe to get the existing rights ESPN already has? I think that’s probably the best case scenario for ESPN). Because otherwise at the same time that ESPN is going to become the most desperate to get the best sports rights, they’re going to have less and less money to be able to buy them with. Which means it’s going to be harder and harder to get people to subscribe to ESPN+.
The end result? From a business perspective ESPN is a dead, slow growth company that has begun its descent into oblivion. I suspect most intelligent Disney executives know this. But they are attempting to hide this fact by suggesting streaming will save the company somewhere in the future.
The problem is that just isn’t true. If anything, streaming is actually going to hasten the demise of ESPN, not save it. Because instead of just one company drowning, ESPN now has two, the legacy cable business and ESPN+.
The only lifeboat I see is getting the company sold to Amazon or Apple, someone who has lots of money to spend, sees ESPN is doomed and wants to own the sports marketplace based on the rights ESPN has already acquired.
But, as I said above, why would you save a drowning company when you can just blow them out of the water by paying far more than they can for sports rights coming up to auction in the years ahead? ESPN without top sports rights is like McDonald’s without hamburgers, the reason for the company to exist ceases to exist.
Instead of continuing to peddle the lie that streaming will save ESPN, Disney CEO Bob Chapek would be smart to cut ESPN adrift while he still can and find a buyer, almost at any price. Otherwise, he’s going down with two ships, the ESPN cable business and the ESPN streaming business. Because pretty soon the math doesn’t lie, ESPN is going to be costing Disney billions of dollars a year.
And that’s a cost no sport, no matter how popular, can keep from happening.