Market Insight

Disney launches ESPN’s long awaited direct to consumer offer

April 17, 2018

Erik Brannon Erik Brannon Associate Director – Research and Analysis, Service Providers & Platforms

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Disney has launched online subscription service ESPN+, which will feature 10,000 live MLB, NHL and other live events. The service, which launched on 12 April, is meant to supplement existing linear pay TV channel strategies, and will feature content which is not available on the company's existing linear channels. It is built on technology provided by BAMTech, which Disney took a majority stake in last year, specifically to enhance the company's streaming initiatives.

ESPN+ is priced at $4.99 per month, or $49.99 per year. With the one month trial that is customary for online subscriptions, being sponsored by American Express.

The service is being positioned as a value-add for traditional ESPN channels, rather than an alternative way to get core ESPN content and the content line up reflects this. Included are more than 180 MLB games (customers can add content from MLB.tv into the app for a separate $24.99 per month), 250 MLS live games, thousands of college sporting events from 20 different athletic conferences, a large on-demand library of past events, less popular golf, cricket, rugby, boxing, tennis, its and documentaries including the well-received “O.J. Made In America”. Also included in the app is DVR functionality, and several original series which will be exclusive to the service.

Our analysis

ESPN+ is Disney’s first step into direct to consumer video in the US (the company previously launched DisneyLife in the UK in 2015), and it is doing so with one of the most valuable brands in the American TV business. The company’s approach is fundamentally cautious trying to build on top of its established but dwindling traditional TV business, rather than cannibalize it. Traditional Pay TV is where ESPN makes its money, and will continue to do so for the next five years at a minimum. According to IHS Markit’s TV Media Intelligence Service, the US pay TV business is forecast to shrink from 94.0 million pay TV households to 86.0 million pay TV households from 2017 to 2022. ESPN is in virtually all of those homes, and the decrease of 8.0 million pay TV households is going to translate to millions of dollars lost for the company. Increasing carriage fees should offset some of these losses; but the company is going to need to diversify its offer in order to maintain or grow revenue, and this is where ESPN+ comes in setting the building blocks for the future.

At launch the service two divergent direct to consumer elements:

  • At its heart the core ESPN+ offer is a thematic channel with a narrow content selection, limited to the sporting genre. This is the opposite approach taken by the likes of Netflix, Amazon, and Hulu, who’s fat channels are the Walmart of the content businesses. By its very nature ESPN’s offering is sport centric, a more thematic approach than “other over the top” OTT SVOD players. It’s this narrow focus which offers the enticement of riches, or the bitterness of failure.
  • But the company is offering MLB At Bat, effectively carrying the MLB’s channel in addition to its own. This can be seen as the beginnings of a platform play, taking a leaf out of Amazon’s book by offering customers a la carte channels around its core channel. For Amazon this now includes HBO, Starz, and Showtime offers next to its core Prime channel; for ESPN the obvious way to extend this is to leverage other BAMTech distributed channels such as the NHL or PGA.

These components are included in the same app and service as the company’s more traditional channels including ESPN, ESPN 2, ESPN News, ESPN U, etc and online channel ESPN 3 (available to customers of high speed internet offers from partnering ISPs). In practice this makes the ESPN app a one stop shop for customers that take any part of ESPN’s offer and means that ESPN+ stands to benefit from a go-to-market strategy that is not dissimilar to Spotify’s freemium model (where the free ad-supported tier, promotes the premium paid subscription) as existing customers will be in the app anyway and can be sold on the benefits of subscribing. Such strategies have been effectively deployed by video services too, most notably Hulu which used a freemium model during the major growth period for its paid subscription offer.

What is less clear is how popular the ESPN+ thematic channel is going to be, despite its ability to leverage other ESPN content for promotion. The majority of ESPN’s audience get the channels as part of their basic package, while clearly not free at point of delivery it's not a separate cost those viewers need to think about. Getting those users to convert to paying subscribers can be a challenge, unless there are compelling reasons to do so.

The current version of ESPN+ is unlikely to do that for a mass market audience, because the most popular events are intentionally being kept on more traditional channels to avoid cannibalizing the core TV business. This leaves ESPN+ with niche events, who’s small number of diehard fans will care enough to sign up and its documentary content, which is being promoted heavily. By contrast, Spotify’s premium tier gives access to the fullest experience of the service: ad free, on-demand listening combined with offline playback – a clear step up from the ad supported offer. As a result, IHS Markit believes that ESPN+ is walking an esoteric path where the technical aspects of the product and its business rules have a lot of potential to drive significant uptake with a content strategy that will limit that uptake. For the time being the priorities of traditional channels business are winning out, but there is significant long-term potential if, or arguably when, ESPN should every choose to flip the switch. If the Disney’s acquisition of Fox goes through then ESPN's options for developing Plus should be significantly enhanced.

A number of proxies come to mind for assessing the prospects for the current iteration of the core ESPN+ channel in the form of other online channels from established TV brands. Tellingly few of them had more than three million subscribers at the end of 2017, for example:

  • WWE Network 1.5 million subscribers globally at the end of 2017, having launched in early 2014
  • CBS All access 2 million subscribers in the US at the end of 2017 having launched in Q4 2014

Even HBO had only managed to reach 5 million online subscribers in the US at the end of 2017 but that’s including distribution deals with Amazon and DirecTV Now which are understood to account for meaningful numbers of subscribers. The key lesson from this being that narrower focused, traditional channels typically attract far lower subscriber numbers online than the major fat channels (e.g. Hulu, the smallest of the ‘big three’ fat channels in the US, after Netflix and Amazon Prime, had 17 million subscribers at the end of 2017, the overwhelming majority of which are understood to be taking the Hulu channel rather than its virtual pay TV offer). While it is true that these other services offering online equivalents to conventional channels also make content available in traditional TV, both WWE Network and CBS All Access have tried to use a mixture of exclusive content and access to their libraries of shows to drive online subscriptions, and to date neither service has captured consumer attention en masse. It seems highly probable that ESPN+ in its current form, with sports too niche for conventional TV, replay games and documentary library will follow a broadly similar trajectory.

However, we do not believe that this current version should be seen as the end game for the service. Rather, ESPN+ includes a number of interesting ideas for how the company could leverage its existing pay TV channels even as it builds a future that is less dependent on operator distribution.

Geography
USA
Organization
ESPN Walt Disney
Research by Market
Media & Advertising
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