Disney's cable demise begins: DISH offers Sling with and without ESPN, effectively making it à-la-carte, so Disney is now scrambling to find a new digital distribution strategy

Has the ESPN cable-bundle bubble already begun to burst?
Anyone who has been following the ESPN saga at Disney knows that the once infallible all-sports cable TV network has fallen on hard times of late due to progressively worsening subscriber losses in the pay cable and satellite TV industry and exploding television rights costs from major professional sporting leagues.

ESPN boss John Skipper probably couldn't imagine ESPN
being offered à la carte for only $15 per month
The 24-hour, all-sports network has lost a staggering 11 million subscribers just in the past five years and is locked into expensive long-term TV rights deals with the NFL and NBA.

These days, consumers are either completely cutting the cord with their cable providers, to do away with very expensive monthly cable TV bills, or opting for smaller, less expensive cable packages.

Consumers simply no longer want to pay for hundreds of channels they will never watch, and they want on-demand features for programs they do want to watch at their own convenience and a choice of which channels are included in smaller and less expensive core bundles.

ESPN has been far and away Disney's biggest cash cow among all its operating divisions, accounting for close to a quarter of Disney's total operating profits all by itself, according to Nomura Securities, and the media networks division, of which ESPN is a part of, has been the largest revenue generating operating segment inside of Disney, accounting for roughly 53% of the company's annual operating income and 44% of the company's $52.46 billion in revenue last year.


Both, however, have seen their profits decline this past few years, due to poor, sagging ratings at ABC Networks and ESPN and accelerating subscriber losses at ESPN, prompting many Wall Street analysts to prognosticate that Disney's best days may be behind them. Ratings for ESPN's Monday Night Football has precipitously and very noticeably plummeted this year.

Cable providers in the past that have tried to move ESPN off its core tier
and onto an add-on tier have been sued by Disney in the past, such as in
the case of Verizon's Custom TV last April
This is occurring while a gaggle of former top, big-named on-air talent, who were forced out of their jobs by ESPN in order to save money, are bad-mouthing the 24-hour, all-sports network.

The rationale behind the concerns from Wall Street is this: As the fortunes of Disney's largest revenue-generating segment go (i.e., media networks), so goes Disney's fortunes.

It was Disney's media networks' double-digit growth numbers in the past decade that had powered the rise of Disney's stock prices.

And ESPN, in particular, has been Disney's goose that laid the golden eggs for many years because anyone who has an old-fashioned multi-channel cable TV subscription pays a hefty carriage fee for the channel to be in the basic cable channel line-up in their monthly cable bills as part of the bundled package, whether they watch the channel or not.

Because ESPN is, by far, the most expensive cable channel on the market that is included on the basic cable line-up, commanding monthly carriage fees that are about fives times more than the price of its nearest cable competitor TNT, it's been making money, hand over fist, for many years because Disney has made deals with all the cable and satellite TV providers to include the channel in every basic core channel line-up that is offered.

It is, far and away, the most lucrative business in all of Pay-TV, but it is also the most costliest to consumers, who may or may not watch the channel, but are required to pay a monthly carriage fee anyway as part of the bundle of channels included in their subscriptions.


With the advent of viewing television on-demand in the new digital media landscape, however, viewers began jumping off of their expensive cable subscriptions in droves in order to pick and choose which channels and TV programs they can purchase and watch at a fraction of the price of the old cable subscription bundles.

Dish's Sling Orange offers ESPN Networks and 2 Disney channels along with
several other channels for $20/month
Over the past few years, the world of pay TV has turned the advantage away from the old cable companies and content providers controlling the market to consumers and new digital media companies, who are making the pay-TV industry much more consumer friendly.

As a result of this major disruption to the pay TV industry, competition from more consumer-friendly digital TV providers, such as Netflix, Apple TV, Roku, Amazon, Hulu, Google, and others, cord-cutters have forced the cable companies to offer smaller more attractive "cord-shaving" basic cable packages that have tried but failed, in the past, to separate out outlandishly expensive channels, such as ESPN, into a separate sports package off of the core tier. The cable providers failed to separate out ESPN because Disney has retaliated whenever this has been tried.

Last April, Verizon tried to separate out ESPN from its basic package in a new basic FiOS cord-shaving cable package called Custom TV. Disney swiftly responded by suing Verizon so that the cable provider could not exclude ESPN from being part of any of its basic pay TV package.


The move would have been a huge blow for Disney because it would have caused an avalanche from other pay TV providers to likewise move ESPN off the core tier and accelerate an already quickening progressive loss of its subscriber base from both cord-shavers and cord-cutters.

Dish's Sling Blue takes out ESPN Networks and 2 Disney channels for more
other channels for $25/month
Thus, the perception in the cable and satellite TV industry has been that any cable provider that tries to separate out ESPN from the core channel line-up and offer it as a separate tier, or à la carte, in order to try to pass the savings onto consumers, will be sued by Disney to make sure ESPN is included in the basic channel line-up.

However, those bygone days of Disney dictating that ESPN is to be included on all basic cable channel lineups to the cable providers are already over.

Dish Network has already found a way to do exactly what Verizon failed to do, effectively forcing ESPN into a separate add-on tier of service, without any retaliation of Disney.


In Dish's two basic options for Sling—Orange and Blue—subscribers have a choice of either keeping ESPN 1, ESPN 2, ESPN 3, Disney and Freeform for $20 a month in the Orange option (30 total channels), or forgoing the five disney channels and getting an additional 20 other channels (including Fox, NBC, NFL Networks, etc.) for $25 a month in the Blue Option (45 total channels.)

Opting for Sling's All Channel Option adds back ESPN Networks for
an additional $15/month, effectively making ESPN à la carte
ESPN Networks is thus essentially optional in the choices given in the basic slimmed-down core packages offered by Sling.

But here's the kicker: If you opt for Blue for $25 a month, you can add back the five Disney cable channels, including ESPN, for an additional $15 a month, effectively making ESPN networks an add-on sports tier that FiOS tried to accomplish—but failed to do—with Custom TV.

That effectively makes ESPN/ESPN 2/ESPN 3, plus two Disney cables channels, à la carte for only $15 more a month for Sling, without so much as a complaint from Disney's legal department.

Many financial analysts have projected the cost of a standalone ESPN over-the-top offering would have to be priced somewhere in the $36 a month range to break even outside the core tier, so it appears that the Sling offering to add-on ESPN Networks and two other Disney channels is far-underpriced and likely a money-losing proposition for Disney.


But it also proves to be a very glaring weakness in Disney's cable strategy in trying to preserve its existing but eroding cable subscription numbers, and is a very real threat to quicken its own cable bundle demise.

Disney's revenues by segments
This is the first bonafide à la carte ESPN offering, outside the core tier that hasn't been challenged by Disney, suggesting there will be more to come from other pay TV providers.

But with the advent of the first cord-shaving cable packages excluding ESPN, Disney may have just thrown in the towel on its fight to preserve its existing cable bundle business model, and the flood gates may have already opened for many others to follow.

Many experts now think this is the beginning of the end of ESPN's dominance in collecting colossal subscription frees from cable subscribers from the multi-channel cable bundles as we know it.

As news of Dish Network's à la carte offering of ESPN for $15 a month on Sling spreads, there will most certainly be more pressure on other cable providers to offer more cord-shaving bundles for their customers which will exclude ESPN from the core tier.

This may be why Disney of late has been seeking a mega-acquisition from the likes of Twitter and Netflix, both of whom deal in digital steaming video. It's pretty obviously Disney is still lagging behind in a digital strategy in distributing its content, but the end of ESPN as we know it has already begun.

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