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OTT Bad Play for ESPN, Analyst Says

Consumers dropping cable bundle would want to avoid paying for sports

As ESPN loses subscribers to cord-cutting, Disney is likely to be asked about the likelihood that the sports network would create an over-the-top direct to consumer product on its earnings call next week.

One analyst says that ESPN would be running towards the wrong goal line by going OTT.

“A very common perception is that ESPN OTT is some kind of ‘nuclear option,’ which Disney is holding back until the necessary/right time,” says Todd Juenger, analyst at Sanford C. Bernstein. “Once unleashed, the theory goes, it would wreak havoc on the pay-tv bundle, preserving/salvaging ESPN at the expense of all others. We have come to believe the opposite would more likely be true.”

Juenger says that ESPN now has 100 million households paying $7 a month. An ESPN OTT service would need one-third that many customers paying $20 a month to generate the same revenue.

But he asks who would be willing to pay that? Sports fans would not be the right answer, because Juenger says sports fans would want sports on other channels too, so the pay-TV bundle including regional sports networks would be their best buy.

And given that “only” a third of all American watched the Super Bowl, how many would be willing to pay for ESPN, he asks.

The group most likely to buy an ESPN OTT service is young cord-nevers—a group too small for ESPN to take such a big risk over.

How big is the risk? Under Juenger’s scenario, a decision to offer ESPN OTT would lead to other network groups doing the same. He sees programmers including Turner, Discovery, AMC, Scripps Networks and Viacom possibly banding together to offer an OTT service that would cost about $15 a month.

“It would have scripted drama, comedy, non-fiction, lifestyle, news, kids, (and even some sports). Pretty much something for everyone in a non-sports household,” he says. That OTT mini-bundle would give its participants a 50% margin and would be devastating for ESPN by encouraging non-sports fans to drop the traditional pay-TV bundle.

“There are many commonly held beliefs/myths/legends about ESPN. Another one we often hear is: ‘ESPN is what holds the bundle together.’ Maybe that is true, but in a different way than most people intend,” Juenger says. “If ESPN went OTT, we don't think the bundle would collapse because millions of households would drop cable and subscribe to ESPN. Instead, if ESPN went OTT, we think other networks would respond in kind, and perhaps millions of households would drop cable to avoid ESPN (and other expensive sports networks) and take advantage of the rich array of entertainment video options.”

Juenger says this is the reason why he thinks “ESPN is wise to keep OTT safely tucked away on its list of ‘things we could do, but choose not to.’”