Summary: The sports network ESPN is a master of the paid content business model, building platform scale and success using premium content. What are the lessons from ESPN’s US and UK strategies for other service providers and content distributors?
Internet Video is a booming business in its own right, a key driver of broadband volumes and costs, and increasingly an important component of telcos and other broadband service provider’s (BSPs) packaged broadband offerings (see our recent Strategy Report “Online Video Market Study: The impact of video on broadband business models”). The Goliath US Sports network, ESPN, has just entered the UK market, and we analyse here their history, strategy, and lessons for BSPs and other content aggregators both here in the UK and elsewhere.
In the rush to find a working model for monetizing internet video, the most obvious solution is often overlooked – the payTV model. Since 1979, when the Entertainment and Sports Programming Network (ESPN) secured an exclusive deal with the USA colleges (NCAA) to screen their sporting contests, the model has proven resilient to both the advertiser-funded free model and economic climates. The model has also delivered both steady profits and growth to all players in the value chain – rights holders (e.g. sports bodies), content aggregators (e.g. channels) and distributors (e.g. cable systems). In the payTV model the money flows from the consumer to the distributor to the rights holders via the aggregator.
In the internet world, we are starting to see hybrids of the payTV model emerge. In this note, we analyse two of the more adventurous services: ESPN360 (USA) and SkyPlayer (UK). We also put these services into the context of both incumbent video distributors (Comcast and BSkyB) and challengers (Verizon and BT). We focus upon the elements that historically have driven success for aggregators and distributors and place those elements into the more complex internet-era.
ESPN actually started life as an ad-funded network. It only started charging the cable distributors in 1984, only once it had built an audience and had been purchased by ABC – a parent with deep pockets. The rate card seems meagre these days: US$0.25 per subscriber per month in the first year rising to US$0.30 per sub in the second. However, it was enough for the legendary John Malone and his TCI cable system to refuse to pay and threaten to set up a rival network. The battleground has always been the same: the relative value of controlling the home versus controlling the content.
By the mid-1990s ESPN, now owned by Walt Disney, had lucrative contracts for major league baseball and the National Football League. It perennially asked for and got double-digit rate increases from the cable networks. When ESPN wanted carriage of a sister channel ESPN2, for extreme sports, they got it gratis. This was at a time when new and unproven channels such as FoxNews were actually paying the cable networks for carriage. As Malone said at the time “Little Mickey had us by the throat”. Of course, the cable companies passed on the charges to homeowners and took most of the flack. Again, very little has changed over the years with aggregators leveraging popular content to expand into new areas.
ESPN now offers much more than “live sports” channels for the distributors. Two key channels are ESPN Classics which shows replays of historical matches, and ESPN News which provides highlights, commentary and analysis of past and upcoming events. ESPN offers its core audience a menu served up 24/7. As at Sept 2008, ESPN had 93.7m subscribers to its main channel, 97.3m to ESPN, 63.2m to ESPN classic and 67.4m to ESPN News.
The main competitor in the USA is Fox Sports Net which launched in 1996. Fox Sports takes a regional approach to broadcasting tailoring output to local markets. For example, Fox shows the local Chicago Bulls (NBA) and Cubs (MLB) matches in competition to the ESPN national games. However, Fox Sports has never achieved the scale of ESPN and caters for a niche audience. The lesson is that there is a first mover advantage and scale matters both for negotiating for exclusive content and in determining the share of the distribution pie.
ESPN on the Internet
ESPNet.SportsZone.com launched in 1995 and has since grown to become #2 sports site in the USA (now ESPN.com) with 24m unique views in August 29009 (comscore – http://thebiglead.com/?p=21595) after Yahoo! Sports!
The primary focus of ESPN.com is highlights, interviews, statistics and analysis. The site offers ad-funded video, but is relatively small in scale compared to YouTube and Hulu. In 2008, it served an average of 120 million videos per month, a 32 percent increase from 2007. The real ESPN innovation is the ESPN360 website which offers live streaming of broadcast events. In the USA, this is only available to “affiliated ISPs” – those which have signed wholesale carriage deals with ESPN. The major ISPs, such as Verizon and Comcast, have already signed-up. (http://espn.go.com/broadband/espn360/affList). ESPN has once again left the billing and customer care relationship with the distributor.
ESPN360 is effectively a mirroring the original payTV strategy – people will indirectly pay for live streaming of exclusive sports events. There are a few subtle differences for the internet era: a remote viewer option which enables people to watch the events from hotels and work; a free offer to the college networks; and a free offer to the military networks. Outside of the USA, ESPN offer subscription and pay-as-you-go packages direct to the end-consumer.
ESPN do not publically disclose the rate card for ESPN360 affiliates, but no doubt it will favour the distributors offering a traditional broadcast payTV service. Single-play broadband pipe only providers are likely to suffer as they don’t have the negotiating power of the likes of Comcast. For telephony incumbents, such as Verizon and AT&T, the case for offering a TV service becomes ever more compelling. Similarly, distributors offering payTV via satellite are likely to suffer. ESPN360 effectively adds the option of watching events on PC at home or on the go as well as on the TV.
The Rights Holders’ side of the equation is similarly shifted towards incumbent channels and away from new entrants. ESPN leverages not only its investment in acquisition, but also in production to effectively push the same product through multiple means of distribution. The marginal costs are limited compared to a new entrant. A new entrant streaming internet-only content faces a limited future. In effect, the Rights Holders will end up licensing live broadcast rights as a bundle regardless of transmission medium (broadcast, internet or mobile).
The UK landscape
The payTV market in the UK followed a different evolution path to the USA. When the cable networks started to be built in the mid-to-late 1980s the industry was very fragmented; the original networks spent the majority of their capex on infrastructure and rather than investing in content bought in most TV programming from the USA. Also, telephony capabilities were built into the network from day one and therefore they had BTs lucrative monopoly on home telephony revenues to target.
In 1992, the nascent satellite industry starting investing heavily in sports programming by securing the exclusive right to the UK’s Football Premier League. BSkyB effectively played both the Content Aggregator and Distributor. Investment was balanced between programming and customer acquisition. BSkyB wholesaled their channels to cable companies in much the same way as ESPN did and had similar periodic fights over the value chain. Playing a dual role in content aggregation and distribution was, and still is, nothing new. Warner Communications invested in the earliest USA cable franchises and began investing in channels such as Nickelodeon. Distributors such as TCI and Comcast have also invested in channels, and Ted Turner’s CNN was initially financed from ownership of a local TV station.
The cable industry in the UK has consolidated and restructured over the years to leave just one remaining network, Virgin Media, serving 3.4m homes and covering around 50% of UK homes. Unlike the USA, satellite penetration is much higher than cable penetration with BSkyB serving 9.4m homes in the UK & Ireland. BT, a relative latecomer to the TV market compared to Verizon and AT&T, serves only 0.5m homes.
The broadband market has also evolved differently to the USA with BT being forced to open its access network to third parties by the regulator. This enabled BSkyB to launch a broadband (and telephony) service in 2006 which has grown to serve 2.2m homes. This compares to Virgin Media which serves 4m homes and BT which serves 4.8m. There are also other players such as TalkTalk (4.3m homes) and Orange (1m homes) which currently do not offer a significant TV offering.
In 2009, ESPN acquired some rights for UK Premier League football and launched a series of channels around this content. ESPN have mirrored their USA model in the UK. The previous holder of the rights, Setanta, adopted a very different model with Setanta using an end-to-end service model – hence carrying all the operating costs of subscriber management. Setanta’s model ultimately failed. The ESPN model is simpler and provides incentives for distributors and in our opinion has a much higher probability for success.
BT’s own label TV service has not yet taken off in the UK, with only 400k customers at July 2009. The lack of momentum in this service has many causes, not least the strength and established position of competitive offerings from BSkyB, but most fundamentally because of BT’s unwillingness to invest in the premium video content (e.g. live Premier League football) needed to establish a truly competitive video platform.
The ESPN PayTV internet product, ESPN360 is not yet available in the UK – but it is in our view a likely market development, and one that presents attractive possibilities for the Telcos and cable companies alike. Despite being a huge brand in the US, ESPN is a comparative newcomer in the UK, but we expect it to grow significantly over time, and for ESPN’s internet video strategy to be a key component of that growth.
SkySports on the Internet
Sky is taking a very different initial approach to ESPN to distributing its sports programming on the internet. It is selling the content direct to end-consumers. Live sports streaming is available through SkyPlayer without any additional cost if the consumer is a Sky Broadband or Sky Multi-room customer and subscribes to the Sports channels, otherwise the service costs around £10/month. The service streams other channels apart from Sports and includes some video-on-demand content. The service is available on both PC and Xbox. Effectively, Sky is using its streamed Sports content in its broadband packages to add value and competitive differentiation and thereby drive broadband subscriptions. This is an innovative approach but potentially arouses all kinds of regulatory questions through the combination of broadband access and content in one package.
Elsewhere in Europe, we have seen the reverse situation with dominant distribution networks (e.g. Orange in France) winning exclusive rights for content (some French Football games) and exclusively showing them on their networks. Whether in the USA or Europe, we believe that premium video will slowly but surely disappear behind some type of walled garden.
The current situation is a regulatory nightmare and a lawyer’s dream. It will be quite a few years before regulatory clarity emerges.
Access to premium video content is becoming an increasingly important feature of broadband access packages, and the PayTV model, where it can be included for an additional fee, is a very attractive model for Telcos and other service providers particularly those without premium content.
There is a large window of opportunity for incumbent video players to leverage exclusivity on live popular streaming events to either strengthen content aggregation, distribution or both. New entrants in aggregation will struggle to gain scale without the must-have content. New entrants or incumbents in distribution will only struggle to gain scale in video without significant investment in content.
We expect ESPN to launch a UK version of the ESPN PayTV internet service ESPN360. This will present an opportunity for all broadband service providers, particularly those currently without any premium video content. However, Virgin Media and Sky with existing relationships with ESPN may be able to negotiate a better initial wholesale price. This presents an opportunity both for ESPN as it builds its brand and reach, and to broadband service providers seeking to improve attractiveness and margins by selling extra services, and reach by acquiring more customers.
For telcos and other broadband service providers in markets outside the UK, ESPN’s varying market entry strategies present useful case studies, and a potential indicator of opportunities – or threats – to come.
Lessons for Telcos
- Premium Video is both popular and expensive – do expect to need it as part of your offering, but don’t expect to be able to give free access for your broadband consumers
- Traditional PayTV operators will try to leverage their scale and bundling ability to differentiate their broadband offerings
- Traditional Content Aggregators are used to Distributors billing and maintaining the customer relationship – so there is both an opportunity for distributors like telcos and other BSPs to build new service offerings and margins as well as a threat if by-passed.
- There is also a potentially controversial role in helping content aggregators minimise piracy.
- Define carefully your role in the value chain and be prepared to invest in content – and if you do invest, make sure you acquire the premium content.