ESPN Leads the Way Over the Top, But Will Others Follow?

1Executive Summary

When Microsoft announced at E3 that ESPN would make live and on-demand video available through its Xbox Live service, the news had strong implications for mass adoption of cable services being delivered over-the-top. And while much has been made of the potential cord-cutters who will finally be able to get live sports content without a cable subscription, very little has been written about the effect that Microsoft’s ESPN deal might have on the other cable networks, many of whom have been shy about making their video content available online, let alone on a consumer electronics device connected to the TV.

The problem facing pay-TV providers

The reason for the networks’ hesitation is fairly simple: Giving viewers access to content online, for free, runs the risk of cannibalizing the audience that pays to watch that same video through a subscription. Cable networks don’t want to give away content that viewers already happily pay for.

And unlike ESPN, most of them haven’t negotiated broadband streaming rights as part of their cable deals, though it’s becoming clear that more are interested in making their content available online. Some — like HBO and Epix — have incorporated broadband services into their more traditional cable offerings. That means that if you’re an Epix subscriber through one of its cable partners, for instance, you’ll also have access to its library of on-demand content online.

Other networks are experimenting with similar services as part of the “TV Everywhere” initiatives of cable providers like Comcast and Time Warner Cable. Through these services, programmers make certain content available on portal sites operated by the cable companies, which handle the authentication and user logins. Through TV Everywhere services, cable subscribers get access only to programming for the networks that they’ve subscribed to and paid for. By offering additional broadband content to subscribers, networks are hoping that they can keep customers happy.

Still other cable networks are making their content available online in an ad-supported manner. The most aggressive company doing this today is probably MTV Networks, which has made a good portion of its content from shows like “South Park,” “The Daily Show” and “The Colbert Report” available for free. Interestingly, MTVN has unleashed that programming onto the web despite the fact that cable providers pay carriage fees to distribute those flagship programs. Viacom is betting viewers that watch its shows online aren’t the same viewers that would tune in through cable. Furthermore, it is making the assumption that it can monetize those views online just as well as it can on TV. Or at the very least that it can keep users who won’t pay for that content from pirating it.

But in all these cases, that broadband content is (for now) only available through PCs. Online video firms like YouTube and Netflix may be aggressively striking deals with consumer electronics manufacturers to make their content available on the biggest screen in a consumer’s house — the TV — via Internet-connected TVs, Blu-ray players, set-top boxes and DVRs. But in the meantime, broadcast and cable companies have been slow to move, fearful that those over-the-top services might cut into their more traditional TV audiences.

The problem with taking cable content over-the-top

In the case of the ESPN-Microsoft deal, we’re not talking about making that content available on the PC, but making it available for viewing on user television sets via the Xbox. Very few consumers would rely solely on their laptops as their primary video viewing device, but the prospect of watching that same content on the largest screen available is a much more attractive proposition.

This is part what makes the Microsoft-ESPN deal so interesting. In many ways, ESPN has the most — and the least — to lose from making its ESPN3 video content available through the Xbox. On the one hand, since many users and cable networks see ESPN as “must-have” content, the network collects more in per-subscriber fees than any other major cable programmer. If viewers began dropping their cable subscriptions in earnest, the effect could be costly for the network.

On the other hand, ESPN has struck agreements with ISPs such as Comcast, Verizon and Cox to make its ESPN3 service available to its broadband customers. So if a user isn’t paying broadband dollars to an affiliated ISP, they won’t have access to the ESPN content on Xbox Live. So the network gets paid either way, but with Xbox Live on its side, the door is open to a whole new potential audience without the existing cable base being cannibalized.

In the longer term, by being early to the over-the-top game, ESPN could find itself at the forefront of a whole new business model. By using over-the-top video, the network could reach its audience directly, without the need for a cable distributor. More importantly, it can reach an audience that was not previously available.

The future of pay-TV networks

Networks’ wariness to distribute content online might lift if ESPN proves to be successful in its experiment with Xbox Live. By hooking up with consumer electronics manufacturers, programmers might find the potential audience available might be just as large — if not larger — than is available through some cable companies. Microsoft has sold more than 30 million Xbox 360 gaming consoles worldwide, which trumps the size of even the largest cable network in the U.S. If programmers can tap into something like the Xbox Live audience, they might find just as many eyeballs as they can get through more traditional cable distribution.

Furthermore, if the content provider is able to charge the end user directly, it could monetize its streams better than through current cable carriage agreements. A consumer who doesn’t currently pay for cable services might be willing to pay $10 a month for broadband access to HBO content, if the service was pitched to him directly. But HBO is unlikely to get close to $10 per subscriber on its own through current distribution agreements.

As more content becomes available online through services like Netflix and Hulu Plus, more consumers might consider cutting their cable subscriptions — which means more cable programmers might want to think about making their video available directly to consumers over the top.

Relevant analyst in broadband
You must be logged in to post a comment.
12 Comments Subscribers to comment
Explore Related Topics

Learn about our services or Contact us: Email / 800-906-8098