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This is an incredibly important question for Disney, which relies on its cable networks (of which ESPN is by far the biggest) for 49% of its operating income. For comparison’s sake, the cable division brought in over six times as much in profit as the company’s broadcast networks (i.e. ABC), which used to be the crowned jewel of any media company lucky enough to have one.

The difference is that cable networks have a dual revenue model: advertising and subscription fees. Pretty much everyone who has cable in the United States (about 98 million, according to the WSJ) pays $3.65 per month for ESPN, the highest rate of any network. That’s about $4.3 billion in revenue… and that’s just the primary network, and only in the United States. So even if ESPN did exactly $0 in advertising, it would still be an incredible business.

But what happens if IPTV takes hold, and all those sub fees disappear? Or if, in a less extreme case, cable became a la carte? Could ESPN survive as is? Could Disney?

Well, here’s one possible solution: maybe ESPN should jump the gun, and start offering their networks online. Could they get die-hards to pay $100-120 per year for the service (i.e. 2-3 times what your grandmother pays for ESPN on cable)? I don’t think it’s out of the question, and it definitely won’t be in a year or two when there’s a bit more convergence between your computer and your TV.

This is probably the model all networks will have to go to in order to remain big businesses. The broadcast networks still have huge audiences today; they’re in every home in the US, so how could they not? But even they are struggling to keep up their ad rates, and that was true even before the recession hit.

Expect lots of middling cable networks (the ones that nobody ever watches but are still profitable because of sub fees) to disappear once cable is gone. But the really strong brands, like ESPN, should still be able to thrive. Getting ahead of the game would help immensely, and I think we may see this sooner than most think.

Feedback? Write a comment, or e-mail the author at shawn(AT)squawkingbaseball.com

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