In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "The definition of scarcity is continuously evolving away from linear. What happens next?"
Author's Note: My latest opinion piece for The Information, "Disney's Hulu Deal Ain't Over Till It's Over" is live! With the help of New York Yankee legend Yogi Berra, I analyzed why Hulu has obvious value for both the supply (content producers) and demand (TV watchers) sides of the business, and that is why no one is an obvious taker.
Last week, Disney's ESPN signaled its interest in aggregating scarcity in a post-RSN world. To remind you, scarcity is the linear distribution model’s historical moat — the linear model enabled multichannel video programming distributors (MVPDs) to aggregate millions of households locally, regionally and later nationally. It has similar business logic to the circulation model of the print business.
CNBC’s Alex Sherman reported that ESPN has“held conversations with major sports leagues and media partners about launching a feature on ESPN.com and its free ESPN app that will link users directly to where a live sporting event is streaming.” The vision for ESPN is as “the hub of all live sports streaming”, a single destination where all sports fans can discover where their team’s sports event is streaming.
The superficial math of it makes sense: ESPN Digital announced that in 2022, Comscore recorded 108.2 million average monthly unique visitors and the ESPN app recorded 25.4 million average monthly unique visitors. Assuming it can convert 1% of those visitors to streaming subscribers to any live RSN game, the rule of thumb for conversion funnels is that the agreement may create 1.1 million average monthly visitors to such sports streaming apps as Apple TV+, Amazon Prime Video, or a regional sports service such as Sinclair’s.
Key Takeaway
The risky bet in ESPN's plan to be a streaming hub is the conversion funnel. Does it control enough of the funnel to succeed? Does it know the consumer well enough to make money?
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But, the conversion funnel
But the risky bet in all this is the buyer’s journey from ESPN.com or the app to a streaming app (aka, a conversion funnel). The assumption seems to be that because the sporting event will be one click away from nearly 110MM monthly average users on ESPN.com and ESPN+, therefore a business model is feasible. Because as I have written before, this is not only a bet on a basic conversion funnel. It is also a bet on user interface (UI) and user experience (UX), and that has two challenges.
The first challenge, as I have highlighted often, is that Disney has not invested heavily in personalized interfaces in streaming. It has not been their strong suit in their direct-to-consumer businesses. That said, ESPN.com *is* a personalized UI and UX: it asks users to select their favorite sports and teams as part of their sign-up process for an account. So, a big advantage of ESPN pursuing this model is that it can target sports streaming data based on information it has in its database.
This points to a second challenge: the business model must rely entirely on the conversion funnels of third-party applications. In the case of relying on Apple or Amazon, that is not a terrible thing. Apple has more than 50% share of smartphones used in the US. If there are 300 million smartphone users, that is an audience of 150 million active iPhone users. Amazon has over 200MM Prime subscribers, with over 75% in the U.S. The win-win relationship seems obvious.
But Bally Sports+ and MSG+ are both new to the DTC game. Meaning, there are points of friction throughout their conversion, with the stickiest one being price. As I highlighted last Wednesday, MLB's Pittsburgh Pirates average 55,000 viewers per game and are paid $60 million per year for their TV rights. So, each fan would have to pay $1,090 for the season ($181/mo. for a six month season) for the Pirates to make the same from DTC. Another example is the Minnesota Twins, who are in the final year of their contract with Bally Sports North for $40MM per year. With 100,000 viewers per game, the Twins would need to charge $66/mo. (for six months) or $400 per season to make the same with a streaming-only option.
Thinking a few steps ahead
We can see a few steps ahead as to where ESPN may be headed. I think it is looking in the long-term to be like Amazon Prime Video Channels or YouTube Primetime Channels, both of which are building out strategies to benefit from recently acquired NFL rights. I wrote in January:
"From the perspective of “scarcity”, the NFL deal suggests YouTube is “sitting in the catbird seat” because it can aggregate:
A subscale “scarcity” of linear subscribers and monetize them both at a fee of $65.99 per month and also with connected TV inventory it owns on the service;
YouTube viewers of NFL content at scale (some percentage of 2.5B monthly active users) and sell them to advertisers; and,
YouTube creator audiences and monetize them both with advertising and also Partner Program monetization tools, which they split with the creators 45/55.
No traditional media business — not even Disney with ESPN+, Hulu and Disney+— offers anything competitive.
But the scale of ESPN.com *is* competitive. Disney would need to build out a Channels back-end specifically for sports streaming (and, if BAMTech past is precedent, they will buy before they build). The business model would be similar: both a revenue share on subscriptions and also a share of ad inventory. But YouTube’s model reflects that ultimately the technology would be key: ESPN has scarcity on its digital properties, and the audiences it would need to drive to each are in the high five figures to low hundreds of thousands. That is less than 1% of its monthly active users for each game. There is a *there* there.
The ultimate technology product would be a hybrid of ESPN.com and Hulu: personalized content recommendations and a UI/UX conducive to them (I wrote about ESPN’s success with The Masters broadcast across Hulu and ESPN+ last April). But that is expensive to build, Hulu’s future is uncertain, and so is the successor to Robert Iger.
But, the ultimate question is what sports streaming consumers need from ESPN sports streaming: ESPN+ subscriber numbers have grown from 3.5MM to 24.5MM since November 2019, almost in lockstep with Hulu (26.8MM SVOD Only subscribers in November 2019 to 42.8MM in November 2022) after the launch of the Disney+ bundle. In other words, users may want the economics of a bundle more than they want sports streaming from ESPN.
All this uncertainty suggests the idea is less ambitious than it may read.
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