[Business★★★] Why ESPN Won’t Pull an HBO (P1) When HBO and CBS announced they’d offer paid apps that would allow viewers to completely BYPASS TV and stream their content directly to their preferred device, it was hard not to see the moment as dominos starting to fall. Everyone from DISRUPTIVE INNOVATION THEORISTS to CHEAPSKATE APPLETV-streaming HIPSTERS has been SALIVATING OVER the UNBUNDLING of cable for years. AEREO’s lost legal battle? A BUMP IN THE ROAD on the inevitable way to A LA CARTE TV. (P2) It’s widely accepted that live sports is one of the major things keeping cable’s profitable bundle INTACT. But might that begin to change? I spoke with JAMES ANDREW MILLER (@JimMiller), author of Those Guys Have All the Fun: Inside the World of ESPN. What follows is an edited version of our conversation. (P3) HBR: I think the first thing to establish is whether ESPN is, like HBO, a generator of premium, exclusive content, or whether they’re just a MIDDLEMAN who brokers sports between the leagues and the fans. (P4) Miller: They really started creating a lot of original content in the 1990s, when they developed PARDON THE INTERRUPTION, Around the Horn, documentaries, series, movies, stuff like PLAYMAKERS. There was a lot of attention and money paid to that. Then when JOHN SKIPPER became head of content he decided it was all about live sporting rights. He went on one of the great SHOPPING SPREES for television rights of all time. He went after a lot, and also engineered longer contract terms than was usual — eight, 10, sometimes 12 years. They’ve invested a lot of money — for instance, their last deal with the NFL was over $15 billion. Their recent deals for college football total over $20 billion. (P5) And what’s been the impact of that on the COMPETITIVE LANDSCAPE? (P6) They think it’s essential. It builds a big MOAT around ESPN in terms of competition. When FOX Sports 1 went on the air, everyone was talking about how they’d be a FORMIDABLE competitor for ESPN, but I didn’t believe they could GO TOE-TO-TOE WITH them because there’s just not a lot of inventory left out there. ESPN has so many deals LINED UP, and they’re lined up for quite some time. So how are you going to compete with ESPN when they have such a head start in terms of inventory? (P7) What’s interesting to me about the recent changes in the TV landscape is that you have distributors like NETFLIX turning into content providers and you have content providers like HBO trying to become distributors. It just seems like if you can have both a direct relationship with consumers and exclusive, premium content, that’s the best of both worlds. So why wouldn’t ESPN want to PULL AWAY FROM cable and STRIKE OUT on its own? (P8) Both ESPN and [parent company] Disney are addicted to the huge increases coming in from subscriber fees. ESPN does not want the cable universe to go away. They’ll bring in over $6.5, $7 billion dollars in revenue from subscriber fees this year and that’s a lot of money, for them and for Disney as well. They’ve spent a lot of money since the 1980s lobbying to make sure no one got rid of the cable package and create this a la cart universe, because they did feel like that was a threat. (P9) Look, my mother spends more than $6 a month for ESPN and she’s never turned the channel on. That’s true of probably 90% of people — at any given time — who have cable. We think of ESPN as this BEHEMOTH, but in terms of people who watch it day in day out, that’s probably not a huge percentage of the cable viewing universe. They don’t want to go to an a la carte system. (P10) What if they have no choice? What if the cable industry FALLS APART and they have to FLY SOLO? (P11) Let’s say Congress passed some law and there was no cable bundle. ESPN would be able to go out and charge a monthly fee that would probably be pretty high, because they have so much inventory. (P12) Or what if, when those broadcast rights do EXPIRE, a major partner like the NFL decided they could make more money going direct-to-consumer? It seems like ESPN’s original programming wouldn’t be enough to keep people; it’s really just FILLER AROUND the games. (P13) I don’t think the NFL is going to not want a broadcast and a cable partner. At least for quite some time. The idea that Google might compete for rights next time they’re up, that’s possible, but the NFL is ESPN’s crack cocaine. It’s not just about 16 weeks or a wildcard. It’s about taking those rights and creating shoulder programming throughout the year — like the NFL draft, the countdown to the pre-season, the COVERAGE during the pre-season. ESPN MONETIZES the NFL 365 days a year. They’re not about to let them go. They’re paying now $2 billion a season for the NFL, and they have it for many years to come. The NBA deal is also a long one. There’s just no way that ESPN is going to allow itself to be out of the running. The leagues don’t want that to happen either. They want to be in business with ESPN, particularly when it comes to college football and college basketball — the coaches love ESPN as a recruiting tool. Now, ESPN LOST OUT ON the World Cup, so those things may happen, but by and large they have a ton of baseball, the basketball, soccer, football. They’re going to be as aggressive as they need to be. (P14) So where do you see change starting to happen? (P15) The deal ESPN just struck with the NBA is really fascinating in terms of the future. READ BETWEEN THE LINES of that deal, there are a MULTITUDE of possibilities for ESPN to create a new universe with certain rights and possibilities. You could possibly spend a couple bucks to go on demand and buy a specific game you want; there are all sorts of options. I think it shows that ESPN is building for the future. (P16) We are STRADDLING two worlds right now. Consumers are definitely in a multi-screen universe. But the architecture of the pricing and the way it’s all going to work hasn’t been fully realized. Those things will shake out in the next couple of years. And in the end there will be more customization, more choice, more flexibility for the consumer, depending on what a particular consumer’s appetite is. (P17) One thing that has always BUGGED me as a Red Sox fan is that I can’t go out and buy, say, Pedro Martinez’s 10 best regular-season starts. Is that the kind of thing you’re talking about? (P18) Yes. I mean if all of a sudden I wake up this morning and I have an old Beatles or Led Zeppelin song in my head, I can buy that song on iTunes. If I’m getting PSYCHED UP ABOUT the World Series, though, and I want to watch the last time the Kansas City Royals were in it, there is no mechanism to pay and watch that game. But there will be. (P19) What if you get some Aereo-type, low-cost disruptor coming in? Is that a VIABLE threat to a company like ESPN? (P20) I just think in the world of televised sports, “low-cost competitor” is an OXYMORON. Here’s what ESPN knows. Five years from now, we don’t know if THE GOOD WIFE is still going to be a popular show, we don’t know whether there’s going to be contract problems with Julianna Marguiles or if the writers are going to stay. But we do know that there is going to be an incredible amount of interest for the ROSE BOWL. We know that the NBA finals are going to be popular. Depending on who the teams are, they may be up or down 5% but there is a built-in CONSTITUENCY. And that’s the genius of live sports programming. People want to see these games, and see them right away. Words: 1,334 Source: https://hbr.org/2014/10/why-espn-wont-pull-an-hbo/ Discussion Questions If you found the passage difficult to read or had problems understanding specific words or idiomatic expressions, please discuss them with your tutor. The following discussion questions should be answered in your own words and with your own arguments. 1. Briefly summarize the content of the article in your own words. 2. According to Miller, is ESPN like HBO (P4)? In what ways are they similar (or different)? 3. How does ESPN have competitive advantage over other broadcasters? What made this possible? (P6) 4. Does ESPN want to pull away from cable and strike out on its own? (P8) 5. What changes is Miller expecting from ESPN in the future (P15)? 6. Do you follow sports? What are the latest trends in business models of video content providers? Share your insight with your Cambly tutor! What/Who/Where Are They? HBO (TV Network) HBO is an American premium cable and satellite television network that is owned by Home Box Office Inc., an operating subsidiary of Time Warner.