How Watching 'Unbundled' ESPN and AMC Could Cost More Than Your Whole Cable Bill

http://m.theatlantic.com/business/archive/2013/07/how-watching-unbundled-espn-and-amc-could-cost-more-than-your-whole-cable-bill/277916/

by awwstn • 13 years ago

25 60 13 years ago

m.theatlantic.com

untog4• 13 years ago

It amazes me how much money sports is costing everyone that doesn't even care to watch it. The sad reality is that no-one would end up paying the prices outlined in this article- ESPN would realise that they were pricing themselves way out of many people's budgets and adjust their fees accordingly. As it is, the confusion over cable TV billing means that they don't have to.

As for AMC and the like, I can't help but feel like their future is in allowing people to buy individual seasons of TV - like you can on DVD, but at broadcast. I don't watch 90% of AMC's output, but I'm glued to Breaking Bad and Mad Men.

jdminhbg2• 13 years ago

I'm the exact mirror of you; I couldn't care less about Breaking Bad or Mad Men, the only thing I ever watch on cable TV is sports. This is how the bundled model works -- you pay a % of your bill for ESPN, I pay a % of my bill for AMC, and we get both. The %s are determined by the providers and networks playing chicken with each other over how many subscribers would leave if a network weren't included in a package.

A la carte proponents seem to have a particular bee in their bonnets for sports, but it seems to me that that's the kind of content most likely to survive a cablepocalypse -- it has the most value in being viewed live. In your iTunes model for AMC, producing high-quality shows like Breaking Bad or Mad Men suddenly takes on movie-like risk.

untog4• 13 years ago

In your iTunes model for AMC, producing high-quality shows like Breaking Bad or Mad Men suddenly takes on movie-like risk.

Undoubtedly. But sports are rarely going to be purchased after their live broadcast date, wheras high quality dramas will have a huge longtail of purchases- I just started watching The Wire, for example.

I think the reason that anyone has a bee in their bonnet about sports is that it commands far more money than other channels do. We are all subsidising sports fans far more than most other categories.

ctdonath3• 13 years ago

This is how the bundled model works -- you pay a % of your bill for ESPN, I pay a % of my bill for AMC, and we get both.

...and I have no interest in either, use Netflix & iTunes, watch exactly what I want, pay no more or less, and don't end up with the short side of your "bundled" stick.

twoodfin• 13 years ago

AMC's a great example of why bundling "works" for content producers. They were a third or fourth tier network before Breaking Bad and Mad Men. But because they were on enough people's cable packages, they still had enough reach to bootstrap themselves to a point where they can charge the cable and satellite providers much more than they did before.

Imagine instead of letting almost anyone in America watch Mad Men for "free" after reading about it or hearing about it from a friend, AMC had to count on people calling up their cable company and tacking on their channel for a dollar a month. No way does that model make sense, and under it, Mad Men and Breaking Bad wouldn't have been made.

Obviously, there are alternative models that might work, but "paying for only the channels you watch" is a huge payoff to incumbents who already have shows you like.

Jasber• 13 years ago

Isn't this exactly HBO's business model? They seem to be doing just fine (and I don't think this is because they're an incumbent as much as they make good TV).

I can't speak for bootstrapping a TV network, but I think long-term if you have good content, consumers will jump through hoops to get it.

mikestew• 13 years ago

Sports is just one part of overall package that explains why I no longer subscribe to satellite or cable: I don't feel I'm getting good value for my money. Summarizing what started out as a much longer paragraph, we were paying $80/month for a lot of crap, crap we would never care to watch. Buried in that $80/month somewhere was ESPN.

AMC, however, continues to get our money. _Breaking Bad_ and _Mad Men_ are two shows that I just pre-pay for the seasons as soon as iTunes makes them available. I don't even know how much a season costs because I don't care; take my money, damn it. And we get episodes the day after they air. (_Walking Dead_, OTOH...meh, two season of that was enough.) TNT and _Falling Skies_, same thing: take my money. _House of Cards_ and _Arrested Development_ were enough to get me to come back to Netflix. I've got money, and a fair amount of it; I'm willing to pay for good programming.

But what I won't do is pay a bunch of money for reality shows and ESPN. I don't want to hear sob stories about how it's just not financially feasible to do it any other way. Figure out a way, because I can live just fine with the TV I've got, or none at all. And if I'm just not the kind of TV customer anyone wants, I'm fine with that, too.

mratzloff2• 13 years ago

That was my thought. "How much of my cable bill is going to ESPN?"

What's really outrageous is with Comcast I have to get a whole host of channels I don't care about to get anything in HD, which I do care about. I only watch a few channels. If I could get the main networks, HBO, AMC, Comedy Central, and BBC America all in HD, that would be enough. I could accept about $60 per month for those.

danielweber3• 13 years ago

Once the cable company builds the infrastructure to send 300 channels to houses in your neighborhood, their costs for you are the same whether you want 1 channel or all 300.

That's a prime recipe for bundling. You think you are "paying for all these channels you don't want" but that's not the reality. Just like I'm not paying for the tens of thousands of Netflix shows I will never ever watch but nonetheless get by paying one monthly fee.

acgourley• 13 years ago

This is the second article I've seen on HN that implies that it's "bad for consumers" for ESPN to go a la cart, be paid for by less people, make less money and be forced to offer a lower quality product.

It's great for me, I don't want to watch ESPN. It's great for me, as my money is allocated towards the content I want to see. It does mean, overall, less money is allocated to TV entertainment creation. That doesn't strike me as bad on it's face either, but for some reason it does to the author.

newbie12• 13 years ago

Actually ESPN doesn't create much original TV content-- they are so expensive because they pay for the rights to sports events. A la carte ESPN likely means less money for pro athletes, and if you spend the saved money on actual channels, more money for TV content.

vsprabhakara12• 13 years ago

I would classify this as the most rational "insider alarmist" version of the anti-unbundling argument. There will certainly be discomfort upon the arrival of unbundling, but this article ignores long-term adjustments of the ecosystem. Here's five gaps that aren't considered:

1) Bundling will still exist, but just not in the current 100 channel, one-size-fits-all variety. Media conglomerates will bundle directly to consumer - that's how Disney gets distribution for the SOAP channel, they bundle it with ESPN to the cable provider. Various channels may team up. Bundling across media types will happen (MSNBC + NYTimes; Fox News + WSJ). Massive direct-to-consumer marketing groups will be formed.

2) Sports Rights will cost less, not more - Sports leagues know hoe much ESPN makes, and they make sure they get their cut. Eventually, costs will decrease.

3) Sports providers will differentiate their product offering, and be free to sell different subscriptions to different tiers of fans (TV, internet streaming, mobile devices, value add services). The same, to a lesser degree, will apply to other genres

4) The average cable bill may be $40, but the key is what is the LTV of a cable customer (including all services - cable companies make profit in other areas like internet and phone that help keep that number down.

5) Companies will manage their bottom lines, revenue be damned. If ESPN can cut costs (rights, headcount, production, distribution) as it loses revenue, there's still hope. Maybe its not as huge of a profit, but it can hang pretty close and probably become significantly more capital efficient.

*I worked at ESPN as a Director of Finance & Strategy, and founded Fanvibe (YC S'10) that partnered with the NBA, NHL, and Comcast. And I can't wait for unbundling.

LanceH• 13 years ago

There are tons of people paying $30 a month for ESPN or $10 for AMC, or more, because of bundling. The bundling is designed so that if you want a single channel, you have to jump up an entire tier of service. This means that if you want basic channels plus ESPN, you have to jump up to that first tier, going from $16 a month to $64 a month.

That first non basic tier has options for me. There are two versions of it, one with kid's shows and one with ESPN. So if I want Nickelodeon and ESPN, I have to jump up another tier and I'm not paying $80 a month and I still don't get Game of Thrones.

Legion• 13 years ago

I for one would kill to see an ESPN that has to court direct subscribers.

Getting people to pay to subscribe to you is a whole different beast from chasing ratings among an audience that pays for you either way.

ESPN may get ratings doing endless Tim Tebow stories, but I posit that the viewers that generate those ratings aren't the same people the network could successfully convert into subscribers. Fluff crap may get people to stop while flipping channels, but nobody is going to be directly subscribing to get it.

I'm a sports fan, yet like many other sports fans, I consider ESPN to be borderline unwatchable. The only thing I care to watch are actual game broadcasts. And what happens when wider direct distribution means that the sports world no longer needs ESPN's cable reach to get to viewers?

vsprabhakara12• 13 years ago

And what happens when wider direct distribution means that the sports world no longer needs ESPN's cable reach to get to viewers?

Its not the viewers the sports leagues value ESPN for. Its the money ESPN pays them for the right to broadcast to their viewers. That's why the NFL Network is a step-child network that can't maximize its value as the NFL can't make more from it that they can selling to ESPN, Fox, CBS and NBC

rhizome2• 13 years ago

Its the money ESPN pays them for the right to broadcast to their viewers

What? No. The cable companies pay ESPN for the privilege of carrying them. It's a revenue share, that's why ESPN is a part of basic packages: cable companies using their billing base to increase the cable company's profit margin on the extortionate amounts they kickback to the network. You think ESPN doesn't use sports agent techniques in their business development department?

jdechko• 13 years ago

Outside of Baseball, Basketball and College Football, ESPN's sports broadcasts can be difficult, especially if you follow a less-popular sport. Due to some unfortunate circumstances, NHL games aren't even broadcast on ESPN. Usually, the only soccer I see is the MLS Game of the Week (and Fox Soccer is a much better channel for soccer anyway).

Some leagues (MLB, NBA, NHL) are getting better, though, at providing direct access to the consumers.

dhugiaskmak• 13 years ago

Better unless you live in the same broadcast market as the team you want to watch. In all leagues that I am aware of those games are blacked out and TV is your only option.

jdminhbg2• 13 years ago

I'm a sports fan, yet like many other sports fans, I consider ESPN to be borderline unwatchable. The only thing I care to watch are actual game broadcasts. And what happens when wider direct distribution means that the sports world no longer needs ESPN's cable reach to get to viewers?

I agree with you about the quality of non-game broadcasts on ESPN, but I think this is sort of exactly why it's not more profitable for leagues to sell directly to consumers. The major networks pay a price for broadcast rights that is greater than what they make in just advertising during those events because they use the NFL/MLB/etc to prop up the rest of their programming.

untog4• 13 years ago

The major networks pay a price for broadcast rights that is greater than what they make in just advertising during those events

...and when the major networks can no longer afford those fees, the prices will drop. It's a market, and if ESPN loses a ton of money at the same time as every other purchaser does, the leagues are going to have to change their fee models or find themselves with no coverage.

rhizome2• 13 years ago

I think this is sort of exactly why it's not more profitable for leagues to sell directly to consumers

Well yeah, forcing every cable customer to subsidize your multi-channel mandatory presence in basic packages is going to be "more profitable" to ESPN than becoming a selection that has to compete for optional package selection. I don't think the advantage of this arrangement for ESPN is any question to anybody.

ryangripp• 13 years ago

Did anyone else see that ESPN alone is only $6? But the "other" regional stations add the other $24?

cortesoft• 13 years ago

That wasn't the number they were referring to when they said it would cost $30 a month. They are saying that CURRENTLY every subscriber pays $6 a month, but since only 20 million of the current 100 million people paying for ESPN would pay for it a la carte, those 20 million would have to pay $30 a month to generate the same revenue.

lftl• 13 years ago

The chart and reasoning for the headline are horribly explained, but here's the line of reasoning:

ESPN currently makes $6/sub a month, and there are 100m subscribers, which leads to the $7.2 billion in revenue for ESPN from subscriptions.

Needham estimates that only 20m of the current subscribers would subscribe to ESPN. In order for ESPN to maintain current revenue, they would need to charge 5 times as much per subscriber per month, leading to the $30/mo number.

ChuckMcM• 13 years ago

Interesting to watch how this plays out. As the per subscriber price rises the piracy rate will rise until you reach a point where any additional $ of price increase only increases piracy but not revenue. With somewhat more global knowledge one could plot that curve for a number of entertainment products.

Ultimately, I expect that things like Netflix (or Amazon video) will be the winner. Where small 'flooring' revenue (paid to keep the listing in the store) and incremental revenue from views, will dominate the distribution chain. The per-episode price will rise (perhaps Amazon will have a cap on total episodes + month like phone minutes but video minutes, with extra charges for overage) but the cable model is creaking, and I expect it to break.

Aero's win [1] is just going to push harder on that breakage.

[1] http://www.nytimes.com/2013/04/02/business/media/aereo-wins-...

joezydeco3• 13 years ago

ESPN is in an enviable position with a product that is hard to pirate.

talmand8• 13 years ago

I wouldn't think it would that much different. It's just a slightly different problem with a slightly different solution.

chadgeidel• 13 years ago

Hard, but not impossible. I'm willing to wait for a few hours for <sporting event that I watch> from <torrent site I use>. Sure, I'm relying on SOMEONE to record and package the broadcast, but it could be largely automated.

There's also the recent phenomenon of people watching blacked-out content via Slingbox. Several years ago MLB considered bringing suit against the company (my google-fu is failing me, it appears that it never happened).

qeorge• 13 years ago

Chris Dixon has a great post about this phenomenon:

http://cdixon.org/2012/07/08/how-bundling-benefits-sellers-a...

tptacek• 13 years ago

Yglesias on the same phenomenon:

http://www.slate.com/blogs/moneybox/2013/07/17/a_la_carte_es...

kvb• 13 years ago

And here's an understandable presentation treating the economics a little more formally:

http://marginalrevolution.com/marginalrevolution/2013/05/bun...

mullingitover• 13 years ago

So, on the other hand, that means that channels other than ESPN would be drastically cheaper, given that such a huge chunk of current cable subscription fees are currently subsidizing these two channels.

danielweber3• 13 years ago

No, they won't. Cable networks have huge capital costs and minimal marginal costs. In fact, sports and their consistent fans is probably creating the marketplace that allows the other less popular shows to even have a marketplace.

salmonellaeater• 13 years ago

I think the main reason bundling will continue to be how most television is offered is because it offers easy price discrimination. Which customer will be willing to pay more for ESPN: customer 1, who already is subscribed to 200 channels and has more than enough shows to watch; or customer 2, who isn't subscribed to anything? The cable companies and networks know that each additional channel or show offers diminishing marginal returns for the customer, and they want to get as much of the surplus in this transaction as they can. If they unbundle, they'll charge much more per channel, because they know customers will be willing to pay more.

If unbundling starts becoming more common, the big advantages I see for consumers are that people will waste less time watching things they don't care about (because they never subscribed to them in the first place) and money will go to studios that produce quality shows people are willing to pony up for, increasing the overall quality of entertainment. I'd love to be able to not subsidize reality TV.

megaman821• 13 years ago

This claim is pretty confusing. Is it saying on 1/5 of US cable subscribers watch ESPN or that at a $30/mo price point only 20 million people would subscribe? If it is the latter is basically answers nothing; would 40 million people subscribe at a $15/mo price point or 80 million at a $7.50/mo price point?

ctdonath3• 13 years ago

In simpler English: TV just got more expensive with just two a la carte channels.

That's assuming buying those two is a given. The article notes, without further notice, that the "hardcore" audience for those is relatively small - meaning that given the chance to unbundle, and to have some reason to not have those (saving money), chances are the majority of viewers will lose interest and find other desirable & affordable content.

Sure there's a lot of desirable stuff not on Netflix ... but my time is limited, and my queue is large, so I can satiate my viewing desires for $9/mo.

talmand8• 13 years ago

Thank you. Every one of these articles never explores the third option: not paying for anything. I'm doing just fine thank you very much without access to ESPN or AMC through a cable TV subscription.

ctdonath3• 13 years ago

Duly noted. I'll remember to include it in future discussions. The local public library has more free content available (don't forget inter-library loans) than you can ever get thru - no need to pay even for Internet access.

the_watcher• 13 years ago

The figure the author cites (most people pay around $40/month for cable) seems inaccurate for this purpose. I know I paid more than $40 a month to get ESPN and AMC. Are the numbers including all cable subscribers (including those with the most basic package), or just those whose package includes ESPN and AMC?

btilly• 13 years ago

If unbundling happens, it will be very, very hard. For reasons explained by the noted economist Andrew Odlyzko many years ago in http://www.dtc.umn.edu/~odlyzko/doc/price.war.pdf.

Here is the short explanation. Suppose that we have two competitors, with non-negligible fixed costs but very low marginal costs, selling the same content. One is selling on a bundled model, the other a la carte.

The result is that, as long as both remain in the market, a price war will inevitably ensue. The lowness of the prices is constrained by distribution costs. Therefore it will continue until one leaves the market.

For historical reasons, bundled models are common. There is no easy way from that to a la carte.

imperialWicket2• 13 years ago

Unbundling is a stop-gap solution. The problem isn't actually as distilled as people not wanting certain channels. At this point, the problem is that people actively want only certain programs. This is where services like Amazon's can shine. I don't want AMC, I want breaking bad, mad men, or walking dead. Some hardcore sports fans probably want ESPN; but my guess is that more fans want all of ESPN's coverage of a particular league(s).

Unbundling needs to be the first step towards per program subscriptions. Would I agree to pay $10/mn for AMC? Absolutely not, they air a bunch of crap programs that I would never watch. Would I pay $25 each for seasons of the shows I actualy want to watch, you bet.

talmand8• 13 years ago

It seems like I keep saying this in this thread, and others, but Amazon already meets this demand. I feel I must keep repeating it because it seems so many don't realize this. I don't pay for cable TV but I watch the latest seasons of Breaking Bad and Walking Dead on Amazon. The only catch is I see them a day after broadcast.

$25 for each season? More like $13-$15 per season. And I can watch them again anytime I want. $10 a month for AMC? Screw that, I already get a better deal on their shows I want right now, TODAY.

EDIT: I just looked it up; I paid $13.99 for Season 5 of Breaking Bad on Amazon. Under the $10 a month for AMC idea, assuming I only wanted this one show, it would cost me about $50 based on aired episodes and expected air dates of the final episodes. I did watch the third season of Walking Dead through Amazon as well but it has $0 for my order on that for some reason, but it lists for $26.99 currently. Walking Dead also broadcasted over five months but did not overlap with Breaking Bad. For those two shows alone at $10 a month would have cost me around $100, I got them both for $40.98. Since I do not watch any other AMC shows, even though I could watch some of them on Netflix, I think I came out ahead.

I agree with you, unbundling is not the future the cable companies are fighting. They are fighting on-demand viewing. The only thing I need cable companies for is the bandwidth to watch what I want when I want. Their arguments to the contrary fall on deaf ears.

Are there problems with this? Sure, I can't watch some shows because they aren't available as season passes on Amazon so I may have to wait for them to appear later. If the show never appears as on-demand? Well, too bad for them because my money just went elsewhere. There are enough quality choices out there that I just don't care.

At this point, there's very little cable TV can do to convince me to return to paying subscription fees for a hundred channels I don't want. The only way I see it is if they somehow get Netflix and Amazon Instant to be made illegal.

Engage in the future, cut the cord.

danielweber3• 13 years ago

At this point, the problem is that people actively want only certain programs.

For the vast majority of people, this isn't true. It's not even true for most people who insist they want a la carte.

People hate being nickled-and-dimed. Three quarters of the cell phone market are people paying more for a bundle so they don't have to worry about how much each call to grandma costs them even though they end up paying more than they would if they kept careful track of their minutes and only bought what they needed.

People want to be able to flip to Mad Men without clicking on the "Buy Now" button.

imperialWicket2• 13 years ago

I'll grant that there's a healthy amount of assumption in that statement, but I think it's pretty safe in the context of many of the more expensive channels.

The channels where someone just wants a channel qua channel tend not to be that expensive (Network channels, Cable non-premium channels). The more costly channels are the channels that offer premium content. I think it's safe to say that most users don't want an HBO subscription so that they can watch whatever HBO 2 happens to be playing this evening. They want some premium channel, or a couple particular movies.

There is definite merit to the concept of just flipping to a show and not having to buy it. For the people who are concerned about this, or concerned about watching episodes the moment they air in a given timezone - a bundle from the current implementation seems appropriate.

makomk• 13 years ago

Is it just me or do the figures given in the article not add up? They're calculating the current revenue of ESPN based on customers paying an average of $70 a month for all the networks, but then when they compare the supposed unbundled cost based on those figures with the current bundling they're saying that the average consumer only pays $40 a month for all the networks bundled together.

Avshalom• 13 years ago

$70 cable bill of which $40 goes to the networks as subscriber fees

ynniv• 13 years ago

Every article arguing against unbundling premium channels misses the point that people who don't want these channels will soon unbundle everything else. Without subsidization ESPN and AMC will be expensive, but it's silly to pretend there is a choice here.

drcube• 13 years ago

I see this all the time. "Waah, we won't make as much as we did before!".

Who cares? You'll make what you can make, or you won't and somebody else will.

Did the world frantically try to prop up typewriter repair revenues in the 80s? Nope. Those guys marched into the future along with the rest of us whether they liked it or not.

talmand8• 13 years ago

That 20 million viewers part confounds me. Where exactly did that number come from? It just seems to be "our best guess" kind of data. Second quarter ratings for this year seem to average at 1.3 million nightly primetime viewers. You could say the number of uniques varies because people only watch the sports seasons they're interested in, but then they also assume that people would pay a monthly fee for ESPN during seasons they have no interest in. Never mind the fact their ratings have been dropping.

Plus, ESPN makes revenue in more ways that just cable TV subscriptions. Does this data reflect that in some way? It mentions ad revenue for instance but I have to believe that ESPN has more than two channels of revenue. I can easily see ESPN expanding into areas outside of cable TV and I would say that they started this years ago.

The article doesn't mention other avenues of viewing AMC content that's available today. Older seasons on Netflix and current seasons on Amazon.

The article also doesn't explore the third option that I currently employ: not paying for either. I don't have cable TV, therefore ESPN gets none of my money and AMC gets a bit through Amazon/Netflix. I'm quite happy with that arrangement. Why is these type of articles always assume there's only two choices; bundling and a la carte of cable TV subscriptions?

The cable TV subscription model isn't dead yet, but its future is limited and the cable companies know it.

Groxx• 13 years ago

Where are they getting that $40/month number? The site it links to claims $80, which is more than double their two supposed-to-be shockingly-high-cost examples. If it's just the subscription fees, the listed percentages are lowest at the extremely-high-$ ESPN values at 71%, and go up to high-80% and 90% in the other categories, both a far cry from the required %50. Nothing adds up.

How Watching 'Unbundled' ESPN and AMC Could Cost More Than Your Whole Cable Bill

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