When a Subscriber Is Not the Customer: Surviving the Unbundling of Pay TV

By Brian Ring, Contributing Editor

Last Thursday, the Wall Street Journal ran a great piece on the pay-TV biz. It seems the most revered, profitable media brand in sports history is facing turbulence as the bundled–pay-TV cord begins to fray.

ESPN’s subscriber numbers have declined 7.2% since 2011, according to Nielsen data. In the past year, 3.2 million subscribers have disappeared. With ESPN’s monthly carriage fee at $6 a subscriber, we’re talking about $216 million in revenue. Annually. Lost in a single year. Although the ad business is healthy, most of ESPN’s revenue is tied to these basic-package subscriber fees, so this is a big hit.

Haven’t we heard these stats before? Not really. Quarterly SEC filings from pay-TV operators provide some data, but it’s typically a mix of subscriber adds and losses across a jumble of pay-TV providers, each with seasonal and regional competitive intricacies. I’ve not seen a chart that provided such a singular view on the negative trend hitting pay-TV programmers. This chart makes the evidence for cord-cutting easy to see.

It’s sure to bring more urgency and attention to the complex, difficult-to-execute strategies that TV networks need to employ going forward.

The challenge lies ahead for ESPN.

In the pay-TV business, pricing — one of the most important concepts in free-market economic theory — is disconnected from the product in both purchasing and usage. Average subscribers to ESPN do so as part of a basic package with all kinds of stuff bundled in. They don’t think of themselves as “ESPN subscribers,” and they certainly don’t know that $6 of their monthly bill goes to ESPN.

If they did, most would think that $6 is arbitrary. There are sports fanatics — say, 10% of households — who might well pay $30 per month or more for ESPN. There are plenty of viewers who think $6 a month is just right. And there are many who wouldn’t pay anything at all.

Unfortunately, like other industries where there are market disconnects between pricing and product — for example, enterprise software or healthcare delivery — the pay-TV business has grown up with B2B habits that make no sense when analyzed in a B2C context.

Consumerization of TV
Rebuilding a more rational, consumer-driven economy for premium and live video content is one of the defining features of the OTT TV landscape. Call it the Consumerization of TV. It may prove to be the biggest challenge of all.

To get it right, ESPN will have to do the splits while juggling chainsaws. It needs to charge premium customers a higher price without annoying them with too many ads. It will have to continue to compete in digital-video land, where younger, stingier, and shorter-attention-span mobile-video fans reside. And it will have to retain the viewership of the majority, who fall in the middle.

The economic term for this is price discrimination. Content businesses have noodled these concepts for decades. Why can’t movie theaters charge more for a universally loved film like Inside Out? Even our big tub of popcorn felt cheap after the smiles and laughs were counted up.

Price discrimination is tough to execute. No one likes to find out they paid twice as much as someone else for the exact same product. So it works best when it’s matched with an investment in the consumer offer: premium-priced tiers need to have a clear and tangible dimension upon which to place that higher price.

Fortunately for sports networks, they have a great example to learn from, right in their own backyard. Let’s take a trip to the ballpark.

MLB Approach
Over the past few years, MLB teams have worked with StubHub to implement dynamic pricing in the ticketing domain. It’s complex and slightly different from price discrimination, so we’ll skip the details for now. But the idea is simple: you pay more for games that are in high demand and less for those that aren’t. Implementing dynamic pricing hasn’t been without hitches, but, after eight years of operation, it’s widely seen to be a win-win for most stakeholders. The lesson? Go forth and experiment. Doing so enabled MLB Advanced Media and StubHub to improve and optimize the economics of their most important stakeholders.

The next thing you’ll want to look at is premium parking. Nothing’s more valuable in life than time, and convenience is a way to buy more of it. A big part of TiVo’s success in the early days was the Season Pass. It made it simple and easy to find and watch the TV shows you want. But TV-interface improvements have been painfully slow in coming, and, today, it seems harder than ever to find, watch, and track the sports I’d love to see but don’t track on a daily basis (like baseball.)

And have you noticed those stunning videoboards going up everywhere? They’re like magical binoculars! Enter UHD and HDR. Pay-TV operators have no doubt accelerated plans for these technologies in the past six months. Going to HD from SD was a clear and tangible improvement for consumers. Ultra HD and High Dynamic Range won’t be the same step-change in improvement, but most consumers will appreciate — and pay for — the better picture quality. (This is perhaps the best defense against cord-cutting — and also the best offense for OTT.)

For the Super Fan
Then there are the special experiences, exclusive super-fan access: getting on the field at halftime or, if you’re in the suites at AT&T Park, getting to meet a retired athlete like San Francisco Giants legend Will Clark. (Yes, I have a selfie to prove it! There’s simply nothing like having the opportunity to be an insider, to be part of the magic of the team, even if it’s just an illusion created by SFG Productions.)

Special live content also factors in. Live-production folks call it “shoulder programming”; film and home-entertainment buffs, bonus content; live-music lovers, a backstage pass. And everyone else calls it YouTube, Instagram, and Periscope. The fact is, leading broadcasters like ESPN need to continue to innovate throughout the entire mobile/social-video ecosystem. And, simultaneously, they’ll have to carve some of that out from the free social platforms and reserve it for those of us willing to shell out a few bucks.

Enter the age of the freemium multiscreen super-fan TV product. Start with the product. Work backwards from there and then put the deals in place to make it happen.

A Dream Product
So I’ll leave you with my dream product. I’ll pay $50 per month for the service that I call the SF Giants MLB Super Fan Plus DVR.

I’ll pay this to ESPN or to Comcast Sports Net Bay Area or to the MLB. But here’s what I need:

• No blackouts. Any game, any time. Nuff said.
• Bonus content. Exclusive Periscopes and Instagrams, with an amped-up production value. (Periscopes are still pretty awful, but the simple idea of providing more and unique live streaming is a home run.)
• Uber DVR service. I’m part of a small flock of odd birds that love to watch sports off a DVR when I’m pressed for time. Getting through a four-hour game in one hour doesn’t mean I don’t like baseball. And yet, there are challenges. I don’t know in advance whether I can watch it live or near-live or not at all. And I don’t like getting app notifications from MLBAM when I’ve decided to catch the game on a delay. So I want my app to give me a choice at the start of each game. Do you want to watch the live stream now? Or do you want real-time highlights? Or would you prefer to block out any possible spoilers because you plan to watch off the DVR in a few hours? Sure, having a league and a network and a pay-TV operator work toward a coordinated, complex offer will be difficult. But that’s what will make it so magical.
• Video clips, not GIFs and Vines. I don’t know whether most consumers actually prefer five-second GIFs to HD video clips with stats, commentary, slo-mo, and multiple angles. I don’t. It’s true, GIFs work better inside Twitter. But my new MLB Super Fan Plus DVR service will undo that accident. I’ll have one place to get well-produced and commented video clips from across the league, all in real time. And my service will even come with an audio-less option with accurate, made-for-mobile closed captions — just in case I’m in a meeting.
• Skippable ads and social-media exclusives. Yes, I’ll skip most of the ads (not the Toyota ads with Buster Posey in them). But I’ll replace those lost impressions with a permission-based platform for awesome sponsored content and digital fan mementos. Last time I went to a game, I posted a photo with the hashtag #ATTPark. But it never landed on the videoboard. Surely ESPN can burn that photo — and a sponsor logo — into a highlight of the game for me. Call it a digital bobblehead. That’s a video clip that I’d share with everyone twice.