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Why Is ESPN Not Winning Lately?

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ESPN is losing subscribers

In the previous part of this series, we looked at how The Walt Disney Company’s (DIS) ESPN channel is very expensive. Now we’ll look at why ESPN isn’t having a winning season.

As you can see in the above graph, ESPN had 381 million subscribers at the end of fiscal 2013 and 364 million subscribers at the end of fiscal 2014, a loss of 4.4% in one year. This erosion in subscriber base was mainly due to cable or pay-TV subscribers moving to video streaming providers like Netflix (NFLX) or Amazon’s (AMZN) Prime Instant Video.

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ESPN’s revenue model

Cable networks like ESPN derive a majority of their revenues from fees charged to MVPDs (multichannel video programming distributors) like Comcast (CMCSA) and from the sale of advertising time slots to advertisers. These rates charged by ESPN are dependent on the quality and quantity of its programming content.

Currently, ESPN holds telecasting rights for popular professional and college sports programming like the NFL (National Football League), the NBA (National Basketball Association), and NASCAR (National Association for Stock Car Auto Racing).

However, these sports telecasting rights are expensive. As we already saw, ESPN has reportedly paid $1.47 billion to the NBA as part of its renewal deal. That’s three times more than the NBA’s earlier fee of $485 million. This allows ESPN to allegedly charge a high carriage fee of $6.61 per subscriber per month, the highest of any TV channel.

Troubled times for ESPN

The ESPN revenue has come under competitive pressure due to rivals like 21st Century Fox’s (FOXA) Fox Sports and Comcast’s (CMCSA) NBC, which are aggressively pursuing sports telecasting rights. You can get a diversified exposure to 21st Century Fox by investing in the iShares Core S&P 500 ETF (IVV), which holds 0.32% of the stock.

In addition to this pressure, ESPN’s programming costs have also increased substantially due to higher rights costs for the NFL and the launch of the SEC Network.

It remains to be seen how Disney’s ESPN battles will erode its subscriber base and affect costs and competition.

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