

How Watching 'Unbundled' ESPN and AMC Could Cost More Than Your Whole Cable Bill - awwstn
http://m.theatlantic.com/business/archive/2013/07/how-watching-unbundled-espn-and-amc-could-cost-more-than-your-whole-cable-bill/277916/

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vsprabhakara1
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
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
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?

~~~
jdminhbg
> 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.

~~~
untog
_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.

------
untog
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.

~~~
jdminhbg
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.

~~~
untog
_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.

~~~
jshen
Why not cancel your cable? Watch shows once you can get them through iTunes or
amazon?

~~~
untog
I have. But I don't consider this the optimal solution to the problem.

~~~
talmand
Many shows are available on Amazon the day after broadcast. It's how I keep up
with Breaking Bad and Walking Dead. In fact, that pricing currently beats $10
a month for AMC that the article claims.

------
acgourley
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
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.

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qeorge
Chris Dixon has a great post about this phenomenon:

[http://cdixon.org/2012/07/08/how-bundling-benefits-
sellers-a...](http://cdixon.org/2012/07/08/how-bundling-benefits-sellers-and-
buyers/)

~~~
tptacek
Yglesias on the same phenomenon:

[http://www.slate.com/blogs/moneybox/2013/07/17/a_la_carte_es...](http://www.slate.com/blogs/moneybox/2013/07/17/a_la_carte_espn_would_cost_30_a_month.html)

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

[http://marginalrevolution.com/marginalrevolution/2013/05/bun...](http://marginalrevolution.com/marginalrevolution/2013/05/bundling.html)

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salmonellaeater
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.

------
btilly
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](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.

------
talmand
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.

------
ChuckMcM
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-...](http://www.nytimes.com/2013/04/02/business/media/aereo-wins-in-
appeals-court-setting-stage-for-trial-on-streaming-broadcast-tv.html)

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

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

~~~
joezydeco
I'm not sure what the state of Bittorrent Live is, and I'm sure 10 years from
now we'll scoff and say 'what a trivial problem', but right now it doesn't
seem feasible.

~~~
talmand
I'm willing to bet the problem can be solved today rather easily with tools we
have right now. Live streaming is not an unknown concept. You just need access
to a video source that you can then output in a way that allows other people
access to it.

But I'm willing to bet that a good reason for low piracy for sports is because
not enough people really care to pirate sports broadcasts in the first place.

~~~
joezydeco
But if ESPN is unbundled and charges $30 a household, would more people care?

~~~
talmand
Oh they would care for sure. They would stop watching sports on ESPN. I could
even see local teams seeing their ticket sales increasing.

That's the rally cry! Support your local sports, stop watching ESPN!

Would $30 a month ESPN cause an increase in sports broadcast piracy? I
seriously doubt it. Do people around the world really care what happens in
sports from the other side of the globe that they are not involved with in
some way? Do baseball fans in New York really care how that football team in
Texas is doing?

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megaman821
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?

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imperialWicket
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.

~~~
danielweber
_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.

~~~
imperialWicket
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.

------
ctdonath
_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.

~~~
talmand
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.

~~~
ctdonath
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.

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mullingitover
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.

~~~
danielweber
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.

------
Groxx
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.

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

------
drcube
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.

------
the_watcher
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?

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

~~~
lftl
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.

------
ynniv
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.

