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Analysts ponder how ESPN streaming service will play with legacy distributors

Sports media analysts view Walt Disney Co.’s decision to put a broad-based, ESPN-branded streaming service into play early in 2018 as both a defensive and offensive gambit.

The launch of the direct-to-consumer service, which had been expected later this year, comes as ESPN (US), once the crown jewel of Disney’s vast portfolio, continues to shed subscribers, partly due to consumers migrating from the traditional programming bundle to over-the-top offerings and skinny bundles. The company is about to enter a renewal cycle with its traditional distributors. Kagan, a media research group within S&P Global Market Intelligence, estimates that ESPN alone will receive an average monthly subscriber fee of $7.54 from affiliates in 2017, the highest for a basic-cable network.

Apps for the ESPN and Disney OTT services will be available for distributors to deliver in package deals. Disney is about to enter a renewal cycle with its traditional affiliates, but Iger said the company has not yet had conversations with its current pay TV distributors concerning the streaming ESPN service.

Kagan analyst Seth Shafer said it will be interesting to see how ESPN "looks to protect its legacy affiliate dollars and navigate new revenue opportunities and where things net out as subscribers from traditional bundles continue to decrease."

Chris Bevilacqua, co-founder of sports and media advisory firm Bevilacqua Helfant Ventures, said the traditional content bundle is not going away anytime soon, "but it is melting." He noted that the industry will be keeping its eye on Disney’s "renewal resets" with the top five or six distributors over the next few years, beginning with Altice USA Inc.

"Would Altice take a hard stance against a pricing increase for the linear service? Or is it going to work with ESPN on the linear service and share in revenues from the new DTC offering? Will it be able to offer the DTC service to broadband-only customers who don’t want the big bundle? ESPN and Altice should be able to figure out a path to give customers what they want," he said.

Neal Pilson, president of consultancy Pilson Communications and the former head of CBS Sports, said the streaming service from ESPN and the one that CBS Corp. plans to launch later this year, afford them added ammunition with distributors. "Any time there is an alternate platform it gives you leverage in negotiations and will drive discussions to keep the linear offering intact."

Pilson added that he always expected ESPN to "protect itself with a streaming service, so it would not be outflanked" by Google Inc., Amazon.com Inc. and Netflix Inc.in terms of major, future rights negotiations.

Marc Edelman, a law professor at Baruch College's Zicklin School of Business, and consultant to sports, gaming and online businesses, agreed, saying the upcoming launches of the ESPN and CBS streaming sports services "mitigate against the threat to some degree from the internet companies." He brought up the example of Blockbuster, which opted not to enter the streaming business and was ultimately driven out of business by Netflix.

He expects that NBC (US), FOX (US) and other sports media players will soon follow suit with their own multisport streaming services helping to keep them viable in a changing media world and as "a safeguard against obsolescence."

TV and media consultant Brad Adgate said ESPN and CBS are "following the eyeballs. This is how young people like to consume content. Many millennials are bypassing MVPDs and ESPN has lost 12 million subscribers over the past five or six years."

Adgate wonders whether those defectors will have interest in the new offering. He also expects ESPN to take a page from Hulu LLC, in which Disney holds an ownership stake, and offers a higher-priced, ad-free version of its branded streaming service.

As the media and distribution landscapes evolve, Bevilacqua believes at least one constant remains. "The leagues and conferences holding the IP are sitting in the catbird seat," he said. "The traditional networks are looking to further monetize digital rights, while Amazon, Google and Verizon Communications Inc. want more sports. More importantly, there still seems to be willingness to pay for the different rights."