ESPN and the Skinny Bundle

The results of a consumer survey released Wednesday by Digitalsmiths raised some eyebrows for what they said about pay-TV viewers’ channel preferences in a hypothetical a la carte pay-TV universe, particularly with respect to ESPN.

Asked if they would prefer to be able to select the channels they subscribe through a la carte, rather than in pre-selected bundles, nearly 82 percent said “yes.” That espn_leadergroup was then given a list of 75 channels and asked to pick their own, ideal bundle. Fewer than 36 percent included ESPN in their ideal bundle, putting the top rated cable network in the U.S. well behind the Discovery Channel, which was cited by 62 percent of respondents.

Even Digitalsmiths was surprised.

“The top channels selected by this group were ABC, Discovery Channel, CBS, NBC, and the History Channel,” the company wrote in the accompanying report on the findings. “Digitalsmiths finds the high demand for the Discovery Channel (ranked second) to be very interesting, but even more shocking is ESPN, which ranked
twentieth. ESPN is some of the highest-priced content compared to other channels and is likely more expensive than the Discovery Channel” (full chart below).

It should not have come as a surprise. ESPN is a niche channel, with very high appeal to a slice of the TV audience — roughly a third based on the Digitalsmiths findings — and little to no appeal among the rest of the audience. Its ratings success, and more critically its pricing power with advertisers and cable operators, is tied to the dynamics of the big bundle. Eliminate that dynamic and ESPN’s current business model collapses.

Significantly, Digitalsmiths did not provide survey respondents with per-channel pricing assumptions before asking them to select their own bundle, so the results presumably are not greatly influenced by price/value calculations but instead reflect the more or less unfiltered appeal of each network across the entire universe of pay-TV subscribers. Respondents included an average of 17 channels in their ideal bundle, a little less than twice the number of channels viewers report regularly watching.  Only after they had selected their channels were they asked the maximum they would pay for that bundle and the average was $38 a month, or roughly $2.23 per channel (less than half what ESPN collects in per-subscriber carriage fees from cable and satellite operators).

As the tables below illustrate, how likely respondents were to include a particular network in their bundle was only loosely correlated with the network’s current viewership numbers. The table on the left ranks the the top 20 ad-supported cable networks according to the percentage of respondents including them in their bundles; the table on the right ranks the same networks by their average number of viewers in primetime in 2014, according to Nielsen.


Digitalsmith tables

While ESPN may be the most dramatic example of the divergence between viewership and appeal it’s not the only one. The Fox News Channel, for instance, is the most watched cable news network by far, with an average of 1.73 million viewers in primetime, almost three times the viewership of CNN. Yet only about 18 percent of respondents included Fox News in their ideal lineup, compared with more than a third who chose CNN. Even low-rated MSNBC turned up in more bundles than Fox, at 20 percent.

Adult Swim pulled in an average of 1.3 million primetime viewers last year, good for 12th place among ad-supported cable networks. But it turned up in only about 15 percent of bundles in the Digitalsmiths survey, well behind Lifetime, The Food Network and Bravo, all of which drew smaller primetime audiences. The Disney Channel ranked fourth in the Nielsen table, with 1.94 million viewers, but 23rd among ad-supported networks in the Digitalsmiths survey, with only about a 28 percent share.

ESPN, Fox News and the Disney Channel all benefit disproportionately from the current structure of the pay-TV bundle. They’re all watched heavily by a small segment of the total audience. In a world of 200 networks, however, the ratings that produces, relative to other networks, are sufficient to give them the leverage to gain broad distribution on basic tiers, where they’re able to extract rents even from those who never watch them through higher carriage fees.

In a world of smaller, a la carte bundles, however networks with broad, steady appeal like the Discovery Channel get more shelf space, which is likely to translate into more pricing power. Discovery ranks first among ad-supported networks in the Digitalsmiths data, and a respectable seventh in the Nielsen table, with an average of 1.41 million viewers in primetime.

Notably, Discovery’s most-watched show, the reality series “Gold Rush,” pulls in an average of 5.17 million viewers, or roughly 3.6X its average viewership. ESPN’s most watched show, “Monday Night Football,” pulls in an average of 13.23 million viewers, or nearly 6x ESPN’s nightly average.

Narrow, streaky appeal works well for a network within the big bundle because the structure of the bundle allows a network to leverage narrow but disproportionately deep appeal into broad distribution. Based on the Digitalsmiths data, however, the dynamics of an a la carte world appear to be very different. Achieving broad distribution requires broad appeal, tipping the advantage to the slow, steady tortoise over the streaky hare.