Just as the college football season was about to kickoff, ESPN, along with every other channel owned by Disney, went dark for Charter Communications subscribers.
Carriage disputes involving Disney/ESPN and cable operators are nothing new — in the last two years, both Dish Network and Youtube TV pulled Disney content from their services for several days before new deals were eventually reached.
This time, however, things feel different.
Charter (which operates under the Spectrum brand) is coming to the table with a new dynamic that will upend the traditional cable bundle and would further accelerate the subscriber losses ESPN has suffered. If successful, it would call into question the very foundation of modern college sports revenue.
ESPN is by far the most expensive basic cable offering, costing cable operators $7.64 a month per subscriber as of October 2020. Factoring in ESPN2, SEC Network, ACC Network, and other smaller channels, the entire ESPN family of networks costs cable operators over $10 a month. Charter has cited the excessive fees Disney charges cable operators as one of the reasons for the current dispute. These fees have been the primary way ESPN has funded the explosion of college sports media rights over the last 25 years. However, ESPN and its smaller channels only represent a fraction of the TV viewing audience. A 2020 study by Wizer found that only 25% of cable subscribers regularly watch ESPN, while 3.1% watch SEC Network, and 2.2% watch the ACC Network.
Earlier this summer, Charter subdivided its entry-level TV plan to create a cheaper option which excluded most Regional Sports Networks (RSNs). If ESPN were to return, it may face a similar fate. In an investor call on Friday September 1st, Charter CEO Chris Winfrey called the current pay TV model broken and stated one of Charter’s main goals in the dispute is to have greater flexibility with the placement of Disney-owned channels in bundles. Winfrey went on to state that a protracted battle could lead to Charter simply not offering Disney-owned content.
In the past, angry football fans calling in to complain would be ESPN’s greatest leverage. But unlike then, with a multitude of streaming options available, consumers have more choice and cable operators have less pressure to give into the whims of fans. In fact, Charter is actively promoting FuboTV to disgruntled cable subscribers, while Disney has been steering fans to its Hulu+Live TV service. For Disney, striking no deal may be a better play than one that favors Charter’s terms due to other large traditional cable operators having Most Favored Nations clauses in their existing carriage contracts.
In other words, if ESPN is successfully knocked off basic cable by Charter, then Comcast, Cox, DirecTV, etc would be able to automatically apply the same terms Charter negotiated and the subscriber fee losses would grow exponentially.
While Disney is planning on offering a direct-to-consumer version of ESPN, the biggest hurdle is still figuring out a model that can maintain profitability. If ESPN completely left cable and every regular viewer subscribed to a streaming option, ESPN would need to charge $70 a month to maintain its current revenue levels.
ESPN has already begun to tighten its purse strings to offset cord-cutting-related subscriber losses and it has directly impacted college sports. The PAC-12 demanded almost double what ESPN was willing to pay for their TV rights only to likely become the first major conference to dissolve since 1995 due to not finding a deal even comparable to what ESPN offered. The SEC delayed a vote on going to nine conference games because ESPN was unwilling to fork over more money to ensure it got more Oklahoma vs. Alabama and less Georgia vs.Tennessee-Martin. If ESPN moves off basic cable and retains only a fraction of the subscribers it had when its rights deals were originally signed at some point the math won’t add up.
The ACC credited a large portion of the 6.7% increase in revenue between 2021 and 2022 to the ACC Network finally gaining carriage on every major cable outlet. Charter is the main cable provider in Orlando, Tampa, Charlotte, New York City, and a host of smaller markets in the ACC footprint. The ACC Network charges a subscriber fee of $1.30 a month if you are considered “in-conference” compared to 25 cents a month if you are “out-of-conference.” If there is an ACC school in a state the entire state is considered “in-conference”, as confirmed by former ESPN President John Skipper. Cable subscribers in Florida who receive ACC Network pay $1.30 a month regardless of whether they’re in Tallahassee, Miami, Jacksonville, or Orlando. Similarly, cable subscribers in New York City pay $1.30 a month for the ACC Network despite Syracuse being 4 hours away. The longer ACC Network remains dark in those markets, the more likely it is that every school in the conference will end up taking a significant revenue hit. New York City alone has 800,000 Charter subscribers and would account for over $10 million a year in lost subscriber revenue for the ACC Network.
ESPN having the statewide carriage clause was one of the arguments in favor of the ACC adding Stanford, Cal, and SMU. The new additions would mean every cable subscriber in California and Texas would now be paying the “in-conference” rate for ACC Network. Former Fox Sports President and Big Ten Network co-founder Bob Thompson believes another sticking point for coming to a deal is Charter pushing back on paying the new “in-conference” rates outside of the Bay Area or Dallas. Charter is the main cable provider for Los Angeles, Austin, and San Antonio. Such a change in carriage fees would wipe out much of the newfound money from the westward expansion.
For Florida State, the immediate concern is that the part of the state where a large portion of alumni live couldn’t watch this weekend’s game vs. Southern Miss and may be in the dark for any other games that air on ESPN channels this season. If the ACC Network doesn’t return to Charter, it could potentially end up costing FSU around $1 million a year in revenue. After AD Michael Alford and other school officials spent the offseason loudly proclaiming their frustrations with the conference, this new development adds another talking point. At the same time, these developments make it all the more imperative that FSU has a definitive plan laid out before an ACC exit strategy is finalized.
If ESPN experiences faster revenue decreases than they were projecting, it would make them more hesitant to open up the checkbook for further SEC expansion. That would leave the Big Ten as the only viable option but there is still the looming question of would the conference invite FSU despite not being an AAU member. After an offseason that saw the ACC wrestle with the growing financial disparity compared to the SEC and Big Ten, this issue couldn’t come at a worse time.