Will ESPN streaming service be a game changer for the sports juggernaut?

The Walt Disney Co. finally unveiled its plan to offer an over-the-top video streaming edition of ESPN for the growing number of fans who want live sports — but not the big cable bill that a previous generation paid.

Now the question is whether the revenue generated by the new service to be launched in 2018 will be enough to offset the subscriber dollars that go away every time a household decides it can do without cable. It may take a few years for that to happen, but the consensus in the sports TV industry is that Disney could not afford to wait any longer to find out.

“It was almost a mandatory that ESPN had to do something like this,” said Lee Burke, president of LHB Sports, Media Entertainment, and a former sports TV network executive. “It’s not going to all be made up for in the next six months or a year or two years, but streaming is where the growth is and it’s where the next generation of viewers are increasingly heading.”

While ESPN continues to be a significant profit center for Disney, the migration of viewers to streaming continues to cut into the revenue it receives from pay-TV providers.

Disney this week reported a 22% third-quarter drop in operating income in its media networks unit, which houses ESPN and ABC. Within the cable networks group, which includes ESPN, segment operating income was down 23% to $1.46 billion. Disney attributed the drop-off, in part, to higher programming costs — including $400 million toward a new NBA TV contract — and lower advertising revenue at ESPN, which fell 8% in the quarter due to smaller audiences.

Every household that decides to cancel its pay-TV subscription means less revenue for ESPN, which commands the highest carriage fees of any network — commanding around $7 to $8 out of every monthly cable bill, according to SNL Kagan. In other words, cable and satellite TV companies pay ESPN about $8 a month for every household that receives the sports channels.

ESPN was in 100 million cable and satellite households in 2011. It’s now at 87 million households, according to Nielsen data, as streaming video has become a way of life for the current generation of TV viewers, many of whom are foregoing a pay-TV subscription.

That group is on the rise. According to Nielsen, 62% of all U.S. households — around 73 million — now use Internet-connected televisions or streaming video devices. In those homes, streaming video consumed by those ages 25 to 34 accounts for 23% of TV usage.

The new ESPN over-the-top offering meant to appeal to streaming video users will not be the same channel that cable subscribers currently receive. It will be a separate service available through the ESPN app and offer access to thousands of live events from Major League Baseball, the National Hockey League, Major League Soccer, Grand Slam Tennis, and various college sports organizations.

It will not include NFL or National Basketball Assn. contests that are the big ratings drivers for ESPN’s cable channels, which can only be streamed with a pay-TV subscription. Disney has not said how much the service will cost.

But the service could become more robust over time. Walt Disney Chairman Bob Iger said the company will have the ability to deliver the ESPN channels directly to viewers if the number of pay-TV subscribers continues to deteriorate, but indicated there would be an impact on the revenue it receives from cable and satellite providers.

“If we wanted to take ESPN direct [to consumers], we could,” Iger told analysts Tuesday.

Iger added that an over-the-top offering would have an effect on some of its agreements with pay-TV providers that he described as “sub-optimal.”

Disney’s preparation for the streaming future includes increasing its stake in BAMTech, the interactive media company formed by Major League Baseball that designs and operates the platforms for streaming video services. The acquisition announced Tuesday gives ESPN access to BAMTech’s technology and the streaming rights to sporting events that the company currently holds.

But whatever strides the company makes in reaching over-the-top users, it may not be fast enough to outpace the loss in revenue that occurs through the loss of cable subscriptions. An analyst note from Barclays Capital called the Disney announcement on ESPN a defensive move.

Andrew Zimbalist, an economics professor at Smith College who specializes in the sports business, agreed with that assessment. He said the bounty that ESPN and other cable sports networks have enjoyed by getting fees for every cable household they reached is going to be missed if sports moves to an over-the-top distribution model and consumers get used to having the ability to pay only for the channels they watch.

“That is going to diminish or disappear and that’s bound to hurt,” said Zimbalist. He added that the new proliferation of over-the-top services is only going to make the TV landscape more crowded and competitive.

Shifting TV habits have already prompted cuts at ESPN. It went through a major round of layoffs in 2016, reducing its workforce by 4%. Earlier this year, the network fired around 100 reporters, analysts and commentators.

ESPN has also been under pressure from escalating sports rights fees — its costs to carry the NBA just doubled. Other fees may get even higher going forward as technology companies such as Google, Amazon and Facebook are expected to pursue exclusive rights to National Football League packages when they become available in 2022. Amazon is paying $50 million this year for the non-exclusive streaming rights for 10 of the NFL’s “Thursday Night Football” games this season that will also air on CBS or NBC.

Patrick Riche, director of the sports business program at Washington University, said ESPN and other TV networks are still in a better position to deliver a massive number of viewers to advertisers than a streaming service.

“Given where the ratings are and what audiences the network can generate, I’d be very shocked if it could make business sense for an Amazon or [Google] to outbid them,” he said.

stephen.battaglio@latimes.com

Twitter: @SteveBattaglio

ALSO

Share and Enjoy

Android Distribution: Nougat Reaches 13.5%, Marshmallow 32.3%

The latest Android Distribution numbers are now in and the big takeaway for August is that Android Nougat has increased once again, and now resides at a 13.5-percent distribution level. This can be further broken down as 12.3-percent for Android 7.0 and 1.2-percent for Android 7.1. To put this into perspective, this sees a month-over-month rise of 2-percent for Android Nougat. As back in July, Nougat occupied an 11.5-percent distribution share, broken down as 10.6-percent for Android 7.0 and 0.9-percent for Android 7.1. Which means that in addition to Nougat having now passed the 13-percent market, Android 7.1 has now passed its own 1-percent milestone.

Moving past the current version of Android, and Android 6.0 (Marshmallow) is not necessarily seeing its upward trajectory hampered by the continued rise of Nougat. As Marshmallow is now up to 32.3-percent. Marking an increase of 0.5-percent month over-month, compared to last month’s 31.8-percent figure. Unfortunately, the same cannot be said for the other recent Android versions which all saw a decline month-over-month. The first of the decliners is Android 5.x (Lollipop) which dropped from its previous 30.1-percent standing down to its current 29.2-percent level. Likewise, Android 4.4 (KitKat) dropped down from 17.1-percent to 16-percent. Further back is Android KitKat which dropped down from 8.1-percent to 7.6-percent. With each of its increment versions (4.1.x, 4.2.x, and 4.3) all showing their own month-over-month drops. Ice Cream Sandwich and Gingerbread on the other hand, proved to be no-changers between July and August. As both of which were accredited with a 0.7-percent distribution share in July, and in August both of which occupy a 0.7-percent distribution share.

To sum up, Nougat and Marshmallow continue to rise, Lollipop through to Jelly Bean continue to slip, while ICS and Gingerbread remain as they did last month, after seeing only a very slight drop (0.1-percent) between June and July. While these changes are somewhat steady and predictable at the moment, that is likely to change over the coming months. As Google is preparing to release the final version of Android O soon – likely before the end of August. At which point, Android Nougat will no longer be the most recent version of Android.

Share and Enjoy