ESPN 360: Not a net neutrality issue, but is it a good business model?

Posted by Giles Cottle Tuesday, February 24th, 2009

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There’s been recent renewed interest in ESPN’s attempts to charge US operators to provide its ESPN 360 online service, mostly prompted by this article in Wired.

In summary: instead of getting users to pay for its online video service, ESPN is dealing directly with the operator, charging them on a per subscriber basis to allow their all their users to access the service on a per-subscriber basis. AT&T, Verizon and several other providers have signed up; their users can view the service for free. Others, most notably Comcast and Time Warner, have not. Their subscribers are blocked from the service.

It’s not, as many said when ESPN launched the service, a net neutrality issue. ESPN is free to license its content to any company that it chooses. But the strategy does raise some interesting issues (on top of the very grievances non-sports may have over their subscription funding a service they will never use):

How to monetise online content without cannibalizing your core revenues?: In order for this model to work, any content must be very popular and mass market. If it isn’t, operators won’t stump up for all of their users to watch it. But no broadcaster will put all their content solely online, because the revenues that can be generated from online video are still a fraction of those from TV. NBC’s much hailed online coverage of the 2008 Olympics did not feature many of the Games’ most popular events, for this reason. ESPN has not gone down this route, but the most desirable content on ESPN360 – NBA and MLB – is simulcast with ESPN’s TV station. This makes it difficult to make it attractive. ESPN is relying on those that cannot access a TV set to drive viewing of these events.

Few other content owners can follow this strategy: Were this model to be more widely employed it would be a worrying trend for operators, who could effectively be held to ransom by a raft of content players. But few companies are in a position as strong as ESPN to negotiate with operators in this way. Other types of premium content, such as popular TV series and films, can be accessed in a number of different ways, both legally (cinema, DVD releases) and illegally (piracy). If you’re away from your TV set when Lost is on, you can simply TiVo it. Sport, if you’ll pardon the pun, is a different ball game. It is much more difficult to get from alternative channels, and is a live experience that is people enjoy in a live manner. Surveys have constantly shown that sport is the genre of programming that people time-shift the least. This gives ESPN a bargaining position that few can match.

It’s not a symbiotic or mutually beneficial relationship: ESPN is undoubtedly negotiating from a position of power. In the long term, its aims for ESPN360 are also contrasting with those of the operator. Those offering the service will hope to win subscribers from other operators that have not done a deal with ESPN. But ESPN is attempting to do deals with every operator, in order to get its content to as many people as possible. It is actively encouraging would-be ESPN360 customers to lobby their operators to sign up for a service. It even provides an automatically generated letter LINK that they can send to their operator encouraging them to sign up for the service.

Net neutrality and usage cap concerns: the service itself is not a net neutrality issue, as others have said. But at least one carrier – Frontier – is alleged by several posters on forums to not be including usage of ESPN360 to count towards its usage cap, which stands at 5 GB per month. There are also questions over whether operators can simultaneously impose usage caps and promote high bandwidth services, a quandary Comcast may find itself in if its recently announced plans are successful.