Much of the discussion around forthcoming ESPN premium streaming service ESPN Plus has revolved around the service’s planned at-launch content (all MLS out-of-market games, 182 MLB games, tennis, non-Power Five college sports and so on) and price point ($4.99 a month), and those discussions are worth having to get an idea of the immediate numbers of people (both current pay-TV subscribers and those who don’t have cable or satellite packages) likely to sign up for this and its immediate revenue impacts for ESPN parent corporation Disney.
But ESPN Plus is perhaps even more interesting with respect to its larger implications for Disney, and that was much of the focus of Disney executive vice president and chief strategy officer Kevin Mayer (who’s been discussed as both the potential next head of ESPN and perhaps even Disney CEO Bob Iger’s long-term successor)’s conversation with Recode’s Peter Kafka at this week’s Code Media conference.
As the conversation illustrates, ESPN Plus is certainly going to be important for Disney as a direct-to-consumer testing point ahead of the launch of their direct-to-consumer Disney streaming service (which will include Disney, Pixar, Marvel, and Star Wars content) in late 2019. It’s on a smaller scale than that planned service, and should give them some useful insight into the over-the-top space and how to directly interact with consumers. But what’s perhaps more new and more interesting from the sports perspective is the more speculative part of this discussion, which touches on over-the-top as a likely option for the regional sports networks Disney plans to buy from Fox, and as a potential option for all of ESPN’s television content at some point down the road. Disney CEO Bob Iger has previously called ESPN Plus “the future of ESPN,” so there’s been some indication they might go that way, but Mayer’s comments perhaps enhance that, especially when it comes to RSNs.
Here’s the whole conversation; the key part about the Fox deal and RSNs comes around 11:29.
At that point, Kafka says “One of the narratives of the last couple years has been about ESPN, the problems ESPN has, and the problems that has caused for Disney. There’s been all this discussion about spending all this money on sports rights while viewership and subscriptions are declining. You guys are making a really big bet in part on regional sports networks, basically taking on many more expensive sports rights. Can you explain the logic there?”
Mayer responds “We think that sports is a great business. Yes, there are some elements, you pointed out we have fixed sports rights against variable revenue, but rates are pretty solid and increasing. There are, there has been a slow decline in subscribers. That’s been mitigated a little bit as of late, I don’t want to take too much good news from that, but it has seemed to mitigate the loss of subscribers. And there’s no stronger emotional bond than sports, between the local audience and the local sports team, and I think that survives. And if we do make this broader transition to a direct-to-consumer model, that is a fantastic local way into consumers’ houses and into a relationship with consumers, through their local team.”
Kafka then asks about people who don’t want local sports included in cable packages and how that will work in a direct-to-consumer model, and Mayer says he believes there will be lots of people who do want that.
“We think the fandom there is pretty rabid in terms of local teams and local sports,” he says. “Where there’s rabid fandom and where there’s a high affinity, there’s money to be made. We think fundamentally that will be very good business.”
Going back to the start of the conversation, Mayer talks about how ESPN Plus will launch in “early spring,” and talks about the rights that it will have.
“What we’re selling is thousands of events, upwards of 10,000 actually, that you can’t otherwise consume. If you’re a television subscriber, a pay-TV subscriber, paying that big monthly bill, you still can’t consume any of the product that we have on ESPN Plus. So we have non-Power Five conference football, basketball, lacrosse, every sport actually in the smaller Division I conferences. Many, many thousands of people have gone to schools in these conferences, it’s their alma mater, and they’re interested in watching their teams play and they have no way to do it today. So that’s a very big value add for those consumers.”
“And we have the major tennis tournaments, the Opens, other than the French Open, so if you’re a tennis fan, that’s really great. 182 Major League Baseball games, so one game essentially every night of the baseball season. We have MLS, all of the out-of-market games, all of them, will be on this service, so if you’re a soccer fan, a U.S. soccer fan, you’re going to watch that. We have a very vast array of programming. Plus we’re going to put non-live event programming on there, the 30 for 30s, that great documentary series. The entirety of that library will be exclusively on this service. You can’t get that entire library everywhere else. There’s a lot of good stuff.”
Kafka then asks if they’re targeting pay-TV subscribers who watch extra content or those who don’t have pay-TV packages, and Mayer responds “It’s for both,” then goes on to discuss how this will work in the new ESPN app.
“It’s going to be fundamentally the best app for sports fans ever created. You’ll have news, highlights, scores and clips like we’ve always had, but video will be front and center. That’s free, you just have to download the app, free, you can get all that content like you’ve always been able to, but we’re going to prioritize video in this app. It has a much cleaner, more efficient video interface than what we’ve had in the past.”
Mayer mentions that there will be linear television (so, ESPN channels) events available in the app as well to authenticated pay-TV subscribers, and then discusses how the app may appeal to those who want more than what’s offered on those channels.
“If you want these thousands of other events which might tickle your fancy, if you’re a sports fan, you just want more and more stuff, more leagues, more games, more sporting events, you’ll subscribe to it. Another $5. If you’re a fan of one of the sports that isn’t well-covered, you might subscribe to it. If you went to a school that isn’t well-covered, you might subscribe to this. It’s meant for people that aren’t getting all they need out of the main ESPN.”
What’s perhaps interesting there, and hasn’t really been discussed in a lot of this coverage, is that much of the content discussed here is currently available for free to authenticated pay-TV subscribers through the ESPN app. Many smaller-conference games, non-TV tennis matches at those tournaments, CFL games and so on are currently streamed on “ESPN3,” at no extra charge to authenticated subscribers. ESPN Plus will certainly have some new content not currently available, including the full MLS out-of-market package and these new MLB games, but it’s unclear if current ESPN3 content is going to go behind the ESPN Plus wall (and if so, how much of it will go behind that wall).
Another notable element in this discussion comes when Kafka asks if current linear ESPN content won’t be on ESPN Plus at launch thanks to contracts preventing that, or thanks to ESPN wanting to maintain their traditional pay-TV business. Mayer says they do have the ability to move that content (with “some implications”), but their main reason to not do so at this point is about keeping the standard ESPN service healthy. But he says this also sets them up to potentially go to a fuller over-the-top service at some point.
“We could move it over; there are some implications I won’t get into here,” he says. “It’s mostly a business decision. We’re well served by the pay-TV ecosystem, I think it serves consumers well, I think many tens of millions of consumers feel well served by it, we’re well served by it, so we want to prioritize that but also offer consumers an opportunity to buy more and set ourselves up for a future where we may pivot and go over the top. …This would be the precursor to that, set the table for it, give us the capabilities, where we could test ourselves out and be ready.”
Kafka then asks about the planned Disney OTT service and the content for it, and Mayer says the focus there is setting up their library of films and TV once current licensing deals expire, plus creating original content that will be exclusive to the service.
“We’re pulling all of our library as it becomes available,” he says. “We’re making a lot of original content for it that we’re very excited about.”
Following that, Kafka asks an interesting question about the sequencing of ESPN Plus (spring 2018) and Disney streaming (late 2019). Mayer says ESPN Plus is somewhat of a foot-in-the-door option to test the waters, but they also could launch the Disney streaming service now; the decision to wait is about launching it with the best possible content library. “We have the technological capability now with BAMTech,” Mayer says, and Kafka interjects “You could launch Disney tomorrow.” Mayer then elaborates on why they’re waiting:
“We could launch Disney tomorrow, but we would not have the pay-one movies, and we think that the pay-one movies is a very important component of consumer value. We’d rather launch hot and with all the content, put our best foot forward. We don’t have the pay-one movies and we don’t have the original content made yet, we’re in the midst of making a lot of original content, so we want to go out and have a good array that we think creates better value for consumers. End of 2019, those pay-one movies start to become available and we’re going to launch.”
Kafka then asks about why Disney decided to go to a direct-to-consumer model after years of discussions, and Mayer said the timing was right thanks to the BAMTech acquisition and to the changes in the marketplace that make OTT more feasible.
“There was a confluence of opportunity. We felt consumers would really enjoy our product, we finally had the technical capability to deliver it in as quality of a way as we felt we needed to to serve our consumers. We wouldn’t go out without a product that wasn’t excellent, and now we have the capability to do that. And we have the vision to do that now. So I don’t think it was any particular event that precipitated this move. It was a confluence of realizations; we could serve the consumer better, we could actually vertically integrate into the value chain, into distribution, in a high-quality way, without owning a lot of infrastructure, which you can now do. The confluence of those two events, or those two opportunities, in our minds made it the right time to jump.”
They then talk about how there was initially debate around if Marvel and Star Wars properties would be in the Disney service or in a separate service, with Mayer saying they decided to roll them into the Disney service because there’s “no brand dissonance” between those properties and Disney’s other offerings (namely, they’re featured at Disney parks, in Disney games and merchandising and so on) and because they provide “extra firepower” to that service. After that, Mayer espouses the benefits of direct-to-consumer from a data and personalization standpoint.
“We are learning it’s nice to have a direct-to-consumer connection because you can learn more about them. If you’re intermediated by a third party, you’re a wholesaler to that retailer, the retailer earns and is in a position to get all that consumer data. We feel we can serve our consumers much, much better if we understand their affinities, their viewing habits, when and how they want to interact with our product, and therefore, we can personalize our product to consumers in a way that we could never otherwise do, and we think that serving consumers better in that fashion is really important to us.”
Kafka later asks about Hulu, which Disney would gain a majority stake in as a result of the Fox purchase, and Mayer says it’s a third pillar of their overall direct-to-consumer strategy.
“I think we would deconstruct our strategy into three components, our direct-to-consumer strategy. We have a family-friendly strategy, which is our Disney service. It has Disney, Pixar, Marvel, Star Wars, original content. It will be for families, that’s the sweet spot, it will of course extend well beyond families, but the sweet spot for that will be the family audience. Then we have the sports audience through ESPN and the RSNs hopefully, when those get added in. And then you have a general entertainment service through Hulu, and that will be the home of our general entertainment programming once it’s off its first run. So ABC, Freeform, those general entertainment brands that we have, will find its way onto Hulu. And once the Fox acquisition is completed, we’ll continue that practice as Fox does as well with their brand.”
The other real comment of significance to sports fans here comes when Kafka asks about the timeline of announcing John Skipper’s replacement as ESPN president. Mayer says that’s a question for Iger, but he expects the decision to be made relatively soon.
“That’s a question for Bob, I know he’s working on it and I don’t think it will be too far in the future. We have put George Bodenheimer, who was very nice to come back out of his retirement, in for several months, so I think it will be in that timeframe.”
Kafka then asks “Do you want that job?” and Mayer says “Running ESPN is great, but I’m going to do what Bob asks me to do, happily, and that’s the job I’ll have.”
So that’s certainly not ruling out the idea, and many (including plugged-in ESPN reporter Jim Miller) have suggested that Skipper’s replacement could come from the Disney side and that Mayer might be a logical candidate. We’ll see if that happens. But this overall conversation is definitely notable for what it says about Disney’s streaming strategy and how ESPN factors into that, both now and in potentially a much bigger way in the future.