Can ESPN Go Over the Top?

The worldwide leader in sports isn't ditching the cable bundle anytime soon, but ESPN may soon offer some of its content over-the-top.

Walt Disney's ESPN is reportedly considering a Netflix style streaming service that would allow users to stream MLS soccer games over the Internet -- no cable subscription required. Earlier this year, ESPN made a deal with DISH Network that allows the satellite TV provider to stream its channels over the Internet as part of a bundle.

As ESPN continues to move more toward Internet streaming services, it opens up additional revenue opportunities. It comes with the risk, however, of angering the pay-TV providers that are expected to pay out over $6 billion in affiliate fees this year.

Remember when Netflix cannibalized itself?
Every Netflix investor remembers the Qwikster debacle. The company got rid of its $9.99 per month unlimited DVDs-by-mail and unlimited streaming package, and separated them out into two $7.99 packages. As a result, the company lost a few subscribers and the share price tanked.

A year prior, Netflix started offering stand-alone streaming subscriptions, which immediately began cannibalizing the DVD-by-mail business. Today, DVD-by-mail subscribers continues to decline quarter after quarter. That's not a bad thing, either. Netflix has grown much larger than it likely would have if it stuck to DVD-by-mail and never offered a streaming service.

ESPN could do the same thing
ESPN may be heading down a similar path. It already offers live streaming of all of its channels as well as additional content to cable subscribers through its WatchESPN website and app. An over-the-top trial with MLS soccer is a clever way to test the waters of offering a direct-to-consumer product.

The risk of continuing down this path, however, may be far greater than Netflix's move toward streaming. ESPN only has so much control over how much pay-TV providers will pay in affiliate fees. If ESPN offers a lot of premium content over-the-top, it could diminish the value of the content broadcast on the television network. As a result, those affiliate fees may be cut.

What's more, there are about 100 million ESPN subscribers through cable. That's significantly more to lose than the 17 million subscribers Netflix had before offering a streaming-only subscription.

How ESPN might successfully eat itself
Disney's deal with DISH Network is notable from a technology perspective, but from a consumer perspective, it's going to look a lot like cable when the final product rolls out. Disney's deal requires ESPN (and its other networks) to be part of a bundle of television channels offered for live streaming over the Internet. This way, Disney can maintain its high affiliate fees with the other cable companies.

It will also build up a large customer base that's used to streaming sports programming over the Internet. The infrastructure will be built out to support more streaming from ESPN. Additional trials like the one with MLS soccer will help prove demand for over-the-top services from ESPN.

It may only be a matter of time before ESPN starts offering premium content directly to consumers. It needs to determine the demand curve first, however, in order to find out if it's worth abandoning the excellent economics of the cable bundle.

The future of television
With more and more people subscribing to over-the-top services like Netflix, cable companies are working hard to prove the value of the bundle and prevent cord cutters. Sports is a big part of that value proposition, so ESPN will face a lot of resistance from companies with a lot of power over the network's revenue.

If ESPN doesn't do it, however, someone else (with less reliance on cable operators) might.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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