Pissing Off the Past
ESPN and Spotify must play ball with the powers-that-be, for now…
“Disruption” is undoubtedly the buzzword of our current time. On a daily basis, old ways of doing things are under assault from new ways of doing things. This is nothing new, of course. In fact, you could argue that the word “progress” has simply been disrupted by the word “disruption”. Yet without question, the ever-increasing rate-of-change in technology is hastening such turmoil and turnover.
One area of disruption is of particular interest to me: the businesses that must work alongside the incumbents whilst they pretend to be coming in peace. Two prime examples are in the forefront as of late: Spotify and ESPN.
In both cases, the “disrupters” literally can’t afford to go to war with the powers-that-be. In the case of Spotify, it’s the music labels. With ESPN, it’s the cable companies. But make no mistake, at some point, both will have to. For now, both walk a fine line of doing what they must do to advance their businesses, while not pissing off the past. At least not too much. Yet.
Now, the stories of Spotify and ESPN aren’t the same, nor are their industries (obviously). Certainly, while Spotify is actually a startup (albeit one that just went public), ESPN has been around for decades (and has been owned by multiple parties at different points in their life — currently, Disney). But there are similar aspects in the places in which they find themselves.
Spotify is the future of the music business.¹ Right now, we see this in their streaming model, forward-facing player, and smart playlists. But in order to continue to grow as a now public company, they will have to continue to alter the underlying economics of their business — that is, the music business. Right now, they must work with the record labels in order to get access to the music they need to power everything they do. But at some point, the growth model will necessitate cutting out this middle man.²
The most successful scenario here is probably not a dramatic one. Spotify has already been re-negotiating the licensing fees and payment rights over time to be more favorable. This will undoubtedly continue. At some point, Spotify will probably start doing for new artists some aspects of what a label has traditionally done. But they will need to keep the label relationships for the back catalogue. Until those rights change over time as well…
So again, I view this as more of a slowly raising middle finger. So slowly, in fact, that the labels can’t quite see what signal Spotify is sending. They think an appendage may have changed position, but it’s so slight that they can’t quite tell… That’s the plan. Eventually, the middle finger will be fully extended and the labels will be outraged. But by that point, they won’t be able to do anything.
The ESPN situation is less straightforward. The company has survived and thrived on the traditional cable bundle. As recently as 2014, they clearly thought this would continue in perpetuity. From a report by Shalini Ramachandran for The Wall Street Journal this week:
Turmoil in the sports powerhouse’s business traces back to a spring day in 2014. Disney had invited about 100 analysts and investors to ESPN’s headquarters in Bristol, Conn., to hobnob with talent including tennis legend John McEnroe and show off ESPN’s new, $150-million-plus production facility.
In an unusual move, Disney gave long-term financial guidance for its cable networks division, largely powered by ESPN. It was rosy. ESPN’s research department presented data arguing cord-cutting was unlikely to become widespread, according to attendees.
“They were flat-earthers,” said one former ESPN executive.
Again, this was just four years ago!
Back in 2015, I cut up a different report by Ramachandran (and Joe Flint) about the network, highlighting what I thought to be the “9 Bullet Points of Doom for ESPN”. Not even a month later, ESPN had to acknowledge what everyone else already knew when it came to their future as a component of the cable bundle. And all of the numbers have just gotten worse since.
And yet, ESPN remains a — perhaps the — vital part of said bundle. This is how they get away with charging so much more than all the other cable channels. From a bigger picture, I do largely agree with Ben Thompson’s thought that at some point, the cable bundle will eventually be the sports bundle, which effectively means the ESPN bundle.³ But it will undoubtedly be a significantly smaller bundle than it has been in the past.
This is why Disney bought the remaining stake of BAMTech and used it to finally roll out their first real over-the-top offering: ESPN+. Right now, it seems pretty lackluster, with a focus on more niche sports content. But that’s already changing quickly. Deals are seemingly being signed left and right with eSports gaming leagues, with UFC, and others.
And so we have this bifurcated world of “traditional” sports on “traditional” ESPN on “traditional” cable and “future” sports on “future” ESPN+ on “future” distribution channels. At some point, those worlds will collide and start to blend. Again, it’s just a matter of when…
And the ‘when’ matters, because if done too soon, ESPN will piss off the powers-that-be in cable, and run the risk of triggering all sorts of clauses that will accelerate the decline of their core business. So. They. Must. Go. Slowly.
And unlike Spotify, ESPN is probably happier to do this because they have such a great deal right now with the cable companies. And ESPN keeps renegotiating these deals to make them even more favorable, even with the overall relative numbers declining.
And yet, clearly Disney chief Bob Iger wasn’t happy with the pace at which ESPN kicked off their streaming initiatives. From the recent WSJ piece:
Mr. Pitaro’s first major task is to build a streaming TV business. Years of delays and detours in this area frustrated Mr. Iger, who wanted the network to move faster, people close to the situation said. A streaming venture with the NBA was derailed because ESPN couldn’t settle on an approach, with some executives worrying about cannibalizing traditional TV revenue by courting cord-cutters.
Iger is smart — understatement, clearly — he knows where this is all heading and doesn’t want to be without a seat when the music stops.⁴
And let’s not even add into this mix the fact that Disney and Comcast — the cable company — are now battling over who gets to acquire the 21st Century Fox assets… At some point, this whole relationship sours, clearly.⁵
Another wildcard in all of this is what the rights look like for all these sports leagues going forward. The most recent NBA deal may have a long-term negative impact on that league in this changing environment.⁶ With different models, the contracts will undoubtedly have to change.
So there’s a lot still at play. But the writing is on the wall. ‘Operation: Don’t Cannibalize’ will commence until ‘Operation: Cannibalize’ makes sense.
¹ Alongside Apple Music, Google Play Music/YouTube Music/Whatever-the-next-branding-is-music, Amazon Music, etc.
² Or at the very least, relegating him to Milton, in the corner, with his red stapler.
³ Fine, maybe mixed with a bit of TNT for the NBA…
⁴ Incidentally, a poll I ran a few years back on when we might see a streaming ESPN service ended up being correct: 2–4 years from then, though I held out hope Iger might do it sooner, which he clearly wanted to!
⁵ And let’s really, really not even dive into Disney’s own forthcoming streaming service for their non-ESPN content — you know, things like their animated movies, Pixar movies, Marvel movies, Star Wars movies, etc. Disney dominates Hollywood right now. Obviously, they will use that leverage…
⁶ Though that’s hardly ESPN’s fault — the league should have smoothed out the salary cap increases over time…
