The breakup of cable begins, and ESPN files suit

[spuwho]

After fielding complaints for several years from subscribers about the expense of basic cable, Verizon started to respond by offering an alternative which didn't include ESPN.

Disney and ESPN wasted no time and filed suit. They also blocked all Verizon advertising on Disney owned networks.  Let the programming war begin.

Verizon isn't completely altruistic here, the trend towards "cable cutting" and moving to internet based programming sources is starting to grow. This is the first shot in the battle to break up "all or nothing" cable.

Per the Consumerist:

Verizon FiOS Sued Over No-ESPN-Included "Custom TV" Cable Packages

Just about every basic cable package in the U.S. includes ESPN whether you want it or not. This is because the popular sports network's contract generally forbids pay-TV providers from putting ESPN on a separate sports tier. But Verizon FiOS recently introduced "Custom TV," a programming package that doesn't necessarily include ESPN, and now the telecom giant is being sued by the sports network for breach of contract.

This is according to a summons [PDF] for Verizon to appear in a New York state court in Manhattan.

https://consumermediallc.files.wordpress.com/2015/04/final-summons-with-notice-to-verizon-4-26-15.pdf

We attempted to get a copy of the actual complaint filed with the court, but the document won't be made public by the court until after certain confidential information about the contract between Verizon and ESPN has been redacted.

ESPN is alleging breach of contract and is asking the court to issue an injunction preventing FiOS from offering a base channel package that would not include ESPN. The suit also seeks unspecified damages of at least $500,000.

A statement from the network explains that "ESPN is at the forefront of embracing innovative ways to deliver high-quality content and value to consumers on multiple platforms, but that must be done in compliance with our agreements. We simply ask that Verizon abide by the terms of our contracts."

At the heart of this dispute between Verizon and ESPN is the recently launched Custom TV option for FiOS. This pricing model offers a selection of base channels (which does not include ESPN) to which the subscriber can then add on separate niche-targeted bundles of 10-17 channels each. The $55/month starting price includes two of these add-on bundles at no extra charge, but each additional bundle is $10/month.

Because ESPN is included in a sports bundle and not part of the core base for all customers, the network believes that Verizon is in violation of its contract with the network. In advance of the lawsuit, ESPN's parent company Disney stopped airing certain FiOS commercials on ESPN and other Disney-owned channels.

In response to the news, a rep for Verizon tells Consumerist:

"Consumers have spoken loud and clear that they want choice, and the industry should be focused on giving consumers what they want. We are well within our rights under our agreements to offer our customers these choices."

A recent poll of Consumerist readers found that 85% of them believe that ESPN should not be included in basic cable packages but should be included in a separate tier where customers have the option of paying for it.

[Sonic101]

The only reason I have cable is to watch sports. So in this case I wish it was ESPN that was splitting off from cable.

[spuwho]

The only reason I have cable is to watch sports. So in this case I wish it was ESPN that was splitting off from cable.

ESPN doesnt permit it to be offered as a standalone channel.

If people really saw how much of their cable bill was made up of just them, they would drop it in a heartbeat.

In turn ESPN would probably drop their other channels, ESPN2, ESPN3, ESPNNews, and their webcasting.

ESPN Radio has been losing affiliates due to the higher rates they want to let them be carried.

i am guessing that whoever leads in providing sports content on the internet will win the next round. that way you only need the connection to the Net, not a fixed agreement with a cable carrier.

[Non-RedNeck Westsider]

If people really saw how much of their cable bill was made up of just them, they would drop it in a heartbeat.

From an article I read back a couple of years ago while doing some other research (which is still in my browser history strangely enough):

http://www.sportsgrid.com/media/espn-cable-subscriber-fees/

...Frank Deford did a story for NPR calling cable subscribers (non-sports fans in particular) "hostage{s} of sports." He does that because sports channels – of which ESPN is by far the biggest, of course – take in way more per subscriber than any other network. The Worldwide Leader's current per-household subscription fee: $4.69. The next-closest national cable network? TNT, at...$1.16.

[spuwho]

Per Motley Fool:

http://www.fool.com/investing/general/2015/04/01/espn-for-36-analyst-shows-true-cost-of-a-la-carte.aspx

ESPN for $36? Analyst Shows True Cost of A La Carte Cable

Americans think they want Comcast  (NASDAQ: CMCSA  ) , Time Warner Cable  (NYSE: TWC  ) , DIRECTV (NASDAQ: DTV  ) , DISH Network  (NASDAQ: DISH  ) and the rest of the pay-television providers to offer a la carte pricing.

Under the current system, cable customers must buy packages of channels that include ones they want alongside ones they don't. For example, you might pay for a more expensive tier in order to get a regional sports network that telecasts your favorite team's games. Paying for that more expensive tier might also give you access to other sports programming -- perhaps the Golf Channel, NFL Network, and Tennis Channel.

You might not care about golf, tennis, or football -- you just wanted to watch your favorite hockey team -- but you have to pay for the whole package to get the one thing you want.

This system benefits cable systems and countless niche channels that collect carriage fees from the cable companies for subscribers who might never actually watch their programming, Your subscription dollars support networks you don't watch, which sounds like a terrible deal. In reality, however, it's a form of TV socialism in which I pay for stuff you watch, you pay for stuff I watch, and we're both richer for it.

Without bundles that force customers to subsidize stations they don't watch, a whole lot of channels would go away. Furthermore, if we only pay for the stations we want, the cost of those networks would rise dramatically.

It's a case of a la carte seeming like a good idea but coming with a hidden cost that could raise your bill and make the TV universe far smaller.

What will happen?

If cable companies stop forcing people to buy packages, then every channel would have fewer subscribers and make less in carriage fees (and potentially ad dollars if viewership numbers dropped). This would mean that to continue delivering the existing level of programming, channels would need to charge more on an a la carte basis than they get from current subscribers.

MoffettNathanson analyst Michael Nathanson ran some projections of the per-subscriber payout for some popular channels, and the numbers are stunningly high, according to Fierce Cable. Disney's  (NYSE: DIS  ) ESPN is a prime example in Nathanson's study. The sports network is currently distributed in the vast majority of pay-TV homes and commands a per-subscriber fee averaging out to roughly $6.10 per month, the website wrote.

Nathanson estimated that in an a la carte setup, only about 16.81% of TV homes would subscribe to ESPN. That would lower its audience and ad rates, and each user would need to pay $36.30 a month for the network to maintain its current profit margin, according to the researcher. Using the same math, Nathanson speculated on rates for other networks: TNT would cost $8.95 per month, Disney Channel $8.25, USA Network $5.45, and Nickelodeon $4.99.

"If we use the reach and monthly affiliate fees for each individual cable network to figure out what the implied a la carte pricing would have to be for the network to capture 100% reach, we can easily see that most of these top networks would be prohibitively expensive," Nathanson wrote.

Be careful what you wish for

A la carte pricing seems like it would be good for the public, but it would come at a heavy cost. You would be able to pay for only the channels that you want, but the cost would be exorbitant. Furthermore, it seems likely that in an a la carte world, many channels would cease to exist.

Thus, an a la carte TV universe could paradoxically result in less choice, and at least for some it would not come with a cost savings (quite likely just the opposite, in fact).

Meanwhile, if Disney could not charge $36.30 a month for ESPN, that network would almost certainly have to cut its budget. That could be bad for sports leagues as it could lower the prices paid for rights. It also might tip the balance back in favor of the big broadcast networks because they would have the largest possible audiences by far.

In any case, consumers would be forced to choose between paying an exorbitant rate for ESPN or going without it. Viewers would also have to make the same choices across various other cable networks.

Unbundling could benefit consumers, perhaps in the form of more packages and more premium channels being offered purely a la carte. But if the whole cable world becomes pay for what you want, per-channel prices will skyrocket and we may all end up with a whole let less.