The Disney-Fox-Warner Bros. Streaming Service Is Just Fubo-Lite - An Analysis

The streaming sports joint venture of Disney, Fox, and Warner Bros. Discovery is a lot less revolutionary than the popular press seems to think. It does sound like something the sports fan might be requesting -- nearly all of the sports on cable, without the non-sports to clutter (and push up the price of) the package.

Disney brings to the table ESPN and a number of other full-time sports services and ABC. Fox has the Fox broadcast network and Fox Sports 1 (among others). Warner Bros. Discovery brings the general entertainment channels TNT, TBS, and truTV which each carry some sports (truTV only has a sliver of sports -- a few games during March Madness).

Unlike Netflix or Amazon Prime, this service will not just carry the games, but will also carry all the other stuff on the included channels. So, the experience of watching the NBA on TNT (supplied by WBD) in this service will be the same as watching it on cable. When the game ends, NCIS or Charmed or another entertainment program will follow it.

The as-yet-unnamed service will be carrying linear channels, much like any other virtual multichannel video programming distributor or MVPD (e.g., YouTube TV, Hulu with Live Channels, Sling). Calling it a "streaming service" is a bit of a misnomer, since that term usually describes a mostly on-demand assortment of programs with a sprinkling of live sports.

In essence, what this new service will provide is a sports-oriented skinny bundle, which is essentially the part of the market that fuboTV has staked out. The issue for fubo was (and is) that the sellers of the channels with live sports were generally unwilling to sell the sports channels at the time that fubo launched in January 2015 without fubo also taking their non-sports channels. For example, Disney would really prefer a distributor to carry the Disney Channel and FX in addition to its suite of ESPN sports services (e.g., ESPN, ESPN2, ESPNews, Longhorn Network). It might not be that Disney would not sell the sports services separately, so much as Disney would make the deal terms far less attractive if the non-sports channels were excluded. So fubo's attempt to super serve sports fans ended up being mostly a replication of the full channel lineup carried by the leading MPVDs, with only a few exclusions (channels from cable programmers without any sports programming like AMC, A&E, and Hallmark).

Among the three partners, nine years later, they were willing to sacrifice the non-sports services, provided that the other guys did, too. Because the new service is carrying linear channels, there is no new grant of rights needed from the suppliers of the programming -- the sports leagues. To them, this is a new MVPD.

It is unclear to me if there is much of a market for this service. If it were significantly less expensive than the full cable package, there may very well be. However, each of these programmers is likely selling their channels to the new service at full rate card. The technical costs of streaming the channels to customers costs money as does customer service and processing credit cards. It is unclear if this package can be sustainably much cheaper than cable or a vMVPD. 

What is clear is that the package will be without a bunch of high profile sports -- notably those controlled by NBC and CBS and smaller sports services like Tennis Channel -- and that lacking those and the cable entertainment and news channels, the package might be less-than-satisfactory in meeting the needs of families, where a package that has sports and also has Nickelodeon, Fox News and Lifetime might seem like a better deal, even if it costs a bit more. 

Another ramification is that all of the MVPDs will see this package and ask for similar packaging rights on their systems. The affiliate sales staffs of Disney, Fox and WBD are probably not looking forward to those discussions.

WBD may be the biggest relative winner among the partners, since this new MVPD will fully distribute most of its costly entertainment programming (which runs on the three included channels), while its Cartoon Network and TCM are on the outside looking in. The sports services from Disney and Fox are pure plays; their entertainment services don't have any sports.

Update: fuboTV clearly sees the new venture as a threat, as it felt compelled to issue a press release about it.

Update (16 Feb 2024): The MVPDs' concerns come out in this CNBC story regarding them seeking similar packaging rights for these channels as the the joint venture appears to have.

Update (20 Feb 2024): fuboTV has sued the joint venture claiming antitrust violations related to less attractive licensing terms for the sports channels. fuboTV's press release The US Department of Justice is interested in such an argument, per Bloomberg Law via Reuters. Clarifications to the original post were added and are marked with italics.

Since we were so rudely interrupted, a summary of the last year's developments

The impact of the coronavirus and the changes to daily life in response to trying to slow the spread of it need no further discussion from me, hence a short list:

• movie theatres closed
• sports suspended at all levels
• lots of people at home
• much more online shopping
• nearly complete shutdown of typical professional television and movie production

In my professional neck-of-the-woods, there's three big things to talk about:

1. The continued ascension of non-linear Internet-delivered video
2. The resultant continued demise of "cable TV" (a/k/a "pay TV" or multichannel subscription video) be it delivered by a cable, satellite, telco or "non-facilities-based" provider like Sling TV
3. Perhaps the most interesting -- how the coronavirus lockdown has forced experimentation with new forms of video production

Streaming video

These last fourteen months have shown continued big subscriber growth by Netflix, and much bigger growth since the pandemic was declared, but that's just the start of the streaming video developments.

Disney+ launched on November 12, 2019 at a price of $6.99 per month (less than Netflix's cheapest plan) and showed better-than-expected take-up right away. Disney programmed the new streaming service aggressively. Its billion dollar first year original programming budget is considerably more than an entertainment basic cable network would spent. And that expenditure showed up right away to consumers in the form of Star Wars spin-off The Mandalorian, a project that in earlier times would have found its way to theatres or home video or ABC. Disney+ was marketed aggressively as was expected. The consumer take-up with strong right out-of-the-box with 26.5 million subscribers by December 28. Less expected was the Black Friday discount offer $60 for one year. 

The quick take-up of Disney+ thoroughly demolished the theory that streaming is a special business that the incumbents cannot be competitive in. In retrospect, perhaps it shouldn't have been a surprise -- none of the tactics that Disney employed were significantly outside its core competence in marketing movies and cable TV networks.

Hulu joined Disney with a very aggressive Black Friday discount offer -- $1.99 per month for 12 months (versus regular retail of $4.99 per month).

AT&T saw Disney's successful launch of Disney+ and looks to be following its playbook. It started with aggressive pre-launch pricing by HBO Max -- $11.99 per month for 12 months (versus typical retail of $14.99 per month for HBO alone). As noted in Multichannel News, this is $1 per month less than the most popular Netflix service package. It probably puts a lot of pressure on incumbent cable operators, as it offers more content than the cable version of HBO at what is in most cases a lower retail price. As we get closer to HBO Max's launch on May 27, we'll see if AT&T manages a programming splash as big as The Mandalorian. It doesn't look like any of their launch shows have that kind of profile and the shutdown of production due to the pandemic is probably part of that.

Part of the success of Netflix is that it has expanded the range of its offerings. It has had significant success expanding into unscripted entertainment - lowbrow, middlebrow, and high(ish)brow: Tiger King, Tidying Up with Marie Kondo, Salt, Fat, Acid, Heat. As a Netflix subscription is a household subscription, having a greater variety of programming should lower churn, as dropping the service affects more people in the household (and/or the children away at college who use the household login).

Amazon made its number of Prime subscribers public in 2018 (100 million! considerably more than analysts had estimated) and by year end 2019 it was over 150 million. At a retail of $119 annually, that's an annual revenue stream of nearly $19 billion dollars. By media standards that's a lot of money, even if most of its value for customers is in free shipping, rather than video. However, for some perspective, in 2019, Comcast's cable unit had just over $22 billion in video revenue, and that represented a slight decline from the prior year.

Pulling back, the big advantage that Netflix and similar streaming services have with consumers relative to cable TV is that they are, still, much, much less expensive than the incumbent service. The big basic cable package provides good value to a household that wants and uses all of that programming, but at $75 or so, it's price dwarfs Netflix at $8 (for a single person household). No one has time to watch all of the programming on Netflix, so the greater volume and variety of basic cable is simply expensive overkill for many households, particularly those of young people, who, at least in the recent past, go out a lot. Add in an antenna (or Locast) to get the major broadcasters and that's a very attractive offering for young adults or households that don't highly value cable exclusive national and regional sports services like ESPN/Fox Sports 1/NBCSN and YES/NESN/MASN.

It's unclear if the availability of these streaming services on computers, tablets, and phones is a big deal or not, but it is certainly a plus.

The Achilles heel of these services was thought to be bandwidth caps from Internet Service Providers (typically the cable operator), but these haven't shown up that widely or onerously. As the cable operators know better than anyone, steaming video helps sell a fast Internet connection and their business delivering that service is far more valuable than the legacy business of delivering packaged video services as it has both faster growth and higher margins.

Changes with cable TV subscriptions

Continued video subscriber losses by MVPDs (multichannel video programming distributors a/k/a cable and satellite TV providers). It is ugly. vMVPDs growth slows, then the leaders, DirecTV and Dish's Sling start losing subscribers. One analyst described the possibility of "a rapid death spiral for the category", with the category being "linear subscription TV".

Given that people are spending much more time at home and are bored, these should be the best of times for cable TV. So, why the potential death spiral? Cable TV has always been positioned in the market as a premium product -- something you buy if you want more/better than what you can get free over-the-air. Now, it is considerably less premium on two fronts:

First, new high-profile programming by cable networks is being cut back (because of declining numbers of cable subscribers) and a lot of those marquee new shows are...going to streaming instead. Television producers see streaming providers (Netflix, Amazon Prime, Apple TV+, HBO Max) as a more attractive destination for a new show than cable network -- they may pay more in license fees and they definitely support the shows with a lot of off-air promotion (e.g., billboards in NYC). 

Second, losing sports is painful. It is a key driver of the cable bundle's value and there may be no good programming substitute. We'll see how the Korean Baseball Organization fares on ESPN. Even if the games are compelling, it's hard to imagine there's a way to instantly have a country develop a rooting interest in the Korean teams. Baseball, among all major sports, is the one whose interest falls off the most below the top professional level. College football is nearly as popular as the NFL. College basketball and the NBA have a similar relationship, but that's far from the relative popularity of college baseball or minor league baseball relative to MLB.

What have we learned?

• Stock market valuations of streaming (i.e., Netflix) created huge economic incentive for Disney and others to get into streaming, even if it will cost significant short term profitability, the public markets will reward it. 
• It is unlikely that net-net that Disney will come out ahead during this crisis since coronavirus may have a great negative impact on so many of its lines of business (theme parks, movies in cinemas, sports, and advertising). No other media and entertainment company may be hit on so many fronts, as Rich Greenfield of LightShed describes very well.
• Retransmission consent fees may be going up dramatically -- mostly from deals negotiated over the preceding years, but the decline in multichannel subs is a threat to that revenue stream
• Locast's free broadcast TV service is still operating and has expanded into new markets. It has also finally been sued by broadcasters and sued back. Its existential question remains: will it win its case or lose and suffer the fate of Aereo?

Changes in video production

To me the most interesting development in the TV industry in the last fourteen months is less what we don't have, than the new things that we have gotten. We've had a crash course in new ways of producing television (at home instead of on a set in a studio, using a webcam or phone in lieu of a multiple pro camera setup) and most of it is pretty OK. Local news doesn't seem to suffer a lot by having their anchors at home instead of bantering at a desk. And that's also revealing -- making a more personal relationship between viewer and "talent", as noted in Vogue (with its first link from this blog).

The NFL draft, which for years has been in a dogged pursuit to amp up its production values -- they were planning to use boats to ferry the picks to the stage this year, really -- actually got some great reviews of its home-based draft this year, probably in part to the fact that the stars of that show are regular people (as far as TV skills go) and seeing them in a home environment made them more relatable to the audience, especially NFL Commissioner Roger Goodell who appeared largely human. This fascinating Forbes article, by my friend and former colleague Howard Homonoff, describes the very interesting and innovative video production tech the NFL used.

Seeing musicians perform at home had much that same charm, irrespective of the genre of the music. Billie Eilish in her bedroom with her brother from iHeart's concert of pop stars to a show tune reconceived for Zoom in broadway.com's Sondheim concert.

full clip of Billie's performance is no longer available on YouTube, sadly

full disclosure: that's my office chair that Ann Harada is sitting on in this clip

The music videos produced during this period -- I'd put forward CHVRCHES "Forever" (Separate but Together) as an archetype -- remind me of the simple and fun music videos of the early video age...and we get to see the artists in their homes (or something like it) and that's often fun.

There will be a huge impact on commercial production as well. Given the upheaval in consumer's lives, the advertising messages suitable for before the coronavirus are often ill suited to our lives now (sometimes frighteningly so).

Producing new commercials without the usual camera and sound crew creates new challenges. One actor of my acquaintance shared that she was being asked to film herself at home -- for a national commercial with a DSLR or other similar high end, but decidedly consumer video equipment. (Having the performer supply more of the means of production, apologies to Karl Marx is nothing new -- newspaper reporters don't have to go into the office to type up their stories on the newsroom computer system, and many, perhaps most, audio books are made by voice artists working in home studios. The costs are much lower and the quality difference is much smaller than it once was. Workers' might be a step closer to...emancipation with this ownership.)

So, what's new with you?

What ESPN+ Says About the Multichannel Future

On April 12, 2018, ESPN launched its thoroughly pre-announced subscription video over-the-top service, ESPN+. The service is notable for ESPN trying to establish a beachhead in the direct-to-consumer video business and not distributing a video service primarily through MVPDs. It is a watershed for the most important programmer in basic cable.

It is not hard to see why. after decades if growth, ESPN has lost household reach for many years from its peak in 2011,

driven by higher basic cable prices and over-the-top video services, led by Netflix, have had tremendous growth during the same period.

To remain "The Worldwide Leader in Sports" ESPN has to follow the people.

ESPN has had an over-the-top video service before, ESPN3 provides additional games and other comments to authenticated ESPN subscribers. That service is distributed in coordination with its distributors: facilities-based MVPDs (multichannel video programming distributors - cable, DBS, telco - e.g., DirecTV, Comcast, Verizon FiOS) and, later, virtual MVPDs (e.g., Sling, DirecTV Now).

ESPN had never created a service to address the non-MVPD marketplace. Instead of addressing this growing market directly, they looked to support what the MVPDs were doing to improve the value of the multichannel video subscription as its retail price kept rising. This lead to WatchESPN (its app which distributed its TV Everywhere service ESPN3), ESPN video-on-demand, the short-lived ESPN 3D, etc. That strategy made a lot of sense for a long time.

As the most expensive service by far in basic cable multichannel video, ESPN is the biggest beneficiary of the basic cable TV bundle. The primary benefits of being part of the basic cable package are (1) distribution to consumers and (2) low marketing costs. With the MVPD as the primary marketer of basic cable video subscriptions, ESPN gets a largely free ride. For a cable network, this greatly simplifies the sales process, one needed/needs to get a few dozen key distributors to roll out the network, not millions of individual consumers to buy. Distributors also were keenly focused on selling it. Until the past decade, basic cable was the most compelling offering from cable providers. Now it is not the first priority, eclipsed for cable operators by cable Internet service. [And slightly marginalized by "skinny bundles" of channels that lack ESPN.]

ESPN+ allows ESPN to establish its a direct-to-consumer distribution and is starting from scratch on marketing a video service to consumers. [ESPN does have direct-to-consumer marketing experience with ESPN The Magazine.] There are product, price, promotion, packaging, and distribution issues to sort out. Given its strategic importance, it is not surprising that ESPN decided to go aggressive on price -- at $4.99 per month ESPN+ is materially less expensive than Netflix and Hulu.

The other priority for ESPN is to keep the positive relationships with the MVPDs, because the amount of money coming in via basic cable distribution -- both in affiliate fees and advertising on the TV services -- will likely dwarf the amount of money coming in on ESPN+ for quite a while.

During ESPN's long growth period, adding value for the cable operators was very important. ESPN's affiliate fees, for a long time, increased by an astounding 20% per year. Now, with more typical single-digit rates of increase on affiliate fees, the MVPDs cannot reasonably have the same expectations for added value in ESPN3/WatchESPN.

ESPN has always heavily invested in sports content and then figured out a way to best utilize it to enhance the value of the business. In the 1990s, when ESPN faced little immediate competition on the cable dial and there was no direct-to-consumer Internet video business, ESPN would buy up rights to college football and air few of the games, instead "warehousing" them. The benefit to ESPN was protecting the franchise by not allowing a would-be sports competitor to use this programming to launch or enhance its network. Later, ESPN used additional games to support the TV Everywhere effort -- instead of letting Tennis Channel license extra early round matches of the US Open, ESPN would put them on ESPN3. Now, the best business use of those "extra rights" -- rights not needed to program ESPN, ESPN2, ESPNU, or ESPN's other cable services -- is to build out the appeal of ESPN+.

ESPN going direct-to-consumers is a difficult thing for the MVPD to swallow. MVPDs are used to being the 800 pound gorillas of TV distribution and dictating the key business terms. Historically, the MVPD's only real beef in their dealings with ESPN was its high price -- few questioned its programming or alignment with MVPD objectives. However, all around the multichannel industry, the groundwork has been laid for this moment. Three key over-the-top subscription service launches have led this change.

Starting around 2012, WWE planned to launch a basic cable network, but found little interest from cable operators for more channels for their digital packages. So it launched over-the-top, on February 24, 2017. For WWE, this was, if not a bet-the-company move, something close to it. At first the new network got a tepid response and looked like it might be a disaster -- alienating distributors, like DirecTV, who did not like the impact of this new distribution on their lucrative pay-per-view event busines. Now it is clear that WWE Network was not wrong, and it wasn't even particularly early. The WWE network is clearly an economic success and many of the distributors, like Dish, have found a way to make peace with it.

CBS All Access launched eight months later, on October 28, 2014. Unlike the WWE Network, this was a much less risky endeavor; CBS didn't need the MVPDs in the same way -- its flagship channel's distribution was secure. CBS did need to figure out how to work with its affiliated stations, but both parties had a lot of motivation to sort that out and their interests were basically aligned. All Access turned out to be a brilliant strategic move by CBS to establish its own revenue stream and its own direct-to-consumer distribution. It also works well as a demonstration of the value of the network for retransmission consent negotiations with MVPDs. After all, if consumers are willing to pay $5.99 per month retail for CBS, it is hard for the cable operator to argue that CBS is not worth $1 or $2 or $4 on a wholesale basis. To further support the service, CBS spent money on additional unique promotable content to create some additional reasons for people to subscribe (e.g., its first, The Good Wife spinoff The Good Fight, and Star Trek: Discovery -- both targeted to superfans).

Since CBS All Access is completely under CBS's control, it does not need to work with joint venture partners to make changes to the service or experiment with it, as Hulu does. All Access can be expanded with additional programming and marketing if there is a return; can be scaled back or shut down if it is more profitable to distribute content through MVPDs or other distributors (e.g, Facebook, Apple). It can distribute a version through Amazon with no advertising. All Access is not yet financially material to CBS's business as a whole, but has significant strategic value in establishing a direct-to-consumer business and sorting out the technological, billing, marketing and other issues necessary to run that business should it be the horse that CBS wants to ride over the long haul.

HBO Now was the last big domino to fall when it launched six months after CBS All Access. More like ESPN, HBO's history was synonymous with the growth of early cable. WWE didn't have many direct relationships with MVPDs and CBS, had mostly contentious ones related to retransmission consent pricing. HBO, like ESPN, was a trusted vendor to MVPDs. However, after many fits and starts trying to find a way to launch its service OTT without alienating MVPDs, eventually it just moved ahead, the opportunity was too compelling. And this time, distributors also found a way to make peace with it relatively quickly, which they had to because is has become a material business for HBO it is not going away.

What these three offerings had in common (and how they are all different from ESPN), is that none of them were part of the basic cable bundle. HBO was always available on-top-of basic cable as an a la carte add-on. CBS was always available for free over-the-air. WWE Network was not an established, profitable basic cable channel; it was an aspiring new basic cable channel.

Direct-to-consumer video streaming is the new world, but what does this mean for the basic cable bundle? The conventional wisdom is that sports is the only thing keeping the basic cable bundle afloat, the sports represents unique content that drives all households to subscribe. I'm not sure that is the whole truth.

It has been well documented that core sports fans represent about one-third of cable subscribers, the other two-thirds is casual fans and non-fans. In the UK, where most of the high value sports programming -- Premier League soccer -- is available in a separate subscription, about one-third of customers sign up for it. When NESN, the regional sports network owned by the Boston Red Sox and Boston Bruins, was distributed as an a la carte premium channel, its subscription levels were in the same ballpark (moving up and down with team performance as well).

With the rise of virtual MVPDs, some of the underserved market segments may get services better tailored to their needs. The households with little or no interest in sports are one of them. Historically, there was great fear among distributors in not offering ESPN -- it has been the goose that laid the golden egg. To my knowledge the virtual MVPD Philo TV is the first mainstream service to launch without any major sports. It is a very small player, 50,000 subs at year end 2017 or about 1% of the still modestly-sized virtual MVPD marketplace.

Sports is unique relative to other programming. It is live, unlike most entertainment programs, so it is usually watched live. Unlike the other big category of live programming, news, it is not a commodity -- the audience that watches the NFL does not accept other sports, like soccer or Ivy League football, as a pretty good substitute.

Should MVPDs look on ESPN+ as an existential threat? Will it increase the attrition of basic cable subscribers? From a content perspective, it seems unlikely -- the best sports events are not available on ESPN+ and are only on ESPN and ESPN2. However, if ESPN+ does get established, ESPN will then have another significant outlet and could/likely will, over time, decide to make available some of its programming on ESPN+ in addition to ESPN and ESPN2, later, it might actually take content off the cable channels, in favor of putting it on ESPN+. It is unclear to me if ESPN has already moved content from ESPN3 to ESPN+, but it is clear that it has acquired new content exclusively for ESPN+ like the UFC.

Only a growing market can support additional programming investment. Programming investment is moving off of linear television, which cannot support the cost. The market for basic cable video subscriptions is declining and the market for television advertising is not growing any faster than inflation. We've seen this impact already at ESPN, it is rarely the first choice of TV executives to lay off high profile talent.

Fundamentally, ESPN+ is the hedge to protect Disney for the future in the event that the multichannel bundle declines or collapses. Philosophically, Disney has always been platform agnostic. It has never been allied with an MVPD and would take its high quality content wherever the market led it be that DVD or PPV or something else. Disney sees that it is a strategic priority to develop a direct-to-consumer streaming video platform and is investing heavily to do so. Whether or not it makes a ton of money in the short term does not matter (and it looks like it is not making a ton). That's what a hedge is. Like CBS All Access, ESPN+ is offering more for superfans, but unlike CBS All Access, it isn't offering the the main course. As currently structured, ESPN+ is a complement to getting ESPN in a basic cable subscription, but a poor substitute for it.

My view is that ESPN+ will not be a big success until it is a closer substitute for ESPN and ESPN2 via basic cable.

It is clear that ESPN needs to rationalize its business for the current and future video marketplace. ESPN+ is a shot across the bow of the MVPDs, but the multichannel television business has been under attack for many years now. It would be unreasonable for MVPDs to expect ESPN to go down with the ship. All that said, the ESPN business that comes out of this may not be nearly as profitable a franchise as the one powered by the economics of the basic cable bundle.

Revisiting The Innovator's Dilemma and OTT Competition with Cable

Over two years ago, in November 2013, I wrote one of the most popular posts on this site, Over-the-Top Video and The Innovator's Dilemma. In the wake of a Wall Street Journal article on Hulu's plans to offer a cable competitor service with live streams of certain channels controlled by its owners, Disney and Fox, I thought it worth revisiting that post. Where was the analysis on target and where did it miss? More importantly, what really changed?

What Changed?

• In terms of the players in the market, the biggest change was the exit of Aereo. What might have been a leading company in over-the-top video ended up in bankruptcy after a loss at the Supreme Court that invalidated its business model.
  
• The impact on cable, DBS and telco multichannel subscribers played out almost exactly as I had predicted -- in a gradual attrition. The big multichannel providers lost 385,000 subscribers in 2015, about 0.4%. Cable One, a small cable operator who dropped Viacom's channels after a pricing dispute, saw its video subscriber base decline in 2015 by 19%, as it "pivoted" away from video to focus on high speed Internet service. One of the strategies related to this pivot was raising video prices by $10. None of the largest cable TV operators are following Cable One's strategy.
  
• The decline in cable TV subscribers is showed up in a bigger way on the programmer's side. ESPN's Nielsen subscriber count declined by 7 million in the last 2 years which did not go unnoticed by the investment community. ESPN's numbers are tied up in a few issues, falling cable TV subscribers are one part, "skinny" packages which don't include ESPN are another, and the biggest one may be that Nielsen's own estimates of cable household counts may have been too high in the past.

The Hits

• The technical quality of over-the-top streaming has continued to improve. LTE has become widespread and 5G wireless is on the way. 802.11ac wifi is far more common. Gigabit ethernet to the home has also become more common, although it is hardly ubiquitous. Gigabit is coming from Comcast and AT&T, as well as pioneer Google Fiber (pioneer, that is, if you don't live in Chattanooga)
• The quality of the over-the-top content has continued to improve. Netflix and Amazon were winners at the Emmy Awards in September 2015 garnering kudos for House of Cards and Transparent, as well as a decent collection of other shows. Broadcasting & Cable described a the television production boom triggered by the success of the streaming outlets as creating "a run on talent" in a recent cover story (but put the story itself behind its paywall).
• The availability of over-the-top services would expand. They did, and in ways that I had not described -- HBO, Showtime, and Starz all went direct-to-consumer (not too suprising a development) and Amazon embraced a model to bundle individual OTT services with its Streaming Partner Program (a development that was non-obvious).

The Miss

• The availability of over-the-top services didn't happen in one form that I expected -- the roll out of Aereo to additional markets. 
• I made no mention that over-the top services would expand, but they have. PlayStation Vue, Sony's over-the-top service, not mentioned in the original post, launched in a handful of markets, then went national this year. Hulu's build-out of a service with streams of linear channels would be another expansion geared to the mass market. There have also been all manner of subscription video on demand services for niches by major companies like NBC Universal's Seeso, World Wrestling Entertainment), and Crunchyroll for Japanese anime (its backers). In an earlier time, each of these would have been a cable program service.

Unclear

• YouTube's stopped highlighting its original content channels on the same day as my original post, although its interest in originals morphed into content for YouTube Red. YouTube isn't following the big name Hollywood path to video competition, it is carving out a different one. This strategy is a bit harder to evaluate -- the proof would be in YouTube's views and advertising sales. The former are transparent, but not easy to interpret, and the latter are not visible at all.
• I forecast that the convenience of OTT service would improve based on better interfaces, DVR in the cloud, better recommendation engines. There have probably been some incremental improvements here, but nothing that seems to have changed the nature of competition in a big way. PlayStation Vue reviews praise its more Netflix-like interface, but it isn't clear if this is driving its adoption. Meanwhile, Comcast has licensed its cloud-based X1 navigation software to Cox and others, improving some cable interfaces faster than OTT interfaces, in those places that actually got it.

The Innovator's Dilemma continues to be a useful lens through which to look at the development of over-the-top video, finding its purchase in markets/use cases not central to the big screen at home. Unlike other innovations, however, the role of content makes the video distribution system unique. Some holders of high profile content can make more money going direct to consumers than through the cable bundle -- adult video made the leap a long time ago. The next ones to prosper over-the-top are the new services that probably couldn't get carried by distributor's protecting their margins (Crunchyroll, WWE), followed closely by those that are already sold a la carte (HBO, Showtime, and Starz). Those left are the basic cable channels, whose play in over-the-top is focused on their library content (like Lifetime Movie Club) and may be for a long time.

The Media Sector Meltdown

August 2015 saw the emergence of a new narrative about the cable-oriented media: the sector is doomed to suffer from cord-cutting, It was the media meltdown.

The triggering event was Disney's earnings report, with CEO Bob Iger reported declines in the number of ESPN subscribers.

The retail price of basic cable goes up every year, so, unless there is a substantial amount of additional value being provided by the cable/DBS/telco operator, the service become slightly less attractive than it was the year earlier. Additionally, even with enhancements to the service itself (e.g., more and better original programming, VOD and TV Everywhere access to more and more programming), at a certain price level, the service is simply unaffordable to some segments of the market.

The substitution effect is another part of the story. Every year the Internet-delivered video options for consumers have improved. In the last year, HBO Now and Showtime over-the-top services brought content previously available only via a multichannel video subscription to customers without such a subscription.

Theoretically ESPN could do the same, but the economic model for it is not the same. HBO and Showtime are sold a la carte by all distributors and carry no advertising, ESPN is sold in the basic package and generates a lot of advertising revenue. If ESPN sells itself direct to consumer, it won't be in a big, broad package, it will be effectively a la carte-ish (maybe packaged with the other Disney-owned channels) and not everyone who wants CNN, USA, and A&E will get it, as they typically do now, with a basic cable package. That's not good for ESPN either as its ability to collect license fees and generate advertising from the casual- or non-sports fan, the core of its business model, will be put in jeopardy.

ESPN arguably is the biggest beneficiary of the basic cable bundle. It should be the last service to explore leaving it.

While the returns from YouTube's investment in original content are mixed, at best, the content on that platform is not going away and some stars have emerged, even if they don't look like what we have been used to.

Pewdiepie, the most popular star on YouTube, takes viewers through his video game play

Netflix's original content continues to get good press and high marks from viewers, with new seasons of House of Cards, Orange is the New Black and the unlikely series prequel to cult movie Wet Hot American Summer.

Add to this story two high profile affiliate relations debacles: Viacom's disappearance from Suddenlink and Weather Channel's exit from Verizon FiOS. While these stories appear similar, they are very different.

The programming on the Weather Channel is simply increasingly irrelevant with the availability of its core functionality readily available on both computers and phones (often from the Weather Channel's own apps or weather.com or weatherunderground.com). Before ubiquitous internet access, a dependable destination for weather information on cable TV was pretty valuable. Now, not so much.

The Weather Channel or The Weather Channel app?

However, an even bigger issue for the Weather Channel in its dealings with the MVPDs is that it is on its own. While managed by Comcast's NBCU, it is not bundled with their must-have networks (NBC, Telemundo, USA, Syfy, MSNBC, CNBC, E!, Bravo). So, while Weather Channel is arguably more valuable than NBCU's second tier networks (Oxygen, Chiller, Cloo, Esquire, Sprout), none of those networks have to negotiate on their own. Not coincidentally, none of them have been prominently dropped by MVPDs either. It would not be surprising if Comcast buys out its Weather Company partners -- in one swoop it could solve Weather Channel's fundamental problem (as could any other large programming company. Weather Channel would be a fine fit for Fox, CBS, Disney/ABC or Turner Broadcasting as well; all of them distribute 24/7 live programming services similar to Weather. Bundling is very powerful.

it can work wonders with your customers as well!

Viacom's departure from Suddenlink is harder to explain, but explainable nonetheless. While Viacom critics believe that its programming is not that important and/or that it sold too many of its reruns of its children's programming to Netflix, the fact is that Viacom has a number of attractive, high profile original programs on Comedy Central, Nickelodeon, MTV, VH1 and  TV Land. While its programming has had considerable problems of late, it has a broad enough portfolio of channels that it shouldn't be that vulnerable.

What may have happened is that while its programming was much hotter, Viacom got good deals out of larger cable operators who dominate the large markets (e.g., Cox, Charter, Comcast, Cablevision, Time Warner) and, when it got to Suddenlink offered them the same deal even though a few years later its content had considerably less appeal. especially in Suddenlink's smaller, rural areas.

Still, the people at Viacom are not stupid and less money is always better than no money. It is, unless, it costs Viacom, via most-favored-nations "give backs" with the big operators, more than it would collect from Suddenlink in both its affiliate fees and the advertising that it can generate from its viewership in Suddenlink markets -- which, of course, is 0 if the Viacom channels are not carried. Since Suddenlink represents only about 1% of multichannel households, it is likely that is the underlying issue for Viacom.

However the numbers line up, the other aspect of being part of the basic cable package is the belief among the distributors that your channels HAVE to be in the basic cable package. Suddenlink is now providing data to the industry of exactly how important the Viacom channels have been to them. There is the possibility that, while Suddenlink may be ahead losing some of its video subscribers without Viacom, the loss would be greater for other distributors who operate in markets where Viacom programming is more popular and/or who have greater margins on their video customers than Suddenlink does on its video customers. Local cable advertising, for example, is considerably more lucrative for the major-DMA-covering large operators than for a single system in a non-major DMA.

Changes in TV watching behavior have not caught up with the TV measurement. Everyone knows that younger people are watching TV programs on tablets and computers -- whether through password sharing, Netflix, or actual TV Everywhere use. Yet Nielsen only counts viewership on these platforms if that program is being watched live, even though a disproportionate amount of the viewing on these platforms is likely VOD.

Young people are not, generally speaking, abandoning multichannel television to watch original content on YouTube and other web sites. However, some big changes are taking place. Young viewers' tastes turn on a dime and they have definitely turned away from some of the services they used to lap up (and toward...zombies). Also, the ways that they are watching programming are shifting significantly. When you've got a strong, significant, profitable business, change is scary and two kinds of change are scarier still.

Update (25 November 2015): Eric Jackson's email newsletter details the enormous cost to Disney of ESPN's drop in subscribers. There are some issues with using Nielsen and paid subs interchangeably (they measure slightly different things and Nielsen's numbers are typically 10% higher for a cable network), but the underlying point is on-target as is his "follow the money" approach.

Dish-Disney Deal: Parsing the Press Release

MY COMMENTARY IS INLINE, BELOW IN RED

The Walt Disney Company and DISH Network Sign Groundbreaking Long-term, Wide-ranging Agreement

FILED IN: Affiliate, Corporate Announcements, ESPN3, Longhorn Network,WatchESPN TAGGED: authentication, ESPN3, Longhorn Network, SEC Network, WatchESPN

• New Multi-Year Deal to Deliver Best in Sports, News and Entertainment to DISH Customers, In and Out of the Home
• DISH First to Secure Rights to Carry Disney, ABC and ESPN Networks for Over-the-Top, Personal Subscription Service
• Landmark Deal Adds Disney Junior, Fusion, Longhorn Network, ESPN3, To-Be-Launched SEC ESPN Network and the Full Suite of Authenticated WATCH Services
• Expanded Video-On-Demand Content Available to DISH Customers at Home, On-The-Go
• Dismissal of All Legal Proceedings Between the Two Companies

Englewood, Colo. and Burbank, Calif., March 03, 2014 — The Walt Disney Company (NYSE:DIS) and DISH Network Corporation (NASDAQ:DISH) today announced a groundbreaking, long-term, wide-ranging distribution agreement that will provide DISH customers with access to Disney’s robust lineup of top quality sports, news and entertainment content across televisions, computers, smartphones, tablets, gaming consoles and connected devices.

The renewal agreement supports the companies’ mutual goal to deliver the best video content to customers across multiple platforms by strengthening the value of the multichannel video subscription today and by creating the opportunity for DISH to deliver new services in the future.

A KEY PART OF DISNEY'S LEVERAGE IS THE RENEWAL OF ESPN, THE MOST VALUABLE CHANNEL IN MULTICHANNEL TELEVISION.

The extensive and expanded distribution agreement grants DISH rights to stream cleared linear and video-on-demand content from the ABC-owned broadcast stations, ABC Family, Disney Channel, ESPN and ESPN2, as part of an Internet delivered, IP-based multichannel offering.

THIS APPEARS TO BE THE REALLY NEW STUFF. FROM THE SOUND OF THIS SENTENCE, DISH COULD OFFER THESE CHANNELS AS PART OF AN OVER-THE-TOP OFFERING. DISH MAY NOT BE OFFERING THESE CHANNELS ON SUCH A BASIS FOR A WHILE; DISNEY MAY HAVE INSISTED ON SOME "CRITICAL MASS" OF OTHER TOP SERVICES BE INCLUDED IN ANY PACKAGE WHICH INCLUDES THE DISNEY SERVICES. STILL, HAVING ESPN IN THE FOLD MAKES GETTING DEALS DONE FOR OTHER SERVICES MUCH EASIER FOR DISH. THIS IS A MAJOR GET FOR DISH. MORE ON THIS FROM PETER KAFKA AT RE/CODE.

Additionally, for the first time, DISH customers will be able to access Disney’s authenticated live and video-on-demand products, including WatchESPN, WATCH Disney, WATCH ABC Family and WATCH ABC using Internet devices in the home and on the go.

THIS IS STANDARD STUFF -- "TV EVERYWHERE" TO SUBSCRIBERS WHO HAVE AN EXISTING DISH SUBSCRIPTION OF VALUE TO BOTH PARTIES, BUT PROBABLY SLIGHTLY MORE VALUABLE TO DISH.

The agreement will result in dismissal of all pending litigation between the two companies, including disputes over PrimeTime Anytime and AutoHop.  As part of the accord, DISH will disable AutoHop functionality for ABC content within the C3 ratings window.  The deal also provides a structure for other advertising models as the market evolves, including dynamic ad insertion, advertising on mobile devices and extended advertising measurement periods.

THIS IS A BIG DEAL. THE COURTS WERE UNLIKELY TO HELP DISNEY GET RID OF THE AUTOHOP AD-SKIPPING FEATURE, BUT DISNEY WAS ABLE TO NEGOTIATE AWAY AT LEAST A SIGNIFICANT CHUNK OF ITS FUNCTIONALITY. THIS IS A BIG GET FOR DISNEY. LOOKING AT IT MORE BROADLY, DISH CHAIRMAN CHARLIE ERGEN LAUNCHED A FEATURE THAT HE KNEW WOULD UPSET PROGRAMMERS, THEN HE TRADED AWAY PART OF IT TO GET A DEAL DONE. SAVVY GUY. MORE ON THIS FROM JANKO ROETTGERS AT GIGAOM.

“The creation of this agreement has really been about predicting the future of television with a visionary and forward-leaning partner,” said Joseph P. Clayton, DISH chief executive officer and president. “Not only will the exceptional Disney, ABC, ESPN entertainment portfolio continue to delight our customers today, but we have a model from which to deliver exciting new services tomorrow.”

Anne Sweeney, Co-Chairman, Disney Media Networks, and President, Disney/ABC Television Group, said, “We knew early on we had a responsibility with this deal to not only do what was best for our business, but to also position our industry for future growth.  After months of hard work and out-of-the box thinking on both sides, led by Bob Iger and Charlie Ergen, this agreement, one of the most complex and comprehensive we’ve ever undertaken, achieves just that.  Not only were innovative business solutions reached on complicated current issues, we also planned for the evolution of our industry.”

Added John Skipper, President, ESPN & Co-Chairman, Disney Media Networks: “We worked with DISH to smartly address the future of the multi-screen world on several levels.  Together, we are adding value to the traditional video subscription by making great content accessible across platforms and delivering new products, including our WatchESPN authenticated networks, the highly anticipated launch of the SEC ESPN Network, expanded distribution for Longhorn Network, and a reimagined ESPN Classic video-on-demand channel.  At the same time, we are creating opportunities to add new subscribers and introducing the value of a multichannel subscription to a small subset of broadband-only consumers.”

“This agreement allows us to bring more innovation to the customer experience, including new marketing, packaging and delivery options,” said Dave Shull, DISH Executive Vice President and Chief Commercial Officer. “This paves the way for more customer choice and control over the viewing experience.”

DISH will make available Disney Junior, Fusion, ESPN Goal Line, ESPN Buzzer Beater, as well as Longhorn Network and the upcoming SEC ESPN Network upon its launch. In addition, DISH, ESPN and ESPN Deportes customers will have access to the live and video-on-demand channel ESPN3.

THESE ARE ALL BENEFITS FOR DISNEY AND THINGS IT IS FAIR TO SAY THAT DISH CONCEDED, PARTICULARLY EXPANDED CARRIAGE OF THE CHANNELS DISH WASN'T ALREADY CARRYING OR CARRYING IN HIGHLY PENETRATED PACKAGES: FUSION, SEC ESPN, LONGHORN NETWORK AND DISNEY JUNIOR LAUNCHES ARE ALL SIGNIFICANT GETS FOR DISNEY. IF THE SERVICES ARE LAUNCHED IN DISH'S MORE HIGHLY PENETRATED PACKAGES (E.G., AMERICA'S TOP 120 AND AMERICA'S TOP 200), THESE LAUNCHES ARE VERY VALUABLE FOR DISNEY AND PROBABLY REPRESENT DISH'S MOST VALUABLE ECONOMIC CONCESSION.

As part of the agreement, DISH will launch ESPNEWS, ESPNU, Disney Channel and ABC Family in high definition. ESPN Classic will be reintroduced as a video-on-demand channel.

IN OTHER WORDS, ESPN CLASSIC HAS BEEN TAKEN OFF THE LINEAR LINEUP. ESPN HAS "DEALT OFF" CLASSIC TO GET MORE DISTRIBUTION FOR ESPNU AND OTHER SERVICE FOR NEARLY A DECADE NOW. THE LACK OF CARRIAGE OF THE HD FEEDS OF DISNEY CHANNEL, ABC FAMILY, ESPNU AND ESPNEWS WAS PROBABLY HURTING DISH MORE THAN THEY WERE HURTING DISNEY. 

The extensive and expanded rights package gives DISH customer access to video-on-demand content at home, on computers and on-the-go through the DISH Anywhere app for tablets and smartphones, including:

• ABC On Demand, a fast forward-disabled service that features a selection of top-rated primetime entertainment programming, including episodes of such popular current ABC shows as “Scandal,” Castle,” “Grey’s Anatomy,” “Once Upon A Time” and “Revenge.”
• ABC Family On Demand, which features a variety of top-rated full episodes, refreshed monthly, from such popular millennial favorites as “The Fosters,” ”Switched at Birth,” “Baby Daddy” and “Melissa & Joey.”
• Disney-branded On Demand offerings, including Disney Channel On Demand, Disney Junior On Demand, and Disney XD On Demand.  Refreshed each month, the Disney Channel On Demand offering will include episodes from such series as “Mickey Mouse Clubhouse,” “Sofia the First” and “Jake and the Never Land Pirates” for preschoolers, as well as variety of episodes from “A.N.T. Farm,” “Liv and Maddie,” “Jessie” and other popular series for older kids.  Select episodes featured on Disney Channel On Demand will be available in innovative new offerings, such as playlists and monthly programming blocks, in addition to a number of episodes available in multiple languages.  A variety of Disney Channel Original Movies will also be available. Disney XD On Demand features a selection of episodes from such series as the Emmy Award-winning animated hit “Phineas and Ferb,” “Pair of Kings” and “Kickin’ It.”
• Expanded On Demand content from ESPN, including content from ESPN Deportes and ESPN’s award-winning original content from ESPN Films.

THIS IS ALSO STANDARD STUFF THAT DISNEY HAS DONE WITH OTHER DISTRIBUTORS. IT IS OF VALUE TO DISH, BUT NOT OF EXTRAORDINARY VALUE.

The companies also renewed carriage agreement for ABC’s eight owned local stations, including WABC-TV in New York City, KABC-TV in Los Angeles, WLS-TV in Chicago, WPVI-TV in Philadelphia, KGO-TV in San Francisco, WTVD-TV in Raleigh-Durham, KTRK-TV in Houston, and KFSN in Fresno.

THIS WAS A BIG SOURCE OF DISNEY'S LEVERAGE. RETRANSMISSION OF ITS STATION GROUP IS THE ONLY WAY TO GET ABC FOR DISH CUSTOMERS IN APPROXIMATELY 20% OF THE US. THIS WAS A LARGE SOURCE OF DISNEY'S LEVERAGE.

About DISH

DISH Network Corporation (NASDAQ: DISH), through its subsidiary DISH Network L.L.C., provides approximately 14.057 million satellite TV customers, as of Dec. 31, 2013, with the highest quality programming and technology with the most choices at the best value. Subscribers enjoy a high definition line-up with more than 200 national HD channels, the most international channels, and award-winning HD and DVR technology. DISH Network Corporation is a Fortune 200 company.Visit www.dish.com.

About The Walt Disney Company

The Walt Disney Company, together with its subsidiaries and affiliates, is a leading diversified international entertainment and media enterprise with five business segments: media networks, parks and resorts, studio entertainment, consumer products and interactive. Disney is a Dow 30 company and had annual revenues of $45 billion in its Fiscal Year 2013.

ESPN 3D Is Dead, Here Comes Ultra HD

With the announcement yesterday that ESPN is shutting down its 3D service, it appears that any chance that 3DTV would catch on with consumers has bitten the dust.

My view is that what doomed 3DTV was less the glasses required for 3D viewing -- which are a significant issue -- but more the fact that 3DTV simply wasn't that compelling a viewing experience. 

I remember heading to the 2010 Cable Show in Los Angeles, convinced that I was going to buy a 3D TV upon my return home -- industry interest in 3D was sky high and it looked like a very promising new business opportunity. However, after seeing every single 3D demo on the exhibit floor -- maybe 25 in all -- I though that the experience was underwhelming, when it wasn't actually bad.

What is most interesting about the experiment with 3DTV is how it completely tracked the initial enthusiasm for 3D movies in the 1950s and then their subsequent fall from favor. Around 1980 or so I saw the 3D Creature from the Black Lagoon and Dial M for Murder, but they didn't make me wish that the big films of that period, like Jaws or Star Wars, were in 3D.

In contrast with that experience, this year I saw Ultra HD (also known as 4K) sets on the exhibit floor this year (in Comcast's and Samsung's booths) and both looked pretty spectacular. I don't know if Ultra HD's combination of price, content availability and quality will ever get sufficient traction to be successful in the market, but I do know that the quality is uniformly very good and readily apparent.

Ultra HD set from Samsung booth -- photo does not do it justice; Van Gogh's Café Terrace at Night

Interestingly, the content that might first make a difference on these sets may be consumers own still photographs. Still pictures of masterpiece paintings were used on the demo by Samsung. Consumers' photos are already available in resolutions far beyond that of a 1080p set. An Ultra HD Apple TV device might be a great early use case. Apple already has experience with greater than 1080p resolution displays from their experience with the "Retina" displays in both the iPad and certain MacBook Pros.

More on this: Brian Stelter, New York Times

Fox Sports 1 and 2 - The Strategy of Abandoning Your Niche

According to a report last week on Bloomberg, the long rumored conversion of Fox's Speed Channel to a general sports service/direct competitor to ESPN called Fox Sports 1 is taking a step closer to reality with meetings planned with advertisers to begin in early March. The other key info in the article is that the thinly-viewed Fox extreme sports channel Fuel will become another general sports service to be called Fox Sports 2 (much like ESPN2). The channels are planned to be on the air in August 2013 and "expand their offerings" in 2014. Bloomberg quotes SNL Kagan as saying that Speed currently costs distributors an average of 22 cents per subscriber per month and Fuel costs an average of 15 cents, but that Fox is asking 90 cents to $1 for Fox Sports 1.

This is the logo for an Australian service called Fox Sports 1. The US service may very well have a different logo.

These changes represent a continuation of the trend of networks establishing themselves in a distinctive niche to gain distribution, then broadening that niche over time to be more competitive with and more similar to other larger appeal channels already on the dial.

• Outdoor Life Network becomes a general sports service as NBC Sports Network.
• College Sports TV becomes a general sports service as CBS Sports Network.
• American Movie Classics (now just AMC) branches out into producing original dramas, moving away from classic movies.
• Court TV dramatically reduced its legal coverage and becomes reality-oriented Tru TV.
• Bravo dramatically reduced its arts coverage and become a more reality-oriented channel.
• History expands beyond historical programming to add reality shows.

Essentially these programmers decided it was better to share or compete in a bigger niche than to own their current, smaller one.

For the programmers (and the distributors), these new services, rather than having protected niches that allow them to acquire and produce quality programming inexpensively and promote it efficiently, are now bidding against a large number of other channels for many of the same programs and having to promote widely to reach a wide audience. In a word, cable programmers have, in effect, become broadcasters.

The impact of this is that instead of getting services tailored to underserved niche audience (that communicates the variety of programming on the cable dial), the dial now has more me-too services. Attractive, well-programmed services, but me-too services nonetheless and the cost of these new services to distributors is substantially higher than the cost of their nich-ier predecessors.

In fairness, when multichannel penetration is 85%+, there simply isn't much upside left to attract new cable subscribers. However, on the surface the move to "broadcasting" actually seems like a poor strategy for programmers. It is generally more desirable to grow from a protected niche than to leave that niche. By this I don't mean that the business should stay small in its niche, only that it should endeavor to expand and strengthen what Warren Buffet calls the "economic moat" that protects the business.

There is certainly nothing wrong with a service retooling itself to become more popular. SyFy has continues to serve its science fiction niche with far more original and expensive programming than it ever had as the Sci-Fi Channel.

Below the surface, the logic of the programmers' moves looks clearer. The programmer's fear is that the niche turns into a dead end. Once Pro-Am Sports System lost its rights to the Detroit Red Wings hockey to Fox, the writing was on the wall and its owners closed the service.  AMC faced the issue of a dwindling supply of classic movies when Turner Classic Movies entered the marketplace -- it had to do something different. Similarly, when Fox Soccer Channel lost key fútbol rights, there wasn't much it could do to maintain a service of similar quality in that genre. A general sports service can substitute other sports programming; the Golf Channel can't start running baseball or lacrosse or poker.

is poker a sport?

So, this change likely makes a ton of sense for Fox, but is probably not a change that the distributors were requesting. The distributors don't need another bidder driving up the price for top-tier sports rights and presenting them with the bill. The fact that it is happening does underscore the reality of the current programmer-distributor marketplace, namely that the programmers have far more leverage now than they did in the past -- a function first and foremost of the greater competition among distributors (cable, DBS, telco, "traditional" overbuilders, Google Fiber, Aereo). Motor sports fans will lose a dedicated destination for their sport. The big motor sports events will find their audiences, but the smaller events likely will suffer from lack of a consistent home. Fox competing with ESPN does not help the distributor negotiate with ESPN because taking ESPN off is not a credible threat. 

While distributors always complain about the cost of cable channels, the strategy of investing heavily in programming, especially when the channel's distribution has been built, has long been a far more successful strategy for channel operators than putting on less attractive programming with modest spending. If it were in the business interest of the distributors to to support the latter strategy, they would have done so.

For a sports programmer, the move from a single sport niche to a general sports service seems to be moving opposite the trend of the last fifteen years which saw the launches of services dedicated to sports niches: Golf, outdoor sports (Outdoor Life, Outdoor, Sportsman), motor sports (Speed), Tennis, Fox Soccer, Gol TV, MLB, NFL, NHL and NBA. Obviously, the league-owned services do have the strategic advantage of controlling the supply of relevant rights.

The large programmers already an "economic moat" from their scale in providing a critical mass of programming, it need not be a channel-by-channel thing. It is not a feasible decision for a major distributor to simply do without CBS or Fox or Disney/ABC/ESPN or NBC Universal. Covering all the broad channel niches (news, sports, kids, women, etc.) can help on the cost side, too, by allowing the programmer to utilize just about any programming that is either (a) lying around in a library or (b)  is bundled by a program seller into a package with something the programmer really wants (e.g., Weinstein's films were bundled with Project Runway for sale to Lifetime) and that is a plus. So the niche strategy that works well for an independent channel, like Speed's predecessor Speedvision, might have outlived its usefulness in a major programmer.

Updates (5 March 2013): Fox COO Chase Carey on the Fox Sports 1 investment (deadline.com); coverage of the official announcement (New York Times); official logo unveiled -- more bug-shaped, I guess the yellow trim was a no-go; I assume the football-like shape is no accident

Related: New Names for Cable Networks