The Walt Disney Co. cut the life-support cord on Mobile ESPN at the end of September, with the service scheduled to wind down by year’s end. This makes Mobile ESPN the first of the “mobile virtual network operators” (MVNOs, as branded resellers of cell service like to be known) to go under.
Unlike the other big cell service resellers—Virgin Mobile, Amp’d Mobile, Earthlink, Helio, etc.—ESPN linked multimedia clips over the phone with its TV service and identity, and with a special consumer device. It still is, for another month or so, a boldly comprehensive ecosystem, less like the strategies of other cell-service resellers than it is akin to Apple Computer’s iTunes and iPod, or even to the classic O&O/affiliate/consumer-device broadcast strategy created by RCA and its NBC network at the dawn of time. Mobile ESPN was the first great effort in the U.S. to leverage a broadcast business into personal communications. And it has failed. What does this say about the prospects for other such broadcast brand extensions?
Mobile ESPN cost Disney $150 million, according to CEO Robert Iger, and it accumulated only about 30,000 subscribers, according to analysts. That’s $5,000 per sub, which sounds like a lot but is about what large cable operators sell for these days. Disney hasn’t made public just how much revenue Mobile ESPN has pulled in, and it’s a little hard to figure out, what with monthly plans running from $30 to $225 and handsets running from $100 to $500. But ARPU (average revenue per unit) probably runs a bit higher than most cable operators’. Rival MVNO Helio claims ARPU of about $100 a month. The plain vanilla telcos get monthly ARPU of about $50, so a partnership with an MVNO—such as Sprint’s with Mobile ESPN—clearly can help both parties. Thus it seems that ESPN was building a reasonably successful business, compared with its peers.
Still, it was a costly business to build, and maybe Mobile ESPN’s peers—and, for that matter, cable operators, too—should take on the same rethink that Iger has. Maybe there are better uses for $150 million than generating about $3 million a month in revenue (30,000 subs at $100) and perhaps half that in profits.
Even if Mobile ESPN has had 100% gross margins (and simplifying the math by not including cost of capital), this would put the time to break even at 50 months, or over four years. In the real world, break even would probably never actually come, as the business would need to keep investing in expansion, and as gross margins never approach 100%. Maybe cable operation is just as lousy a business, but Disney is not in cable operation.
Cable operators and telcos and other businesses with heavy infrastructure costs long ago persuaded investors to value them on metrics other than net profits...metrics intermixed with a heavy dose of hope that sometime in the future the company actually will show net profits. Content companies are valued on other metrics, so that capital structures for cable operators or telcos (which are now converging with each other) are very different from the capital structures used by content companies.
Thus Disney probably had a rougher time justifying its capital expenditures on Mobile ESPN than a telco or a pu\re-play MVNO would, because the payback model for Mobile ESPN was very different from the payback models in Disney’s other businesses.
So what does Mobile ESPN’s failure tell us about the MVNO business, and about broadcasters’ or content companies’ likely future involvement in that business?
- Disney clearly has judged that content and a mobile subscription business are now separable enterprises. It may be hoping in the future to model its participation in mobile video the way it works in cable and satellite TV: leave the consumer service to a third party and provide channels of its content over somebody else’s network. It may also be expecting to keep its toe in the water by licensing some of its content to other MVNOs, or other new wireless content players of any sort (while watching to see what sorts of new players evolve), and to learn where next it wishes to more greatly commit itself. After all, Disney sells shows to TV networks and stations other than those it owns. And it may, in the future, find it reasonable to again start something similar to Mobile ESPN. Disney’s decision now only tells us that they see the MVNO market as not right for them now.
- Other large content owners are likely to follow a similar path for the next few years. The biggest of them—when cable operations are combined with content—is Time Warner. And as this is being written, Time Warner is widely said to be planning to spin off its cable operations. Investors are valuing content and distribution as separate plays these days. Which is why a liberated Time Warner Cable will probably feel compelled to invest further in a cellular play. (Time Warner has already invested in lots of winning bids in the most recent spectrum auctions, in partnership with Sprint Nextel, Cox and Comcast; that venture will probably be inherited by the new independent cable company.) Comcast is already an MVNO; mobile media subscriptions and wired media subscriptions are increasingly likely to be seen as merge-worthy enterprises.
- But smaller MVNOs surely see ESPN’s exit as an opportunity. They will grow faster now. Companies such as Helio have been created out of Internet-style venture capital. Lots of this money has always confused media and technology and direct sales to consumers. Investors in Helio or Virgin must look at the same kinds of numbers that daunted ESPN and interpret them as pretty good. And with Mobile ESPN being pretty much the gold-plated standard-bearer for MVNOs, it’s a good bet that those whippersnappy competitors haven’t spent close to $5,000 a sub. And now they have a good shot at getting some ESPN content into their services.
- Let us not forget, however, that while ESPN creates some great content, and it also does a fine job of packaging public-domain data such as sports scores, its most valuable content ultimately belongs to someone else: The sports teams, leagues, players and other rights owners. These entities used to find it reasonable to do the easy thing and simply license all video to a single network. They have been smarter than this for a couple of years, and most have carved up windows to allow themselves to do separate deals for mobile. If they get really comfortable selling mobile rights to an MVNO such as Helio, or to a network operator such as MediaFLO or Mobio or Verizon Wireless, while also producing the video themselves, ESPN could be cut out of the new medium. The sports leagues certainly hope this is the case, but, if it really were a big threat, the sports leagues would have bypassed ESPN and other networks years ago and dealt directly with cable operators. They tried and failed. Networks retained greater packaging and promotional power, and thus the ability to bid far higher for sports rights than cable.
Could Disney be wrong, and could development of an MVNO be key to its future growth? Maybe, but in that case they’d have plenty of time to change their minds. This game is in its early innings.
Neal Weinstock is editor-in-chief of Weinstock Media Analysis and can be reached throughwww.weinstockmedia.com.
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