Linear to OTT Video Inflection Point Grows Nearer

By some reports and studies, ESPN lost 3.2 million customers in less than a year, and the company recently said ESPN could be sold direct to consumers in the future, all signs that a fundamental change in the linear TV subscription business is closer.

Disney says such reports are wrong, though acknowledging some slippage. That is intended to reassure investors, and others, that the ESPN business model remains intact.

Big and fundamental changes in markets rocked by changing technology tend to happen rather slowly at first, then reach an inflection point where everything changes rather quickly.

That is one reason why some believe Netflix will not be challenged, once the inflection point is reached. “Netflix is the most powerful content aggregator in the world today,” said Charlie Ergen, Dish Network CEO. “And there's nobody that's even close.”

That illustrates one element of inflection points. Contestants sometimes think “we have time” to jump in one the inflection point clearly has been reached. The problem is, by that point it is too late. The leaders will zoom and dominate the new market; late entrants will struggle and generally fail.

Just how close we are to the inflection point still is not clear, but Netflix continued growth, subscriber losses in the linear business and what is happening to the fabled ESPN franchise are indicators the inflection point is coming closer.

To be sure, in its third quarter of 2015 report, ESPN owner Disney reported stronger revenue and earnings per share, net income and cash flow.

In fact, the number of subscribers for ESPN overall actually grew, but apparently not at the flagship ESPN network itself.

“ESPN has experienced some modest sub losses, although those have been less than reported by one of the prominent research firms and the vast majority of them, 80 percent, were due to decreases in multichannel households with only a small percentage due to skinny packages,” said Bob Iger, Disney CEO.

It is true that 83 percent of all U.S. households watched ESPN in the first quarter. But that’s the thing about inflection points. Once reached, everything changes, fast. In other words, 80 can become 20 in a rather quick period of time, compared to all the slow, grinding shifts that happened before the inflection point.