Password Sharing: Mountain or Mole Hill for ESPN and Other Sports TV Networks to Overcome?

We’ve all seen a thousand stories about how cord-cutting is affecting subscriptions in the cable and satellite television industries. Netflix, Amazon Prime, and Hulu are lower-cost alternatives that offer a combination of old and original content that for many — especially non-sports fans — rival the traditional cable bundle, while skinnier bundles continue to pop up.

What gets mentioned less frequently is the distinction between cord-cutters (consumers who leave cable) and cord-nevers (consumers who never become subscribers). Also unknown is the extent to which both of these classes are enabled by the ability to plug in the password of a paying customer — anecdotally, often their parents — and gain all the advantages of the bundle on mobile devices, video game systems, Roku, Chromecast, and/or Amazon Fire at a fraction of the cost.

Media executives and experts interviewed for this story acknowledge password piracy as a potential problem, but many also say that the benefit of a younger demographic consuming content on multiple devices makes it a trade-off worth considering. At least for now.

In a story published in October 2015 by Sports Business Daily, reporter John Ourand cited anecdotal evidence of college students frequently using the streaming passwords of others. But when he polled executives from providers such as Comcast and DirecTV, and networks including NBC and ESPN, his concern elicited shrugs.

“[M]ost industry leaders describe the threat of password sharing as overly hyped these days,” Ourand wrote. “Executives from four of the country’s biggest distributors and the top U.S. sports networks say the password-sharing trend is getting much more attention than it deserves. So far, they see no correlation between sharing passwords and cutting the cord.”

Today, it still doesn’t feel like there is deep concern among the stakeholders. That said, there also is not consensus on how prevalent a problem password-sharing has become, and there is some private worry. Some outlets that cover the industry warn of doom and gloom. Others swear it’s having a minuscule effect.

In sports, even if we accept password sharing as a theoretical problem and not a clear and present danger, live rights have skyrocketed, and the ecosystem depends on network subscription fees. A proliferation of password sharing would lead to drastic consequences for the business model.

Cord-cutting began with a trickle in 2011 and 2012, and has accelerated since. With data from Sports Business Journal, TV By the Numbers and Sports TV Ratings, here is where sports networks stood in Nielsen’s estimate of subscribers in July 2013, February 2015, September 2016 and March 2017 (all numbers in 000’s):

Notes: In July 2013, FS1 was still the Speed Network, and in September 2016 TNT was not in the table we drew from. NBCSN recently got bumped up to a better tier on DirecTV. NFL Network has essentially managed to stave off attrition.

While FS1 (disclosure: The Big Lead editor-in-chief Jason McIntyre appears on the program Speak for Yourself) has not sustained major losses over the stretch of years in this sample, it did reportedly lose more subscribers than ESPN — 565,000 vs. 422,000 — between February and March of this year. A Bloomberg analyst recently said that bundles such as Sling TV add over a million subscribers to ESPN.

A single subscriber loss hits ESPN’s business model the hardest because it has by far the biggest fees — $7.21 for ESPN and 90 cents per month for ESPN2, according to SNL Kagan numbers cited in the Chicago Tribune last August. For comparison, FS1’s carriage fees were reported by the Wall Street Journal as $1.15 in the same month. This means each subscriber loss costs ESPN nearly $100 per year.

However, ESPN makes up at least some of the loss by raising prices annually. For example, if ESPN and ESPN2 dropped from 87.4 million subscribers to 80 million, they’d have to raise their price from $8.11 per subscriber per month to $8.86 to maintain equal revenue. At this point, no one can say with certainty where the bottom of subscriber losses will be, nor what they’ll eventually charge the customers they keep. It will be a cat and mouse game for longer than those who say the sky is falling believe.

(Side note: Tobacco companies, in the sense of consumers dying off faster than new smokers emerge, perhaps from a comparable to TV networks that extract subscriber fees in cable and satellite bundles. For nearly five decades since we learned their product kills its users, tobacco companies have raised prices at a rate substantially greater than the combination of inflation and user attrition. Obviously, this analogy is only useful for that aspect of it, and is not a commentary comparing the respective products.)

Again, it’s difficult to discern whether and to what extent password sharing is driving subscriber losses (or cord-nevers). Other sports cable networks declined to comment for this story. An NBC spokesperson did not respond to an email seeking comment. An ESPN spokesperson emailed the following statement: “We lead the industry in offering fans the opportunity to legitimately access our content, in keeping with our mission to serve fans. Unfortunately, opportunities for piracy persist and we do not take that threat lightly. We continue to work diligently, in concert with the industry, to show the value of the multichannel bundle and address the issue of online theft.”

In the aforementioned SBD piece, executives from ESPN and Comcast assured Ourand the technology exists to curb password sharers if they felt it was becoming a problem (given that the DirecTV Sunday Ticket streaming service only permits one log-in at a time, these claims do indeed pass the sniff test). ESPN at that point sought to limit the number of devices concurrently streaming WatchESPN to five and has since done so. While that seems quite high, Justin Connolly, executive vice president of Disney and ESPN affiliate sales and marketing, explained:

"“The WatchESPN experience can be an interesting sample opportunity in terms of taking the access to ESPN out to as many devices and platforms as possible to reach that younger audience,” he said. “At the same time, we don’t bury our heads in the sand on this one. We are not OK with the idea of having widespread usage among unauthenticated, unauthorized users. “There is a delicate balance in terms of it being a sampling opportunity allowing sharing within a household among various members of that household and yet ensuring that you don’t have dozens and dozens of people who aren’t in any way connected to the pay-TV subscription using the product regularly.”"

Reading between the lines, ESPN and others recognize that a given number of sports fans are streaming their product without paying for it. It’s important for them to meet young people where they’re watching videos, which in many cases is no longer television, and hardly a major sporting event goes by these days where record streaming numbers aren’t touted. This is still a nascent market for advertisers, and, as Connolly alluded to, viewership totals must be weighed against protecting existing revenue streams.

In interviews for this story, the importance of getting viewers regularly engaged with content came up time and again. However, that view is not shared by everyone. In January 2016, the investment bank Jefferies released a report saying it found it “increasingly comical” that TV providers and networks enabled what it referred to as “leakage” to Millennials, saying that “the impact that sharing and stealing is having on gross adds is meaningful, and rapidly growing.”

Jefferies cited a focus group of 18- to 30-year-olds in which it was “virtually unanimous” that passwords were being shared, and advocated onerously limiting streams, saying that a cap of 2-4 is still too much exposure: “We expect device activation or wireless gateway authentication will be required to further the cure.”

Bruce Leichtman, the head of the Leichtman Research Group, which consults the media industry, expressed skepticism of the Jefferies report. Leichtman told The Big Lead his firm surveyed over 1,200 people and only 10 respondents and just 4% of TV Everywhere (i.e. cable or satellite streaming) users said their passwords were shared outside their household.

Leichtman compared this with Netflix, which outwardly likes password-sharing for the audience-dependence reasons discussed earlier. Nineteen percent of Netflix users and 9% of all survey respondents said they shared their password outside their household. (That said, the default option on Netflix is to allow just two streams at a time, while WatchESPN permits five.)

“Are non-subscribers using a log-in from somebody else?” Leichtman asked. “Possibly. Would they have otherwise subscribed? We don’t know that. We know that the level of non-subscribing [to traditional pay TV] is highest among younger people, but that’s always been true. In fact, the level of subscription today among 18-34 year-olds is the same level it was a decade ago. It peaked about five years ago, but it’s back to the level it was 10 years ago.”

One sports network executive did express private worry. “I believe that password-sharing is proving to be at least as impactful as cord-cutting, if not more,” he said in an email. He requested anonymity because he was unauthorized to speak publicly on the matter.

This executive confessed that much of his concern was not based on hard data. He said that when he polled a college class, students universally acknowledged sharing passwords for streams. But — and by now we could call this is a trend — he looked at the bright side.

“In a way, I think this is a positive for our company,” he said. “Cord-cutting suggests a lack of interest, or even a disdain, for the product we have to offer. Password-sharing suggests interest in the content but a willingness to find a way to get it without paying for it. I think that’s actually a better problem to have.”