Dish Network’s (NASDAQ:DISH) contract with Disney (NYSE:DIS) to carry ESPN will expire at the end of September, and the negotiations can be rough given the recent dispute between Time Warner Cable (NYSE:TWC ) and CBS (NYSE:CBS). Dish has rallied against the high costs of sports programming and has hinted at its willingness to go without Disney channels. If that were to happen, Dish would be at a significant disadvantage given, the popularity and demand of Disney’s networks. But at the same time, Dish will have to lower its costs substantially. While this issue once again highlights the frustration of pay-TV operators over the rising costs, content owners continue to eye a bigger share of the television market.
Disney Has An Upper Hand In The Dispute
Dish currently pays ESPN more than $5 per month for each subscriber compared to $3.26 a month when the contract first went into effect in 2005.  Dish CEO, Charlie Ergen, recently stated that in longer run, a pay-TV provider could offer TV service without sports channels and he is prepared to go either way.  ESPN on the other hand made a strong point that it is helping pay-TV operators retain customers in a time when on-demand entertainment programming such as Netflix (NASDAQ:NFLX) could provide an incentive for subscribers to drop connections.  We believe that there is a huge demand for sports content and media companies have an upper hand in such disputes as evident from the case of CBS and Time Warner Cable (Read - CBS And Time Warner Cable End Dispute Over Retransmission Fees).
Why Is ESPN Important For Pay-TV Operators?
ESPN is the worldwide leader in sports programming and has rights to telecast major sporting events such as NFL, NBA, and the FIFA World Cup. EPSN is the golden goose for Disney and accounts for 40% of the company’s value according to our estimates. The network has close to 100 million subscribers in the U.S.  However, the network’s true value lies in the high fee per subscriber that it charges for its sports programming. The estimated figure stood at $5.05 in 2012. ESPN’s sports programming reflects high-demand content that viewers don’t record on DVR and unlike other programming, it’s not available from Netflix or other on-demand services.
Frustration Over Rising Sports Costs
According to research conducted by SNL Kagan, sports channels such as ESPN and regional sports networks account for 20% of fees paid by cable and satellite operators and have been the primary culprits behind rising cable bills.  Nielsen estimates that apart from the NFL and the biggest games of the year in a handful of other sports, the TV audience for sports is small amounting to about 4% of the households. 
Some pay-TV operators fear that sports fees could eventually drive customers away from pay-TV subscriptions. Given the fact that the demand for big sporting events is huge for now, major sports networks may still have an upper hand in negotiations. If Dish takes a decision to drop ESPN, the company risks losing subscribers. In its recent earnings, Dish saw a loss of 78,000 pay-TV subscribers due to lower gross new activations and an increase in its churn rate (See - Dish Flirts With Potential Partners As Subscriber Losses Continue). However, the satellite company will save close to $800 million annually and this will lead to lower pricing for its packages, which may attract more customers who are not big sports fans.Notes:
- D-Day Might Be Coming For Dish, ESPN, Mediapost, Aug 5, 2013 [↩]
- Dish Network Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, Aug 6, 2013 [↩]
- Dish, Disney Gird for Showdown Over ESPN, The Wall Street Journal, Sep 4, 2013 [↩]
- Disney’s SEC Filings [↩]
- Sports Fans: Get Ready to Spend More Money to Watch Your Favorite Teams, Variety, Aug 13, 2013 [↩]
- Cable Providers Revolt Over Sports Costs, The Wall Street Journal, Jul 15, 2013 [↩]