ESPN Eyes Subsidizing Wireless-Data Plans
Smartphone users who binge on video, games and other content must monitor their usage to ensure they don't run over monthly data caps that wireless carriers have put in place in recent years.
Now, some media companies whose mobile content gets a lot of traffic are considering arrangements with wireless carriers that would ensure their users can watch, surf and play as much as they want without being hit with stiff overage charges.
ESPN, the cable sports channel majority-owned by Walt Disney Co., DIS +1.03% has had discussions with at least one major U.S. carrier to subsidize wireless connectivity on behalf of its users, according to people familiar with the matter. Under one potential scenario, the company would pay a carrier to guarantee that people viewing ESPN mobile content wouldn't have that usage counted toward their monthly data caps.
No such arrangement is imminent, and ESPN isn't sure if the economics will work out, the people familiar with the matter said. There are also concerns that deals of this nature could attract the scrutiny of telecom regulators.
Such a deal would mark a significant development in the wireless business, creating a new model for media and telecom companies to share the costs of bringing bandwidth-guzzling services to consumers. Another way media companies could compensate carriers is by sharing advertising revenue with them.
The identity of the carrier in the talks isn't clear, although both Verizon Wireless and AT&T Inc. T -1.32% have flagged their interest in such an arrangement. At an investment-banking conference on Wednesday, Verizon Wireless Chief Executive Dan Mead suggested the company is pursuing deals in which advertisers or content providers would pay for data capacity instead of consumers. AT&T has previously said it is interested in a similar strategy.
"We are actively exploring those opportunities and looking at every way to bring value to our customers," Mr. Mead said.
The carriers are motivated by a desire to seek new sources of revenue growth without raising fees for consumers, a growing concern as the industry matures and it becomes harder to add more subscribers.
For content providers like ESPN that generate revenue from showing ads on mobile phones and tablets, the new approach would ensure that carriers' monthly data caps aren't artificially restricting the potential of their business. While the lion's share of advertising dollars still flow to television, digital platforms including mobile devices offer huge growth potential.Subsidizing wireless-data usage would make sense for companies like ESPN whose content has seen a surge of mobile-phone viewing. Many companies don't yet face the problem of their users running into the monthly data caps, which start at one gigabyte per month for the lowest-priced plans. The average U.S. mobile subscriber used 0.659 gigabytes of data per month in the last quarter of 2012, according to Nielsen.
But mobile-data usage is growing rapidly. Some 41 million Americans were watching video on a mobile phone each month as of the fourth quarter and were averaging five hours and 23 minutes of usage per person per month, according to Nielsen. That compares with 33.5 million viewers and four hours and 54 minutes of usage a year earlier.
ESPN has received feedback from at least one big carrier that significant numbers of its mobile users reach their monthly cap before the end of the month, after which their usage drops off, one of the people familiar with the matter said.
The sports-TV juggernaut, which is a major profit-driver for Disney, will get new competition later this year when News Corp NWSA +4.49% . launches the Fox Sports 1 cable sports network, adding to a marketplace that also includes cable sports channels from NBC and CBS. News Corp. also owns The Wall Street Journal.
ESPN has expanded aggressively into digital platforms in the past several years to complement its TV business. It now has 45 million digital users, including about 16 million that access ESPN content exclusively from mobile devices. The mobile offerings include a website with news and streaming video and a host of mobile apps, including WatchESPN, which streams the live signals from ESPN's TV channels over the Web. ScoreCenter, its top mobile app, has been downloaded more than 40 million times. Over the last three years, ESPN's average users per day on mobile Web and apps has more than tripled, from 3.2 million in 2010 to more than 10.3 million so far this year.
ESPN is well aware of the risks of getting into the bandwidth business. Its attempt a few years ago to sell an ESPN-themed mobile-phone service failed to gain traction, and it shut down in 2006. Some of the people who ran that venture are still with the company and have valuable expertise needed to assess whether the economics of subsidizing connectivity for users will make sense, people familiar with the matter say.
Some media companies may balk at paying carriers to relax data caps, arguing that their popular apps and services are a major reason users buy data plans to begin with. At least one other major media company that considered the idea rejected it on those grounds, a person familiar with the matter said.
It doesn't appear that the kind of arrangement ESPN is considering would violate the Federation Communication Commission's "open Internet" rules. Those rules say landline broadband providers must treat all Internet traffic equally, except for reasonable exceptions to manage their network.
But the rules exempt wireless networks from those standards, on the grounds that the wireless market is less mature and cellular networks face special constraints, like the scarcity of available airwaves, or spectrum to carry signals.
Still, some people involved in the negotiations are concerned the FCC could revisit the topic. The commission said in its order it would monitor the development of the mobile-broadband marketplace.
"Creating a second revenue stream for mobile broadband is the holy grail for wireless operators but collecting fees from content companies would probably make the FCC take a close look into the policy implications," said Paul Gallant, managing director at Guggenheim Securities. An FCC spokesman declined to comment.
Verizon Communications Inc., VZ -0.75% which owns Verizon Wireless with Vodafone VOD.LN +0.57% PLC, has challenged the open Internet rules in court. The case is pending at the U.S. Court of Appeals for the District of Columbia.
While a deal along the lines of what ESPN has discussed could simplify how people pay for mobile video, it would also likely raise concerns among consumer advocates. Some have said in the past that allowing content providers to cover the cost of wireless data delivery could give deep-pocketed content companies an advantage over smaller startups in reaching consumers.
Last year, a top executive at AT&T said the company would consider letting providers of mobile services like streaming movies and other bandwidth-gobbling applications pay for the cost of data traffic, instead of consumers. AT&T said it was the wireless-data equivalent of toll-free calling. However, no major deals have come to fruition thus far.
Carriers are trying to get as much return as possible from the huge investments they have made to acquire spectrum and build networks. While Sprint Nextel Corp. S +0.41% and T-Mobile US Inc. both still offer unlimited data plans, AT&T and Verizon Wireless have been working for several years to push smartphone customers from unlimited plans to plans that get more expensive the more data they use.
At both companies, a smartphone plan with unlimited voice and text and one gigabyte of data—enough to stream roughly three hours of video—costs around $90 a month, with the cost for more data increasing in increments of $10 or more.
On Wednesday's conference, Verizon's Mr. Mead said an early example of the new model is how Amazon.com Inc. AMZN +0.57% pays for the wireless connectivity that allows it to deliver electronic books to people for free to their Kindle readers.
"If you start to think about advertising and what else you could do with it, I think we see the possibility to expand far beyond those early days," he said at the conference.