ESPN's secret web weapon: ESPN3January 22, 2014: 11:51 AM ET
The sports giant's online streaming network is growing steadily. It may prove to be a key part of ESPN's arsenal as its TV franchise faces new competition from Fox.
FORTUNE -- With the vast array of digital subscriptions, apps, and streaming services now available to sports fans, it seems likely that soon enough you'll never have to miss a single game or event. Quietly driving this market, to a large extent, has been ESPN3, ESPN's somewhat under-the-sonar online outlet for streaming live sports events.
In 2011, the sports giant rolled ESPN3 (which had existed in various forms since 2005, originally as ESPN360, then ESPN3.com) into its WatchESPN online platform, where subscribers with access can watch everything from live sports happening across the globe to ESPN Classic games, all from a number of ESPN's different channels and services. (For example, you can use WatchESPN to catch the popular radio show Mike & Mike or re-watch SportsCenter if you missed it.)
ESPN3 is where you can see an Australian Open tennis match live when it's 3:30 a.m. in New York. It's where you'd go to catch many of the NCAA Men's Basketball games long before March Madness begins and they start showing up on basic cable. On this particular Wednesday, for instance, you can use ESPN3 to watch obscure French soccer matches like Chasselay vs. Monaco or Paris Saint-Germain vs. Montpellier. Tonight, you can find the X Games live from Aspen.
While ESPN3 does offer access to mainstream sports events like golf's U.S. Open, many of the events that show up on there are more obscure. These "may not get the ratings," says Steven Cohn, editor of Media Industry Newsletter, "but they do have niche, enthusiast audiences that advertisers might like. Plus the rights fees are next to nothing."
And indeed, ESPN's strategy with its streaming network appears to be working well. "We made a commitment to streaming live sports on ESPN3 over six years ago, and it has proliferated into a viable stand-alone network, now available in more than 85 million households nationwide on computers, smartphones, tablets, Xbox, Apple TV, and Roku," says Amy Phillips, a spokesperson for ESPN. (The company will not share financial information on ESPN3, so it's not clear whether or not the service is profitable.) According to ESPN Research & Analytics, viewers spent 711 million minutes with WatchESPN and ESPN3's live and on-demand programming in 2013 (through November), a number that was up 91% from the year before. The month of November 2013 itself was in fact the service's best month ever, with 2.2 million unique users (up 77% over the year before) spending 197.3 million minutes (up 170%).
Last summer Goldman Sachs, which had previously labeled the Walt Disney Company (DIS) a "conviction buy," downgraded the stock to "neutral" due to concerns that the debut of Fox Sports 1 (FOX), which launched in August, would prove stiff competition for ESPN and its properties. The stock fell nearly 4% as a result, the biggest drop it had seen since November 2012. So far, ESPN seems unfazed. Disney stock is up 22% from a year ago.
ESPN3 "bundles" with cable packages from certain providers. For example, if your cable provider is Time Warner (TWC), you can access WatchESPN only if you have ESPN in your TV package. Comcast (CMCSA), meanwhile, includes it with all XFINITY Internet subscriptions. Thus the ability to watch ESPN3 through WatchESPN depends on your cable package, which can be frustrating for web users that don't get ESPN. (It isn't hard to find message boards on which people gripe about whether and how they can access ESPN3.)
Apparently, the bundling method is also frustrating to TV folks. Ted Hearn, spokesperson for the American Cable Association, tells Fortune, "ACA takes serious issue with the fact that ESPN3 is an effort to migrate the broken cable TV business model to the Internet." That controversy has been bubbling for years, as many consumers and groups have argued that viewers should be able to pay for access to a web service like WatchESPN without having to go through TV providers.
For now, the migration has appeared to work well. According to an ESPN "2013 in Review" report on Jan. 7, "ESPN Digital Media wasn't simply again the category leader, but accounted for nearly a third (31%) of all sports usage across digital platforms ... Also, the focus on serving the sports fan on the go continued, with ... WatchESPN now available to 55 million people." College football's BCS National Championship game, specifically, was a hit, generating 773,000 unique viewers on WatchESPN.
Like HBO with its popular HBO GO app, ESPN is unlikely to offer WatchESPN as a solo subscription product you could pay for without having ESPN on cable. Why should it? The service is continuing to thrive. ESPN is having its TV cake and eating it on the Internet, too.