ESPN calls itself the worldwide leader in sports, and there is ample evidence to back up that claim. However, the disruptive force of the internet economy is undermining ESPN’s leadership position, and the right strategic response is far from clear, even for this iconic brand. For hospitals and health systems, the shift in a long-standing business model and the resulting strategic dilemma should sound very familiar.

ESPN has 89.5 million subscribers and is in 77 percent of U.S. households. The network is critical to the financial success of parent company Disney, making up about half of the $23 billion annual revenue of Disney’s largest division. About 60 percent of ESPN’s revenue comes from per-subscriber fees paid by cable TV operators and passed along to cable subscribers. ESPN’s other major revenue source is advertising.

The foundation of ESPN’s business model is the network’s perceived essentiality. Traditionally, ESPN has been included in virtually all cable bundles, resulting in high revenue from both fees and advertising. That strong revenue stream has supported the high-cost programming and talent that help make ESPN a necessity for sports fans.

Business model challenges

This business model has been good for ESPN but not so good for consumers. In recent years, cable customers have complained at increasing volume about the high price of cable TV subscriptions, asking why they have to pay for large bundles of networks, many of which they don’t watch. Fueling these complaints is the rise of streaming video services such as Netflix, Hulu and Sling TV — services that, in industry jargon, go “over the top” of cable TV with more-tailored offerings at a lower price.

Threatened with loss of subscribers to more consumer-friendly options, cable TV operators have begun to look for ways to offer lower prices and more flexibility. The result is the so-called skinny bundle — a smaller group of networks at a more affordable price.

Not surprisingly, the first networks to be excluded from skinny bundles were the most expensive. Priced four times higher than most other networks, ESPN had a gigantic target on its back.

Between consumers who have opted for skinny bundles and those who have cut the cable altogether, ESPN’s revenue stream has suffered. Since 2013, ESPN has lost 10 million subscribers — an estimated $2.5 billion in revenue. The pace of subscriber loss is accelerating: Between March and May, ESPN lost 10,500 subscribers per day.

ESPN’s options

With its revenue base eroding, ESPN has moved to reduce expenses, cutting more than 300 staff in October. Several expensive, high-profile on-air personalities have left in recent months, including Curt Schilling, Keith Olbermann, Colin Cowherd and Bill Simmons. ESPN also shut down its highly respected Grantland website. Reducing program fees is a more challenging proposition, with significant expenses tied up in long-term contracts, such as a $15.2 billion investment in rights to National Football League games. ESPN walks a tightrope with these expense cuts, risking loss of the talent and content that constitute its core value.

A much tougher question is what ESPN’s role should be in the new world of internet-based entertainment. ESPN is dabbling with streaming video through a deal to include programming on Sling TV. ESPN also could form partnerships with other streaming services. Another option would be for ESPN to form its own streaming service through a direct-to-consumer app — similar to HBO’s strategy.

There are at least three serious problems with any ESPN streaming-video strategy: First, it could further erode the remaining subscriber base. Second, the volume and revenue from these options are unlikely ever to replace the revenue stream from the heyday of cable. Third, ESPN’s cost structure would require that a direct-to-consumer offering be priced far higher than most streaming services. Yet, moving into streaming video will be essential for ESPN’s continuing relevance. The problem is that there is no obvious way to make that move without cannibalizing the existing, still sizable revenue base.

Health care’s path of disruption

The disruption of ESPN is strikingly similar to the disruption faced by legacy health care organizations.

Like ESPN, many legacy health systems have strong brands, market presence and quality but high fixed costs and prices. Like ESPN, legacy health care organizations have been highly successful under a long-standing business model that institutionalized high -price cost and utilization — in the case of health care, through volume-based payment and first-dollar insurance coverage.

As with cable TV, this business model is proving unsustainable in the long term. Government, commercial insurers and employers are pushing back on health care costs. As a higher portion of those costs are being passed along to consumers, they, too, are pushing back.

Where streaming video fueled customer revolt in cable TV, options like retail clinics, urgent care chains, virtual visits and freestanding diagnostic centers have the potential to gain the loyalty of health care consumers with services that better fit their growing expectations for low prices and high convenience.

Cable TV operators have provided lower-price options through skinny bundles; insurers and employers are developing narrow networks, sometimes excluding highly reputable organizations that are unable to meet stringent demands for low cost. In the largest cities in each state, 62 percent of health exchange networks are some form of narrow network. In the U.S. as a whole, 45 percent of exchange networks are narrow.

Like ESPN, health care organizations face an immediate need to reduce costs. Historically, health care organizations' expenses have increased and decreased roughly in line with the rise and fall of revenue. Now, however, revenue is likely headed for a more substantial decline, driven by the pressure of value-based payment and consumer demand. As a result, hospitals will need to significantly change their cost structures without harming core services.

As streaming video has disrupted cable, new technology-based options are disrupting health care. Video visits, hospitals at home, mobile diagnostics and precision medicine all represent potential breakthroughs in care that challenge the central influence of inpatient-based organizations.

Like ESPN, legacy health care organizations have no obvious strategic response. Partnering with innovative companies is one option, with hospitals potentially able to align their scale and broad high-intensity services with innovators’ more focused, usually low-intensity services. Examples include Advocate Health Care operating retail clinics in Walgreens stores in the Chicago area and Dignity Health acquiring national occupational medicine and urgent care chain U.S. HealthWorks.

Hospitals also could attempt to go head-to-head with health care’s nontraditional innovators, developing their own low-price, high-access services. However, the talent, technology and other infrastructure needs to do so are unfamiliar and expensive. And like ESPN, hospitals’ high fixed costs make it very difficult to compete on price with more-focused companies.

Hard problems, no clear answers

The business model change being experienced by cable TV and health care is not unique. It is the established path of disruption in the internet economy, cutting through industries from newspapers to taxis. Unlike many business cycles of the past, these changes are not temporary. The percentage of households with cable TV has dropped from 88 to 80 since 2010. In contrast, revenue from streaming video is projected to increase from $3.1 billion in 2013 to $6.7 billion in 2016 in the U.S. In health care, revenue from telehealth — just one of many innovations in care delivery — is projected to grow from $585 million in 2014 to $3.1 billion in 2020.

For both ESPN and legacy health systems, quality of care, market presence and reputation are important strengths that will continue to be differentiating factors. However, both ESPN and legacy health care organizations face very real erosion in revenue and relevance, and neither has obvious operational or strategic options to change that trajectory.

ESPN’s situation shows that even an iconic brand is vulnerable to attack from internet forces and deterioration. And even with the enormous resources and human capital of Disney, ESPN hasn’t to date been able to figure out the right operating and strategic response.

A problem that ESPN and Disney cannot figure out is a very hard problem, indeed. It is a problem that will require all the energy, creativity and insight that legacy health care organizations can bring to bear.

Kenneth Kaufman is chair of Kaufman, Hall & Associates LLC in Skokie, Ill., and a member of Health Forum's Speakers Express.