Okay, here goes:
WatchESPN is the name of the application and linear network streaming service. WatchESPN, the app, lets you watch live streams of the linear (traditional) cable networks you have access to, as verified through your television provider (I'm assuming here your television provider has contracted for WatchESPN - most major providers have now, save for DirecTV, who is currently negotiating, and whose carriage agreement expires at the end of 2014 - I expect, based on all the deals done in the last few years, their new contract would include the service).
So what you see for that piece of the service is predicated on what level of television service you have. Whatever you receive traditionally, you can stream through WatchESPN. With a recent update, that includes ESPN, ESPN2, ESPNU, ESPNews, ESPN Deportes, Longhorn Network, the SEC Network, and Buzzer Beater/Goal Line.
ESPN3 is the continuation of the original streaming service ESPN360, and is sold similarly to cable networks (a price per month per subscriber), but it is sold to your ISP, not your television provider (I realize these are often the same company for many of you). In its early days, it contained a lot of simulcasts of games on linear networks, along with streams of out of market PPV games (those on GamePlan and such, like the MAC's regional package). More recently, with WatchESPN making linear simulcasts obsolete, ESPN3 has shifted towards much, much more exclusive content, as evidenced by the MAC's (and other conferences) recent rights deal. ESPN3 also is the service that offers replay of games after the fact, even from the linear networks.
The confusing thing is that ESPN3 is available in the WatchESPN app alongside everything else. So within the WatchESPN app, it is possible to have access to many of the linear networks (live only), but not to ESPN3-exclusive or on-demand content (if your cable/satellite provider is TWC or another offering WatchESPN, but your ISP doesn't offer ESPN3 - maybe a smaller DSL outfit or similar). It is also possible to have ESPN3 access without access to the live networks - if you have DirecTV paired with AT&T internet or similar, for example.
In almost every case, for ESPN3 service the only thing that matters is your ISP, and your TV deal doesn't play into it. The only exception I am aware of is Time Warner Cable, which offers ESPN3 to broadband subscribers who have ESPN in their video package (
source). Obviously, they're using it as an enticement to bundle.
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Hope that novels helps to clarify. Here are a couple examples that may also help:
I am a Comcast customer with high speed internet, and only a very basic cable package (makes the internet cheaper). I do not get ESPN on cable TV. Without logging into my corporate account, I am able to use ESPN3, but none of the other services.
A customer with Time Warner high speed internet and Dish Network would have access to live WatchESPN linear networks via Dish, but not ESPN3, as TWC requires their cable bundle to get that.
A customer with Time Warner high speed internet and DirecTV, for now, would get nothing. DirecTV doesn't yet support WatchESPN, and as above, TWC requires cable for ESPN3.
If you have a Time Warner bundle, you have access to everything on ESPN3, and all the linear networks in your TV package.
If you have TV through Dish Network and internet through AT&T or similar, you have access to everything on ESPN3, and all the linear networks in your TV package.