ESPN just can’t afford to go on spending like this
Espn, which laid off 100 people this week, has a multitude of problems, but the basic one is this: it pays too much for content and costs too much for consumers.
That didn’t used to matter because, thanks to the way the cable industry “bundled” channels, cable customers were forced to pay for it even if they never watched it. Now, however, as the cable bundle slowly disintegrates, it matters a lot.
ESPN — “The Worldwide Leader in Sports”, as it likes to call itself — is undoubtedly the most important channel in the history of cable television. Founded in 1979, it was airing professional basketball by 1982, and the National Football League by 1987, when its long-running Sunday Night Football franchise began. ESPN showed that major sports events did not have to air only on the legacy networks like NBC and CBS. No cable distributor could do without it.
Indeed, since buying Capital Cities/ABC and its ESPN franchise in 1996, The Walt Disney Co has used the sports channel as a battering ram to force cable companies to accept price increases for other channels Disney owned, like ABC Family, Disney Junior and ESPNU. It also ruthlessly raised the cost of ESPN itself. Only a tiny handful of cable channels get more than $2 a month per cable subscriber; ESPN charges over $7 a month per subscriber. When you throw in the rest of the ESPN channels, that number approaches $10.
At the same time, the content providers — the professional sports leagues and college conferences — were every bit as ruthless in their dealings with ESPN. The $1.9 billion a year ESPN pays the NFL (for one game a week, and usually a lousy one at that) is twice what any other network pays to air pro football. It signed a 12-year, $7.3 billion contract for the rights to the college football playoffs. The NBA costs it $1.4 billion a year. Its new TV deal with the Big Ten will cost it $2.64 billion over six years. Its annual content costs more than $7 billion, according to SNL Kagan.
But then, starting around 2013, the model began to sputter. Over the last four years, ESPN has lost around 12 million subscribers, from over 100 million to 88 million, which costs it well over $1 billion in annual revenue. It remains immensely profitable, but it is no longer the reliable cash cow for Disney that it once was.
ESPN has responded with a series of cutbacks — goodbye Chris Berman! — of which the layoffs this week are simply the latest. In the scheme of things, though, the cost savings are chump change, and have served mainly to show ESPN’s overlords at Disney (and Disney’s overlords on Wall Street) that it is serious about righting the ship.