The Difficult Decisions ESPN Must Face

Most of you are aware about the recent round of high-profile layoffs at ESPN. This is not the first round of layoffs the cable sports network has made – most of the layoffs had affected behind-the-scenes personnel. But this round impacted people who are involved with on-the-air reporting and writing articles for the network’s website.

It begs the question: Why is this happening and what is the future of ESPN?

First, we must remember that when ESPN first launched, the television landscape was different than it was today. Cable TV was still in its infancy and most people got their TV sports coverage through ABC, CBS and NBC, along with some local, independent TV stations providing coverage of their local sports teams.

As cable TV grew in popularity and satellite TV became a reality, ESPN grew its market and subscriber base and was able to expand its coverage to include more live broadcasts. As it relates to the NFL, ESPN was the first to broadcast football games on Sunday nights.

Through the years, ESPN has acquired broadcast rights to Major League Baseball, the NBA, NCAA college football and basketball, along with its NFL deal, though that one changed over time from Sunday Night Football to Monday Night Football, thanks to NBC acquiring the rights to the former and ESPN taking the latter from ABC (another network owned by ESPN’s parent company, Disney).

The amount of money ESPN has spent to acquire broadcast rights to live programming – some of which includes the right to access all of a league’s games for other purposes – is a massive amount of money spent. Here are a few examples:

* $1.9 billion per year paid to the NFL to broadcast Monday Night Football and to expand ESPN’s video highlights and NFL content, plus allowing ESPN to stream NFL content onto ESPN apps. In this deal, what really makes it lucrative to ESPN isn’t Monday Night Football or even the postseason game ESPN gets to broadcast, but the content beyond the live games, because it allows ESPN to enhance its NFL coverage and provide more in-depth analysis. The current deal runs through 2021.

* $1.4 billion per year paid to the NBA for its share of broadcasting NBA games and partnering with the NBA to provide a live streaming service. Turner also pays a significant amount for the rights to NBA games (its share is $1.2 billion). Rumors suggested that Fox Sports wanted to put in a bid but the NBA opted not to include anybody else in the deal. The new deal took effect with the 2016-17 season.

* $700M per year paid to Major League Baseball for the rights to broadcast games on a deal that runs through 2021.

* $500M per year paid to NCAA to air the college football playoffs, a 12-year deal signed in 2012.

For those four deals alone, ESPN shells out $4.5 billion per year. Keep in mind that only accounts for those deals in particular and does not include the rights fees it pays for broadcasting other college football games, other college sports (it has a deal in place with the NCAA, too) or other sports events not listed. It’s a massive amount of expenditure that ESPN shells out each year.

To cover those expenditures, ESPN has two sources of revenue: Advertising and subscriber fees. While advertising on sports programming is attractive, a network can only generate so much from advertising and keep itself profitable, especially if the network is paying a significant amount of money for programming rights. So it must get enough from subscriber fees, too.

This is where ESPN is running into problem. As Kevin Draper recently pointed out, ESPN generates $7.21 per subscriber per month. The network collects that money from the cable and satellite companies from each subscriber who has ESPN in the TV package the subscriber purchases, whether or not the subscriber actually watches the network.

But the subscriber fee for ESPN is much higher than it is for, say, CNN, another network Draper cites. CNN charges 71 cents per subscriber. There is a reason CNN charges less: Most of CNN’s content is produced in-house and it doesn’t have to pay massive amounts of money each year for content it doesn’t own the rights to. It may either use small clips of content under fair use agreements or pay a small, one-time fee for a larger amount of content. The bottom line is that CNN’s model allows it to generate more money through advertising than subscriber fees while ESPN’s model relies more heavily on the subscriber fees than a network like CNN does.

And that’s where the cord cutters come into play. If somebody choose to cancel a cable or satellite TV subscription and does not opt for an alternative package through a streaming service (such as Sling TV) that includes the network in question, that’s a subscriber fee that the network loses. For CNN, it is a concern, but not as great as if CNN lost an advertiser for a certain program. ESPN, however, doesn’t have as much luxury in losing out on subscribers.

Going back to the Draper article, it does not appear that most cable and satellite TV providers are willing to keep paying higher subscriber fees, no matter how popular a network is. So ESPN is going to have a harder time generating subscriber fees to make ends meet.

And it’s fair to ask if there is a ceiling for how much ESPN can raise its subscriber fees, if the same will apply to how much ESPN can collect from advertising and, just as importantly, how much the sports leagues can demand in terms of rights fees. This doesn’t mean that these numbers are going to drop by massive amounts, but the amount of money a network or league tries to charge may not go up as much as the network or league thinks it will.

Draper has written several times that ESPN has been thinking too much about how revenues are going to keep increasing based on past trends in the TV landscape when that landscape is changing. It’s become clearer that ESPN can’t continue to operate under its usual business model and that it can’t assume its revenue and viewership will increase simply because that’s what happened in the past.

Furthermore, there is the valid point Draper makes regarding ESPN’s decision to focus less on in-depth analysis and straight-forward reporting and more on debate and arguments. The latter does tend to draw better ratings, meaning people who aren’t considered much in terms of personality, even if they are good at reporting or analyzing, are getting pushed away. But even then, it hasn’t stopped ESPN from losing people who are considered high on personality, regardless of the reasons they departed. It has forced ESPN to find new people to take their place and there’s no guarantee that those new people will do enough to draw in new viewers.

But even if they do draw more viewers, that doesn’t translate to more subscribers. A person who chose to cut the cord isn’t likely to go back any time soon. That subscriber is gone for good. And who’s to say people who are drawn to the debate shows won’t prefer to cut the cord in the future if they find they can get debate shows some place other than a network? People who wanted to look for good reporting and analysis are getting it somewhere other than ESPN, so what’s to stop them from doing the same for debate, particularly when there are personalities out there who can make themselves known through an avenue such as YouTube?

Thus, ESPN is probably going to find itself making some difficult decisions regarding one of its biggest expenditures: Sports rights fees. While some might believe that ESPN is more likely to stop pursuing the rights to the less popular sports, it might have to cut down or adjust its coverage of the more popular sports, especially with its recent decisions to layoff people with expertise in some of those popular sports.

What do I see happening? Sticking to major sports, here are some possibilities to consider.

* ESPN won’t drop its deal with the NFL, but the next deal with the NFL might not be as high as the NFL thinks it will be. Its most recent deal with ESPN was three times higher than its previous deal, but don’t bet on the NFL getting $3.3 billion per year the next go-around. Monday Night Football isn’t as popular as it once was and, while the rights to other content would be lucrative, the NFL might find it harder to put that into a package deal with Monday Night Football, given that the other companies with networks broadcasting NFL games are happy with the games they get to broadcast. (And even if it did, ESPN isn’t likely to let that NFL content get away so easily.) It’s possible that ESPN will try to get Disney to put ABC into the package somewhere, perhaps with ABC taking Monday Night Football back and ESPN keeping access to the remainder of NFL content.

* ESPN isn’t likely to let the NBA go so easily, either, but as with the NFL, the NBA might find ESPN less willing to fork over whatever it wants in rights fees. And it’s possible that Fox Sports might work its way into the NBA deal in the future, with ESPN and possibly Turner agreeing to take on fewer games in exchange for paying a lower rights fees for a package. Alternatively, ESPN could try to spin more NBA games to ABC to lower its expenditures.

* It wouldn’t surprise me to see ESPN slowly pull out of broadcasting live MLB games. MLB is becoming more of a regional sport than a national one these days, plus MLB seems pretty invested in using the MLB Network to broadcast games. There may be some agreements in place for ESPN to simultaneously broadcast some of MLB Network’s live broadcasts, but that may be the extent of baseball coverage.

* While ESPN won’t drop college football, the network may dump some of its sister networks that focus on specific college conferences and focus on the more popular matchups during the regular season. And, once again, the NCAA may have to settle for rights fees that don’t increase as much as the NCAA may think they do.

ESPN certainly isn’t in danger of shutting down any time soon, but it will have to rethink its business model and reconsider just how much it’s willing to pay for the rights to broadcast live sports or access a league’s content. After all, viewer habits are changing and ESPN’s position of being the go-to place for all national sports coverage is no longer as secure as it once was. It can no longer assume its revenue and viewership will keep trending upward. It must figure out how to adjust to today’s environment.

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Bob Morris

I'm a sports writer in real life, though I've always focused on smaller communities, but that hasn't stopped me from learning more about some of the ins and outs of the NFL. You can follow me on Twitter @BobMorrisSports if you can put up with updates on the high school sports teams I cover.