ESPN’s recent layoff of 100 On-Air Talent should leave the University of Georgia Athletic Association with concern.
ESPN is letting 100 of their on-air journalists and personalities go in time for their Second Quarter Earnings of the 2017 Fiscal Year on May 9. Prominent talent such as Andy Katz, Jaymee Sire, Ed Werder, Jerry Punch, Len Elmore, Britt McHenry and Danny Kanell have no future at ESPN. Layoffs are painful, but this is not exactly a unique situation, which is part of what makes this particular case rather alarming. ESPN led the way in growth and breadth of both subscribers and live sports coverage. ESPN dominated the sports media landscape for nearly three decades, but now is experiencing an era where they are strategically unprepared for digital media disruption and economic conditions. During the time when other sports networks struggled in the ratings race and had to re-invent themselves, ESPN was able to stay the course and spend as if they were immune. The bubble is bursting and the most impacted will likely be college and university athletic programs.
How ESPN got to this point is rather simple.
It is not politics that did ESPN in, it’s a business strategy that made assumptions about subscribers and the marketplace. It is a very similar assumption to what was made by the State of Louisiana concerning crude oil prices and untouchable parts of their annual budget. Both made wrong assumptions and are paying for it now.
ESPN assumed that the cable bundle was going to last forever and people who do not watch sports (there are plenty of them) were expected to continue subsidizing ESPN’s portfolio of networks. Each cable bundle subscriber pays $7.21 per month for ESPN. Three factors have broke apart the cable bundle: (1) An entire generation that is not only experiencing an economic depression, but is less inclined to be interested in sports. (2) Technological disruption has led to multiple ways of consuming media. (3) Increased competition to some extent. There used to be a time when the only way to watch cable networks was through a local cable operator that enjoyed a monopoly bestowed upon them by local governments. Telephone companies, satellite providers and wireless network providers entered the fray to create comparatively more competition.
ESPN has tried to ingratiate themselves to cord-cutters by incorporating their networks in Sling, PlayStation Vue and YouTube TV. Is it working? Not as they would hope per 2016 figures. Cord-cutters are not just cutting their cable provider in favor of Netflix, Amazon TV, YouTube, Periscope, Hulu and anything else they can find for free on their Roku, Amazon Fire, Chromecast or Apple TV device; they are rejecting the channels they either did not watch or choosing to watch certain networks only during segments of the year.
These subscriber figures are significant because cord-cutters that left ESPN by virtue of cutting the cable bundle and not returned through any other service are highly likely not to subscribe to ESPN. This is a significant loss and the disruption is just getting started.
The revenue problems were clear, but the expenses were not well managed as ESPN went on wild spending sprees for the rights to the College Football Playoff, Monday Night Football and NBA coverage. With higher expenses due to poor negotiating capability and poor spending restraint, the recent layoff is the equivalent of moving deck chairs on the Titanic. Sure, ESPN could likely maintain profitability, but Walt Disney Company brass are not going to be impressed by fading operating profit margins and having this albatross hang over them during earnings calls every quarter.
ESPN Cannot Maintain the Status Quo
ESPN’s business model of relying upon subscriber fees and supplementing them with advertising revenues is unsustainable. More non-sports fans will cut their bundle and sports fans will start wising up to not only the sports schedule, but the value that ESPN provides them. Why pay for a channel that may be watched for only a few months of the year? Are ESPN Networks necessary for the sports fan’s experience?
SportsCenter was long a staple of sports fans’ viewing habits, but highlights and witty commentary can be found on YouTube, various independent sports websites and social media.
Daytime sports television such as First Take and other programming that airs before 7 PM Eastern Time on weekdays are not worthy of heavy investment due to the fact that the audience watching these programs is likely either not working or at an airport bar, only one of these two groups is associated with higher incomes and that group is watching it on mute waiting for crab cakes or a Hot Brown sandwich that pairs well with a local craft beer.
Subscriber figures will begin to exhibit seasonality as cord-cutting gains momentum and fans wise up to ESPN’s portfolio of live sports rights. It is not inconceivable that September through January becomes peak season for subscriptions to ESPN Networks including Longhorn Network and SEC Network.
Major League Baseball coverage: Three games per week and one of the two Wild Card Playoff games.
NBA coverage: Three to four games per week and either the Eastern or Western Conference Playoffs. NBA Finals are on ABC.
NFL coverage: Monday Night Football and one Wild Card Playoff game. The right to have a studio table and production crew at the NFL Draft and react to draft picks that were already spoiled on social media several minutes before the stock highlight music plays.
NHL coverage: None.
NASCAR coverage: None.
College Football coverage: A majority of the SEC, ACC, Big XII, Pac-12 and The American Conference coverage. Big Ten Coverage has been scaled back due to Fox Sports’ agreement with the conference. College Football Playoffs and every bowl that exists with the exception of the Foster Farms Bowl, Sun Bowl and AutoNation Cure Bowl.
College Basketball coverage: The vast majority of College Basketball games from every conference with the exception of the Big East and Big Ten.
All other College Sports: With the exception of the Big Ten, Big East and Pac-12, ESPN holds almost all of the television rights.
This should raise alarm bells to the greatest beneficiaries of the ESPN bubble, College and University Athletic Directors. The gravy train could come to an end if tens of millions subscribe to ESPN Networks on a seasonal basis while the cord-cutting phenomenon continues. ESPN could potentially lose a majority of their footprint in the Southeast from February through August, which is seven months!
The SEC Network distribution paid more than $40 million to SEC institutions, which is a huge boost in revenues that goes to pay for new buildings, renovated facilities and reserve funds. Given the economic climate, this may not be expected to last.
How is this fixed?
It is not easy, but there are two directions ESPN can go to get their profit margins back up to par.
Pay-Per-View Models for College Football, Monday Night Football, Major College Basketball and NBA
ESPN could scrap their portfolio of networks and offer programming that hypes games on ESPN Pay-Per-View. The carriage fee for ESPN and ESPN2 would be substantially lower, which means that ESPN returns to being ubiquitous for the “suckers” still with the cable bundle. Digital media is accessible to almost anyone now and this offers the opportunity for cable operators to promote Pay-Per-View games from ESPN and for ESPN to directly promote it themselves.
Basically, ESPN is taking WWE’s business model prior to the WWE Network and applying it to their largest cost centers. There will be “free” games aired, but they will not be the prime games of the week. For instance, a Georgia Tech-Clemson Basketball game could end up being a free game on ESPN or ESPN2, but a UCLA-Oregon Basketball game is going to be on Pay-Per-View with surge pricing. The UCLA-Oregon Basketball game will be hyped to no end and could fetch $19.99 to watch the game from home.
It could take a very extreme turn come College Football season with ESPN. ESPN’s College GameDay becomes a Pay-Per-View pre-show. Virginia Tech-North Carolina State may be a free game on ESPN, but many people would want to see LSU take on Auburn. LSU-Auburn would be an ESPN Pay-Per-View Game that can be ordered through a cable company or through ESPN directly on any device and it could cost as much as $49.99 for the game. Is that an appropriate price for a regular season College Football game? Yes, it can be. Eventually, CBS will lose their SEC Football Television rights and ESPN will likely control them, which means that Georgia-Florida, Auburn-Alabama and Alabama-Tennessee could all be found on Pay-Per-View for $39.99 and up. Auburn-Alabama could end up being a game that has a higher price tag than UFC fights. This could make ESPN hundreds of millions of dollars per weekend, possibly even from one game.
College Football fans are not going to just stop watching their favorite teams, especially in the South. Why give them the best product for $7.21 per month? College Football enjoys inelastic demand in the South, it’s an opportunity to make money hand-over-fist when this audience is actually engaged with the networks.
The College Football Playoff can generate billions of dollars, if ESPN adopts a Pay-Per-View model. More than 26 Million people watched the College Football National Championship Game on ESPN, just imagine if this was a Pay-Per-View event with surge pricing.
ESPN Becomes A Production Company
ESPN and their networks vanish in this scenario. ESPN puts their television production experience and technology to use and ends their run as a content provider. ESPN would contract with various leagues, teams, conferences and schools to have them create their own dedicated 24/7 media networks.
This is not far-fetched as far as dedicated networks to particular teams and schools. The Longhorn Network has poor traction due to distribution issues and cannibalization of live sports programming, it serves as the biggest failure in this sort of a model at least from the perspective of ESPN. However, University of Texas Athletics has not absorbed the losses.
Major League Baseball teams have created their own networks. The New York Yankees (YES Network), Baltimore Orioles (majority interest in MASN – 90%), New York Mets (SportsNet New York), Los Angeles Dodgers (Spectrum SportsNet LA), Washington Nationals (minority interest in MASN – 10%) and Boston Red Sox (NESN) all own their own television networks.
Every team and school can have their own network now and they do not require a cable or satellite subscription, but they could contract with cable and satellite providers. NBA, NHL and Major League Baseball franchises without their own network have regional sports networks that provide regular season coverage. Fox Sports, Root Sports (AT&T Sports Networks) and NBC Sports (Comcast SportsNet) are the major players in the regional sports media.
Every school can have a network that has a monthly and an annual subscription that promotes the college or university and the sports teams that represent the institution. Schools can offer these subscription networks along with targeted advertising that can result in higher rates, which means more revenue into the coffers. No longer would there be one “neutral” and exclusive television broadcast provider, it will be just like radio where there are home and away announcing teams.
ESPN’s revenues and profits could drop substantially in number, but the expenses would fall significantly. Profit margins for ESPN could explode even though the revenues could likely decrease. ESPN becoming a production subsidiary would be a more positive direction than just spinning it off or trying to sell it off. It allows ESPN to take advantage of where they are efficient due to the learning curve effect.
ESPN’s expenses and mismanagement become less of a topic of conversation and Walt Disney Company’s true strengths (theme parks, movies, entertainment, intellectual property) will be able to shine through without a distraction by what is going on in Bristol, Connecticut.
But what about the POLITICS?
Are people cutting the cord over CNN, Fox News or MSNBC for having biases? Not really. Bravo, HBO, Showtime, Comedy Central and other networks show biases that many on the right would find appalling, but yet nobody is complaining about them. Those that are right-of-center can enjoy a movie, watch Silicon Valley, Game of Thrones or even partake in an episode of South Park without getting outraged, right? (Comedy Central is less funny than ever not necessarily due to the programming, but it is because of the advertisements. Sit back and watch the advertisements featured on Viacom’s Networks, it is incredibly depressing considering the targeted demographic.)
ESPN’s shift into the sociopolitical is not about changing hearts and minds, it is about letting their talent have leeway and it is not exactly surprising that a coastal network would reflect coastal values. Complaining and whining about ESPN’s political biases and desires to silence their talent is not exactly productive, but it is far better than what those in Berkeley or at New York University are doing (which is violent and wrong) and have done to silence Conservative speakers. The complaints fall on deaf ears because they have the money of the Donald Trump voter in the South anyway thanks to every Saturday in the Fall and there are only just so many seats inside the stadiums.
When professional athletes and student-athletes choose to be political, it is hard to ignore. Times are turbulent and divided, there’s no way things are going to go back to the way they were. It is a unique time and there is much to re-evaluate, but perhaps Charles Krauthammer had the most poignant way to explain what is going on…
Could ESPN’s tactics of shifting leftward politically and showcasing the progressive snark of Michelle Beadle be their way to reach out to those that have cut the cord from the overwhelmingly left-wing millennial generation? Is it a reaction rather than some plot to proselytize? Logically, it is a combination of giving the talent the freedom to speak (even though in sports media, it’s an echo chamber) and a way to engage a generation that has abandoned the network. Social Justice goes viral whether it is astroturfed through fake users or has actual grassroots support, if ESPN talent share in the outrage, it may result in a subscriber. Virtue signaling and legitimate social action are profitable in 2017.
ESPN has some soul searching to do
ESPN has to take action soon or else their subsidiary executives will feel significant heat. Whatever they are doing now, it is not working and they have to act soon because the industry is being in the process of being disrupted. ESPN does not want to be left out.
Don’t let down Bob Iger. If that is not motivation enough…
Don’t make Mickey Mouse mad.