Why ESPN Is Failing

ESPN once again laid off 100+ employees on Wednesday. The media conglomerate had the perfect idea in 1979, but must adapt to a new culture of consumers

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10,000 — the amount of subscribers ESPN loses on average per day. That alarming number seems to be taking its toll on the ‘Worldwide Leader in Sports.’ Want to know just how big this toll is? ESPN laid off almost all of their hockey staff, during the middle of the NHL playoffs. They also laid off some of their best reporters: Brett McMurphy, Jeremy Crabtree, Max Olson, and Ed Werder, to name a few.

Hearing this news begs the question: what in the world is happening to ESPN? Well, several things. Let’s take a look at a couple aspects that have contributed to ESPN’s decline over the past decade.

Content

In 1979, ESPN had a revolutionary concept: 24-hour sports. With the boom of the cable industry happening a few years later, ESPN could not have run into better timing. The concept was new, intriguing, and fun. The demand for sports was at an all-time high, and consumers grabbed onto ESPN and didn’t let go. The important thing to understand here is without cable, ESPN is nothing. In 2011, ESPN hit its peak with 100+ million subscribers. For context, 116 million homes have a television set in the United States. Right now, ESPN charges over $7 per subscriber (just for one channel). For a bundle of ESPN, ESPN2, ESPNU, and SEC Network, ESPN charges over $9 per subscriber. With over 100 million subscribers at its peak, you do the math. So, what’s the problem? Cable is not what it once was. In the 80s, cable was the service to have. Now, saving money is more important. Cord cutters and cord nevers (consumers who have never had a cable subscription) are becoming commonplace in today’s era. Therefore if consumers are going to spend $9 a month for one cable network, the content must cater to the consumer’s wants. Unfortunately for ESPN, their content outside of sporting events is lackluster in this regard.

To ESPN’s credit, they have tried to adapt to a changing consumer base — sort of. The main issue for the sports conglomerate is the fact that their own produced content has been the same for years and can no longer keep its consumer’s attention. First ESPN put Scott Van Pelt in its midnight version of SportsCenter, which aired directly after prime time football, baseball, and basketball games. Then earlier this year, they revamped SportsCenter yet again with the creation of ‘SC6’ starring Michael Smith and Jemele Hill. The idea behind the newest version of SportsCenter is to rid of the old, highlight-dominated sports coverage and replace it with a new, fresh style.

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This fresher style focuses beyond sports reporting and on topics that can relate better to fans; even occasionally resulting in a bit of controversy. The funny thing is, ESPN already has programming like this. Ever heard of First Take starring Stephen A. Smith? Yeah, we all hate that guy. But guess what? His show gets views. ESPN is gambling that if they create must-see content that consumers want, they can increase viewership. If they increase viewership, more people will subscribe to cable packages. Basically, ESPN is betting that they can make cable great again. In a way, it makes sense. How could you abandon a revenue stream that has made you billions of dollars? On the other hand, the market is changing and ESPN is not stupid. There is a reason that many of the employees laid off by ESPN yesterday are considered standard ‘sports reporters.’

The demand for strict sports coverage with facts and highlights is a part of ancient history. The Scott Van Pelt, Jemele Hill, and Michael Smith’s of the world are the new style of the sports industry. Traditional sports journalism is declining while sports coverage mixed in with debate, opinions, and controversy is what now catches the attention of consumers.

The problem with ESPN’s reliance on cable is that this industry is no longer dominated by television. Although the demand for video content in sports has never been higher, consumers want it at their fingertips. Nobody wants to have to go home and flip on a TV to watch something they could easily see digitally with the same type of production quality. Did I mention that viewing this content digitally is usually free, as opposed to paying $9/month for a bundle of channels you have no interest in? If ESPN is going to get out of this hole, they must find a way to monetize a digital platform. However, ESPN should not be in as large of a bind as they are. They still have 88 million subscribers, and charge $9 per subscriber. That’s plenty of money, right? In the wise words of Donald Trump:

Media Rights Fees

ESPN absolutely loves to spend money. The old saying goes, “You have to spend money in order to make money.” The problem for ESPN is that they spend money to the point where it takes a long period of time to see any profit. In the simplest way I can put it into words, here is what happened with ESPN. First of all, ESPN’s best content will forever be live sporting events. These events are about the only thing consumers will always watch live. In order for ESPN to carry these events on their channel(s) they must pay leagues, conferences, or teams (dependent on what sport and if it’s college or professional) a fee to broadcast the game. They recoup the money spent by collecting subscription fees and selling commercial slots (advertising) for big games and their own, produced content. The chart below demonstrates how much money ESPN brings in each year based on current subscription rates:

Mark Pannes

If ESPN brings in $10+ billion per year, what’s the problem? Do you notice how much ESPN relies on subscription fees? As more cable subscribers decide to cut the cord or never buy it to begin with, ESPN will lose more and more money from its primary stream of revenue. As that happens, ESPN will not be able to afford as many broadcast rights as they have now. And if that happens there is less content to sell advertising slots for, in which they have never sold much of due to being so dependent on cable subscription fees (ESPN only makes around $250 million/year from ad sales). See the pattern? The problem arose when the sports empire reached its peak at ~100 million subscribers. When this happened, ESPN thought the market would always be reliant on its product. While that’s true, they didn’t account for the possibility of cable losing its popularity. As they reached this peak, they had plenty of money to play with. They just didn’t realize that they were hitting a peak. The problem is not solely the amount of money spent on various media rights deals, but also how long these deals are.

The shortest deal that ESPN currently has in place is an 11-year, $7.3 billion deal for the rights to the College Football Playoff. Other deals ESPN has are with the SEC Network (20-year deal) and NFL Monday Night Football (worth ~$15B). Let’s also not forget the Longhorn Network deal — one that has still not made ESPN much, if any profit. Now, all of these broadcast rights deals would be at least manageable if cable subscribers did not start cutting the cord and the ratings for live content remained high. This way, ESPN could keep its primary source of revenue as well as attract big name advertisers that spend lots of cash for commercial slots. If subscribers decrease, there are less viewers of live content. If there are less viewers, ratings go down. If ratings are down, less advertisers want to spend money. That’s what is happening now with ESPN and their live content.

As cable subscriptions continue to fall, there are three ways ESPN can compensate for the money they are losing. First, they can simply bump the rates of their subscription fees. At over $7 per subscriber for only one channel, how much higher can ESPN realistically go before consumers either cut the cord or elect for a cheaper cable package without ESPN? (The latter already happens with ESPN’s current rate). However, even a slight increase in subscriber fees could help. Even increasing sub fees for ESPN alone by $.20 (discounting ESPN2, ESPNU, etc.) would increase revenue by up to $30 million. This would buy ESPN time but has a limit as to how high the rates can go before it is deemed unaffordable for consumers.

Secondly, ESPN could increase the production of its owned content on the gamble that more people would subscribe to cable in order to see it. In today’s day and age, this likely would not work unless ESPN created something as revolutionary as SportsCenter was in 1979. It’s always a possibility, but unlikely at this point. If it did somehow cause a boost in cable subscribers, their revenue would obviously reap the benefits.

Lastly, ESPN can begin to focus more on its digital content. As you can see from the chart above, ESPN does not make much from digital content and ad sales. As cable continues declining, over the top is becoming more and more popular (programming fed to a monitor/TV through the internet). Steaming and online viewing is the future of sports content, but how exactly can ESPN profit off of it? ESPN will need to increase digital ad sales and figure out a way to profit from the online streaming of live content. As for the rest, I am not sure. If ESPN can figure out how to monetize digital content, they will come out of this rough patch in decent shape.

What’s the solution to ESPN’s woes? To answer bluntly: I have no idea. One thing I do know, however, is that ESPN is going to eventually have to take advantage of the digital world. Although they are having to make some tough changes ESPN is not hurting much — yet. They have plenty of revenue to stay afloat, but there is cause for concern because of the lucrative amounts of money they spend on broadcast rights deals. If cable continues to decline like various experts predict, ESPN will be in trouble. This company is a sports conglomerate because of their ability to broadcast live sports programming. Without their primary source of revenue, they steadily lose the ability to afford this programming. Therefore ESPN must make the necessary adjustments now, while there is still time. If they don’t, they’ll only have themselves to blame. The warning signs are there, but will ESPN stop and look for them? Only time will tell.

*I must thank Michael Cramer, Mark Pannes, and Bryan Perez from The University of Texas at Austin Sports Media program. Without them, I would know absolutely nothing about this subject. Because of them, I can at least act like I know the bare minimum. Thank you.
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Why ESPN Is Failing