Is this the beginning of the end for the television rights’ bubble? Disney reported an increase in earnings over Q1, which is a positive for the parent company of ESPN. The problem: Disney cable division’s operating income dropped 2%. This was mostly attributed to the costs of sports television rights and increased production costs at ESPN. The thing is, those costs aren’t decreasing. If anything production costs will increase to provide a better telecast. TV rights have skyrocketed, and even though ESPN has the rights to Monday Night Football, NBA basketball, and the College Football Playoffs, the increased competition from FOX and NBC is going to drive up any future rights.
There is only one way to combat those costs, and that is increased cable subscription fees and increased advertising revenue. Cable companies are battling with consumers now and struggling to compel cord cutters to spend over $100 a month on cable bills. ESPN loses out there because as more people drop cable, the less $7 fees the company collects from Comcast and Time Warner. Advertising actually dropped in Q1 for ESPN, and some of that drop can be attributed to advertising dollars being spent elsewhere (social and digital media being the number one culprit.)
The real issue is whether or not the model is sustainable. Financial models are only as good as the assumptions they are built on (ask the banks involved in the mortgage backed securities crisis). If ESPN projected rising advertising fees as well as cable sub fees increasing continually, that could be costly. ESPN has held back on direct over-the-top subscriptions for the channel as well. Its stakeholders (see Disney and cable companies) have a vested interest keeping the World Wide Leader exclusively accessed through a cable subscription.
It wouldn’t be surprising if Disney and ESPN have the same issues next year. One of the company’s major events, The College Football Playoff, announced it would not move its semi-final game from New Year’s Eve. This is going to decrease viewership, and in turn, decrease the amount that could be charged on advertising spots. Bob Iger, Disney CEO, attributed some of the operating income loss to the new NFL deal kicking in, but the NBA deal kicks in next year at an over 200% increase from the prior year.
All is not lost. ESPN is smart enough to know how to change its business to ensure a profit. ESPN has been the major revenue driver for Disney Corp. for years, and that is not likely to change.
Michael Colangelo is Assistant Director at the USC Sports Business Institute and Senior Editor of The Fields of Green.