Media rights for live sports have risen consistently the past 20 years. Now most leagues have billion dollar contracts and rely heavily on revenue generated by their distribution deals. However, we are at a crossroads in terms of how fans consume entertainment. This four-part series takes a look at the overall market, regional sports networks, national television rights and what could be next for sports entertainment. This section, Part 3, will focus on what has happened recently at ESPN. Click here for Part 1 on the overall market. and here for Part 2 on regional sports networks.
ESPN has long been Disney/ABC television’s main revenue generator. Although owned by parent company Disney, ESPN could operate on its own since you don’t tell the golden goose how to lay its eggs. That’s why ESPN could do whatever it wanted within reason. ESPN has been a huge driver of Disney’s stock price; and Disney is more than happy to have a channel with such wide viewership. It allows the company to cross-promote its other content, media holdings, and parks.
However, something odd happened the last two quarters. Disney has been missing revenue targets and the number one culprit is ESPN, which has been hit on two sides. First, its production costs have jumped as well as the cost of the new media rights signed with the NBA and NFL. Second, ESPN is losing subscriber fees at an alarming rate. Cord cutters are becoming a real problem. Even though ESPN is making an effort to market to the millennials ditching cable through products like SlingTV, it is simply not making up for the increased TV rights fees. It would’ve been hard enough had subscription fees remained constant or grew steadily, but that isn’t happening in the new digital world.
That has led to cost cutting at ESPN and could be a reason ESPN has had a recent talent drain. Even before his most recent controversy, Colin Cowherd was on his way out. Fox’s offer was too much for ESPN to match.
Then there is the Bill Simmons saga. Sure he was an annoyance for the C-Suite in Bristol, but he still had a rabid fan base, drew people to Grantland – which was/is losing money – and played a major role in ESPN’s 30 for 30 series. However, the economics of keeping Simmons, along with his general disdain for ESPN’s corporate culture, made it an easy decision. ESPN has since kept many other members of its staff including Jeremy Schapp, John Buccigross, and Ryen Russillo, but they aren’t on the level of Simmons or Cowherd. Stephen A. Smith and Skip Bayless also have upcoming contract negotiations. With all their bluster and hot air, they draw ratings and attention to First Take. It will be interesting to see if competitors such as NBC or Fox make a run at them.
The real issue is that cutting talent is not going to fix the problem. The TV rights deals are an increase in the billions, while not paying Cowherd or Simmons saves ESPN only millions. ESPN has to look to increase revenue in other areas. Deals like the DraftKings alliance help, but again that is only one advertiser.
There have been rumblings about ESPN offering a digital option similar to HBO, but that comes with its own issues. ESPN is charging MSOs up to $6 per subscriber for its networks. Comcast, Time Warner, Cox and other cable providers rely on ESPN to get people to order larger cable packages. Fans pay for cable and have no choice in the networks offered, but they are still paying for those channels. If ESPN offers a standalone, how much would it cost a month? With its increased costs some experts have pegged the number at almost $30 a month. Yes, some people would purchase that option, but again it could cut viewership based on price alone, and it is the access to eyeballs that makes ESPN such an attractive advertising partner. ESPN may be cutting off its nose to spite its face with a strictly digital offering. Disney CEO Bob Iger may not be on board with the precedent it would set. Afterall, ESPN is one of the cable networks owned by Disney, but not the only one.
Michael Colangelo is Managing Editor of The Fields of Green and Assistant Director at the USC Sports Business Institute.