There are major cost-cutting measures underway at ESPN.
And it should make everyone — yes, everyone: sports leagues, cable companies, advertisers, ESPN employees — nervous.
According to a report from The Hollywood Reporter, the so-called “Worldwide Leader in Sports,” is currently looking to cut $US100 million from its 2016 budget and $US250 million from 2017. And these cuts are coming from the top: ESPN’s parent company, Disney, is demanding savings.
The first thing ESPN has reportedly done to trim costs is save on talent. But Keith Olbermann and Bill Simmons leaving ESPN will not save $US250 million in 2017.
A report from The Wall Street Journal, however, makes it seem like these cuts aren’t just about saving money, but are really moves that seem to be made in response to a quick devolution of the company’s business model.
WSJ reports that ESPN has lost 3.2 million subscribers in over a year. Since 2011, ESPN’s reach in US households has fallen 7.2% after having nearly 100% of the pay-TV market, or about about 100 million households.
And so things have changed quickly for ESPN.
ESPN, though ubiquitous in most US homes, is actually an extremely expensive channel for your cable provider to bring to you. According to a WSJ report from August 2014, ESPN costs about $US6.04 per person for a cable provider.
By comparison, channels like TNT, Fox News, TBS, and NFL Network all cost less than $US1.50. And so while channels like HBO and Showtime are considered “premium channels,” ESPN is head and shoulders more costly than other channels it is often bundled with.
Now, given that it is, again, the “Worldwide Leader in Sports,” and sports are considered just about the only live TV event that still demands viewers watch, well, live, advertising space on ESPN is coveted.
But according to WSJ, Disney has chaffed at just how much advertising ESPN is putting on its broadcasts — and how this is eating into cross-promoting other Disney content.
As it trims costs, ESPN is also looking for new ways to boost revenue. In previous years, Disney’s ABC network received four minutes of time to promote its new shows for the fall during each NBA finals game it aired. This year, ESPN, which manages the NBA rights for Disney, cut that amount by about 75% so that it could sell more ads, people with knowledge of the matter said, a move that angered ABC executives.
And so ESPN, which accounts for about 25% of Disney’s annual profit, seems to be caught in a pickle: it needs to boost revenue but cut costs. And this all while the price of its most coveted content — live sports — goes through the roof.
A new NBA deal, announced last October and taking effect as of the 2016-2017 NBA season, will see ESPN’s average annual fees to broadcast the league triple — to $US1.47 billion from $US485 million. In football, ESPN currently pays $US1.9 billion a year to broadcast “Monday Night Football” in a deal with the NFL that runs through 2021.
This is not cheap content.
But perhaps the most worrying part of the WSJ report is the deal ESPN struck last year with Dish Network’s newSling TV service, a streaming internet TV service that costs just $US20 a month.
According to WSJ, Disney reached a deal with Dish to cancel its agreement to include ESPN on Sling TV if more than 3 million Nielsen households — or homes that count for the all-important Nielsen ratings — got rid of ESPN after May 2014.
According to the WSJ’s sources, this threshold has now been crossed.
So now the question is: will ESPN go it alone, offering something like HBO’s “over-the-top” (outside of a traditional cable bundle) HBO Now streaming offering, or figure something else out.
The economics, at least as the WSJ calculates them, are not favourable.
Per WSJ, ESPN would need to charge $US30 a month for an “over-the-top” offering to make the same amount of money it does from traditional cable companies that include the network’s channels as part of a bundle. HBO Now, in contrast, charges $US15 a month for its new bundle. Netflix costs $US8 a month.
But the existential questions ESPN faces are most pressing not just for the cable industry, but also the advertising industry, the content industry, and the sports leagues themselves.
Again, outside of live awards shows like the Grammys or Oscars, sports events are one of the only things that companies can more or less count on to be viewed live. This gives everyone — the athletes, the leagues, the TV companies, the cable companies, advertisers — some sort of leverage when negotiating how much they want to be paid for the event.
An athlete can demand more salary, a sports league demands higher fees, the TV networks demand higher ad rates, the cable companies demand higher prices from their subscribers (you), the advertisers demand higher fees from clients, and so on.
These are seriously lucrative events.
But if we look at how much money was just doled out in 2 days of NBA free agency — $US1.4 billion (!) — and how the NBA’s salary cap is expected to explode when new TV money kicks in, the leagues aren’t exactly behaving like any major market correction is coming.
Last year, the Los Angeles Clippers were sold for a whopping $US2 billion. And now, a stand-off between the city of Milwaukee and its hometown Milwaukee Bucks franchise over a new arena could see a team that was sold for $US550 million 2 years ago become a more than $US1 billion franchise if moved to another city like Las Vegas, seemingly overnight.
And so in the NBA, the party is on.
The NFL, meanwhile, seems to be prepping plans to go global, planting two games in London every year for a decade under a new deal with English soccer club Tottenham Hotspur.
However, under the surface of how the NBA and other US sports leagues are distributed, things are changing, and they are changing in a big way and changing quickly.
Right now it seems like nothing can stop the NFL’s cultural dominance or the NBA’s meteoric rise.
But nothing lasts forever.