The Revolutionary Strategy That Made ESPN An $8 Billion Company


[credit provider=”Steve Rosenbaum”]

Here’s another tale from James Andrew Miller’s hit book, “Those Guys Have All The Fun,” that explains how one big idea turned ESPN into the gigantic media monster that is today.In 1983, ESPN was one of the fastest growing networks on cable, but was hemorrhaging cash and in danger of being liquidated.

Its only source of income was ad revenue, which wasn’t enough to support the expanding enterprise or buy rights to show new sports.

(Pay attention. There might be a lesson in here for today’s media companies.)

Even worse, executives trying to spread the word in the early days, cut deals with cable companies where ESPN paid them to carry their channel. They were “bleeding.”

So two consultants brought in from McKinsey & Co. hatched a survival plan. HBO and Showtime didn’t have any ads, but were very successful because they charged subscriber fees. They weren’t a premium network like the movie channels, but what if ESPN could do both?

They went to cable companies (starting with small regional outfits) and started asking for a per-subscriber fee. Just a few cents each. They charged one company $48 a year to have ESPN in their channel lineup.

It wasn’t much, but it set a precedent. If your customers want sports, you’ll have to us pay for it. Back then, nobody charged to carry their channel. Not MTV, CNN, or Nickelodeon.

Eventually they went to big boys, fighting tooth and nail against Cablevision (run by current Knick-owner James Dolan and his father.) There was yelling and screaming and “a lot of walking out of the room and throwing stuff around.”

But Cablevision blinked. They started paying 10 cents a subscriber. Sports, no matter how minor, was too important to let go.

Today? ESPN charges more than $4 a subscriber, far and away the most of any channel. The industry average is $0.20.

That decision was the pivotal moment that not only saved ESPN, but turned it into a Juggernaut. It gave them a steady stream of cash that had nothing to do with ratings or the fickle tastes of advertisers.

Roger Werner – the McKinsey consultant who hatched the idea and would later join ESPN full-time – hit on another key realisation. By showing a wide variety of niche sports (ski jumping, bowling, NASCAR) they might get lower ratings than they would with a full slate of college basketball games, but they would reel in the diehard sports fans who are willing to pay money for the one thing they love.

The fanatics who would march on their cable companies with pitchforks when they balked at high subscriber fees and threatened to kick ESPN off the grid.

It wasn’t about ratings anymore. It was about subscribers. It wasn’t long before they had the most.

The most telling anecdote comes from George Bodenheimer, the current president of ESPN, who was a regional sales director in Kansas in the mid-80s. He found himself in a town debate in front of 300 citizens with a cable operator who didn’t want to pay ESPN’s fee.

“The people really didn’t want to hear anything about his business strategy or hear his protestations about paying 20 cents. They wanted their sports. They wanted college football and Kansas hoops. A week later we signed that guy and he got back on the cable system.

These days ESPN has the highest fees and the highest ratings and all the ad revenue they need to buy any sport they want.

That dual revenue model is why, according Miller, ESPN is worth more than the NBA, NHL and Major League Baseball combined. Its $8 billion in yearly revenue makes them almost as big as the NFL.

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