Why ESPN May Be In Trouble Even Though It Dominates The Competition

Yesterday we took a look at a couple of
charts that showed a disturbing trend in ESPN’s viewership. While the total number of people watching ESPN in prime time is up, ESPN’s share of all prime-time sports viewers is actually down two straight years in August, September, and October.

The good news for ESPN is that it is still dominating the competition, with more than four times as many viewers as its closest rival, Fox Sports 1. But those numbers paint a misleading picture.

In ESPN’s world, it is no longer enough to just beat the competition or even to dominate the competition. The basis of ESPN’s existence is that it wants to be a monopoly where there is no other competition at all.

But right now ESPN is trending down on several metrics and other sports networks are beginning to take eyes away from ESPN.

Here are the headwinds going against ESPN right now.

The growth of ESPN’s already-enormous cable subscriber revenue could slow down.

In 2013, ESPN is expected to generate $US11 billion (data via The Atlantic) in revenue with nearly 60% of that revenue ($6.54 billion) coming directly from subscription fees paid by cable customers. That is nearly twice as much as the advertising revenue generated by the network ($3.52 billion).

ESPN is able to generate this much revenue from subscription fees because its network is a must-have for cable customers. As a result, ESPN charges cable companies $US5.54 per customer, while the average cable company charged just $US0.24 in 2011 and Fox Sports 1 is charging just $US0.23 per customer in its first year.

It is hard to imagine that ESPN will ever lose its appeal to sports fans. But if those fans start turning to alternatives more often, the growth of ESPN’s cable subscriber revenue will slow down.

And if ESPN has fewer eyeballs staring at it, its ad revenue will decline too. That’s a problem because the cost of being ESPN is about to go up …

ESPN faces a cash squeeze when it comes to buying live sports.
ESPN is currently paying about $US2.8 billion annually to air its largest live sporting events, such as the NFL, MLB, the NBA, and various college sports, tennis, and golf events.

Based on contracts already in place, ESPN’s obligations will jump to $US4.7 billion next year, just for those major events, and will jump again in 2017 when ESPN must renegotiate its NBA and Big 10 contracts.

ESPN will remain dominant as long as they keep airing a majority of the live sports people want to watch. But if subscriber revenue growth slows down, the network will have less money to spend on skyrocketing sports broadcast rights. That could mean ESPN will have to start choosing which sports to keep and which to give up.

This is the central irony of ESPN: It’s dominant, but maintaining that dominance is extremely costly. Its competitors need not pick off all sport franchises to hurt ESPN. They only have to outbid ESPN on one or two sports each. ESPN, by contrast, must outbid its rivals on all the major leagues.

In other words, ESPN is like Gulliver — overcome by Lillilputians.

Live sports not shown on ESPN will go to ESPN’s biggest competitors.

In the past, ESPN had little competition to worry about as broadcast networks could only offer limited prime-time space to the various sports leagues. But ESPN is no longer competing with broadcast networks and now must go head-to-head with other 24-hour sports networks itching to fill prime-time space with live sports.

At the same time, sports leagues wanting their games in prime time now have more options and no longer have to accept a possibly inferior deal from ESPN just to get their sport in front of the fans. This was a move that the NHL was criticised for when it left ESPN for NBC and the NBC Sports Network.

Soccer’s Barclay’s Premier League also left ESPN this year — it now airs on NBC Sports.

Losing live sports will hurt ESPN’s second-largest revenue stream.

Once live sports move to rival networks, the advertisers will quickly follow and that will mean the growth of ESPN’s television ad revenue, expected to be $US3.52 billion in 2013, will slow down in the coming years.

While ESPN is typical of other cable networks in that they have become more dependent on cable subscription fees, its advertising revenue is still big piece of the pie and will ultimately impact what the network can spend on live broadcasting rights.

ESPN is safe, for now.

While ESPN’s share of the market is shrinking, it is still in a position of dominance, a position that is enhanced by its strong numbers in other forms of media, such as streaming video through online ESPN outlets.

But ultimately it comes down to live sports on television. If ESPN can continue to maintain its stranglehold on the biggest events, it will be fine. But if its subscriber fees revenue slows down, or its ad revenue declines, some of the sports may start to move elsewhere and ESPN’s tumble will pick up speed.

** For the purpose of this chart, we have included ESPN’s deals with the NFL, Major League Baseball, NBA, the six major college conferences (SEC, Big 10, Big 12, Big East, Pac-12, ACC), the BCS and major bowls, U.S. Open tennis, and Wimbledon. This data does not include ESPN’s obligations to major golf tournaments or the Australian Open in tennis, as data was not readily available. Data is based on the average annual value of the contracts.

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