The cuts continue at ESPN as dwindling subscriber numbers threaten ESPN's sports dominance.
Soap Bubbles
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By Clay TravisMar 6, 2017 at 10:12a ET
Two years ago ESPN cut several hundred behind the scenes jobs to save hundreds of millions of dollars in yearly costs. Since that time ESPN's subscriber losses have accelerated, averaging over three million lost subscribers a year. Now new jobs cuts are coming, only this time you're likely to know some of the casualties -- Outkick has heard from a variety of different sources that ESPN is cutting up to $100 million in on-air salaries.
Yep, on air. This means you're going to know many of the people leaving the network.
The cuts will come via buyouts and expiring contracts that won't be renewed and when those layoffs start becoming apparent many will recognize that what Outkick has been writing for a couple of years now -- ESPN is in a world of trouble and doesn't know how to stem a rapidly collapsing business model.
ESPN's collapse is the biggest story in sports yet most still haven't realized it.
That business collapse at ESPN has caused a panic at the network, a desperate grab for relevance that has led to a pronounced leftward move. ESPN's trying desperately to stay relevant as ratings collapse and subscribers flee. The decision? "We'll be MSESPN, the home for far left wing politics and sports!" Only, it's not working.
Maybe it will take dozens of on-air talent leaving ESPN for cost reasons to bring this lesson home. (And I'm certainly not rooting for these people to lose their jobs. I've lost multiple sports media jobs before. It always sucks to go through that process. But every job I ever lost was rooted in a basic business reality, the company wasn't making the money it needed to make to keep me employed.) ESPN's collapse is a basic business reality, just like when the subprime mortgage crisis bubble popped. ESPN assumed that its subscriber numbers were going to remain fairly stable as it spent billions on sports rights. This wasn't a bad bet since its subscribers had gone up consistently from 1979 to 2011. But in 2011, the number of national cable subscribers peaked. Since that time they've been going down every month.
Over the past several years ESPN has lost over 13 million cable and satellite subscribers. Given that each subscriber pays ESPN in the neighborhood of $7 a month for the network, that's over a billion dollars a year in lost revenue that will never be recouped. And those losses aren't stopping. Indeed, every single day in 2017 ESPN is losing 10,000 subscribers or more.
That's why I projected that ESPN is on pace to start losing money by 2021.
At the same time that ESPN has been hemorrhaging subscribers, the network has also been paying incredible sums of money for live sports rights. In fact, ESPN will pay out $7.3 billion for sports rights in 2017, that's more than any company in America will pay for media content.
In 2017 ESPN to spend $7.3 billion on content more than any source; then Netflix ($6bn), NBC (4.3bn), CBS ($4bn) & Amazon ($3.2bn) #snlkagan
— Brad Adgate (@badgate) October 18, 2016
Let's be generous and say that ESPN's average per month subscriber price will be $7.50 in 2017. That's higher than it will be, but let's say that's the cost that every single cable and satellite subscriber will be paying for ESPN in 2017. This means ESPN will do roughly $8 billion in revenue in 2017. Add in another two billion in advertising revenue and we're talking about $10 billion in total revenue. We don't know what ESPN's costs are in 2017, but let's presume that they are less than $2.7 billion. That means ESPN will still be profitable in 2017.
But those rights fees continue to rise and ESPN's subscriber revenue continues to decline. This means that at some point in the near future the network will start to lose money. It's as inevitable as Skip Bayless comparing LeBron James to Michael Jordan every day for the next five years.
If we're very conservative and project that ESPN continues to lose 3 million subscribers a year -- below the rate that they are currently losing subscribers -- then ESPN's household subscriber numbers would look like this over the next five years:
2017: 86 million subscribers
2018: 83 million subscribers
2019: 80 million subscribers
2020: 77 million subscribers
2021: 74 million subscribers
At 74 million subscribers -- Outkick's projection for 2021 based on the past five years of subscriber losses -- ESPN, now costing $8 a month, produces $7.1 billion in subscriber revenue. That's less than the yearly rights fees cost in 2017. And that's being generous about the number of subscribers, it may well be much less than 74 million.
It's fair to say that by 2021 ESPN's rights fees will cost at least $8 billion a year, and probably much more than that.
So within five years ESPN will be bringing in less subscriber revenue than they've committed for sports rights. Advertising dollars will still help, but when you factor in the costs of doing business ESPN will be losing money by 2021, potentially sooner.
Which is why ESPN's cutting employees so aggressively. They see the math coming, it's inevitable now. The problem is that ESPN can't cut costs fast enough to make up for the changing business reality.
Now I've written a ton about this story because I think it's the biggest in sports. Inevitably people don't read the article and they always Tweet, "You're just biased! What about FS1!" (Seriously, check my mentions and see how many people will do this. Feel free to brand them idiots.). First, I'm not on FS1 daily so I don't know why you think I'm biased in favor of FS1. I own 100% of Outkick, the website you're reading right now, and the vast majority of my income doesn't come from Fox. In fact, Fox pays me about 25% of what I'll make this year, virtually none of that from television. So the idea that I'm biased in favor of FS1 is laughable.
As I've written before, the reason I'm focused on ESPN is because ESPN has the most to lose in all of media. In fact, ESPN by itself stands to lose as much money as over a hundred cable channels do combined. ESPN stands to lose three times as much from the collapse of cable than Fox, CBS, and NBC do combined. That's because ESPN's business model is more predicated on subscriber fees than any company in America.
Yes, the decline in cable and satellite subscribers will hurt all channels, but the loss of millions of subscribers to CNN matters much less because CNN makes much less in subscriber revenue than ESPN. What's more, CNN doesn't have the fixed costs on content that ESPN does. If CNN makes less money on subscriber revenue, they can spend less on news gathering. If AMC makes less money in subscriber fees, they'll pay for fewer TV shows, but ESPN's entire business is predicated on the billions they owe for sports rights every year into the foreseeable future. ESPN made a bet that exclusive live sports rights would be the moat that protected Cinderella's castle from all attackers. The problem is this, that moat flooded Cinderella's castle instead.
Moreover, the sports businesses of Fox, NBC, and CBS are more protected because the vast majority of their best games are all on network TV, which may well return to primacy when it comes to sports. Look at the roster of games that Fox, NBC, and CBS have -- virtually all of the top draws air on the main broadcast networks. The NFL's AFC and NFC packages, the World Series, the Super Bowl, the SEC game of the week, the best college football games in other conferences, Sunday Night Football, the big Olympic events, the U.S. Open, the British Open, and the Masters, all air on "free" TV. ESPN -- and Turner -- are the only two networks that put their biggest sporting events on cable. (The college football playoff, Monday Night Football, and most of the NBA's Eastern Conference playoffs air on ESPN, which is how ESPN justifies its massive cable and satellite subscription fees. Turner carries the majority of the NCAA Tournament games on cable as well.)
Unlike CBS, NBC, and Fox, ESPN can't fall back on advertising revenue because ad revenue only represents around 25% of ESPN's revenue. The vast majority of ESPN's income comes from subscriber revenue. And that revenue isn't going to be there in the future. ESPN can't go over-the-top due to its existing contracts with cable and satellite companies and it can't get out of the existing contracts it signed for sports rights either. What's more, these lower cost Internet sign ups like Sling and the new YouTube offering allow month by month sign-ups. So even if millions of people end up signing up for these channels over the Internet, most will only sign up on a seasonal basis. (This is the biggest challenge to leagues going over-the-top too. Why would you pay for ESPN all year around when you might just be, say, a football fan? A football fan could pay for ESPN for September-December and save the money for the other eight months of the year.)
Looking at the NFL's TV revenue in 2016 tells this story. Here is what each network airing NFL games made off of advertising in 2016:
Fox: $1.44 billion
NBC: $909 million
CBS: $867 million
ESPN/ABC: $285 million
ESPN paid the NFL $2 billion to make $285 million in ad revenue.
Why is ESPN's revenue so much lower? Because it has many fewer games and many fewer people watch ESPN than watch games on Fox, NBC and CBS. The NFL's major network partners are roughly breakeven, ESPN loses $1.7 billion airing NFL games and the highlight packages surrounding those games.
Gulp.
Come 2021, that expense won't be tenable for ESPN unless Disney is prepared to lose billions on the network.
From 1979 to 2011 ESPN had the best business model in the history of sports. (The cable and satellite bundle is the greatest money making venture in the history of media.) But starting in 2011 the business began to change. In a hurry. Most didn't recognize it, but I wrote my first article about ESPN's challenges in 2011. Right at the absolute peak of the cable market, I wrote this piece, "Why ESPN has already lost the future." I didn't get everything right -- far from it -- but my basic thesis was correct -- ESPN was a glorified middleman that most didn't need. ESPN realized this and overpaid for sports rights to ensure its continuing relevancy.
The worst TV contract in the history of sports was the result -- ESPN's rights deal with the NBA. A deal so lucrative for the NBA that every cable and satellite subscriber in the country, the vast majority of whom will never watch an NBA game, is paying over $30 a year for the NBA. That's how Mike Conley can make over $30 million a year.
Mike Conley!
But the bubble has since popped.
Now it's just a question of how quickly ESPN can cut costs. And of how many people are going to be left unemployed as a result
