The Billion Dollar Shift In Traditional Sports Media

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Friends,

In September, Disney reported their first quarterly loss since 2001, nearly $5 billion, as the majority of their business segments suffered from the coronavirus shutdown.

Their response?

After surviving the majority of the pandemic without job cuts or furloughs, reports have now surfaced that ESPN plans to layoff between 300-700 employees in the coming weeks — that represents 7.5% to 17.5% of their total 4,000 employee US workforce (Source).

With this being their third round of layoffs in five years, you have to wonder if this is really a by-product of the pandemic — or is that just an excuse for ESPN as they desperately attempt to trim their expenses and pivot their business model?

Let me explain…

(Image Source / ESPN)

To be clear — parent company Disney, which has several mature businesses including theme parks and a studio production franchise with a combined $60 billion in annual revenue, will be fine — my issue is with ESPN specifically.

ESPN is facing three main challenges:

1. The continued emergence & acceleration of cord-cutting

2. An increased cost of media rights combined with an inability to up-charge subs

3. An inadequate digital sports media offering

From a cable perspective, ESPN peaked with around 100 million cable subscription in 2011, but has lost about 20%, or 20 million subs, in the past 7 years alone.

That’s definitely bad, but it gets worse.

As the pandemic marches on and consumers continue to cut non-essential costs, the rate of subscription loss, which traditionally has been steady at 2-3% per quarter, has accelerated to -6% during the pandemic.

From a financial perspective, the cable subscription losses are starting to add up.

At a blended price of +/- $9/month, the loss of 20 million cable subs cost the company around $180M per month — or an annualized loss of $2.16 billion in revenue.

To be fair, ESPN has been able to offset some of these losses through raising the price of a cable subscription by ~5% per year, all the way up to $9/month, even while 99% of cable channels cost subscribers less than $1/month.

But that brings me to my next point…

ESPN is approaching a tipping point between what they are willing to pay for live sports broadcasting rights and their ability to up-charge a cable customer in return.

For context, look at how sports media rights have grown over the last decade.

For ESPN specifically, they have seen their media rights acquisition costs go from ~$5 billion in 2015 to ~$8.8 billion in 2019.

Point being — as media rights continue to increase with no end in sight, at what point do existing cable customers reject the continuous funneling down of price increases and join the other 20M+ Americans that have cut the cord.

My guess?

It’s already happening — cost-cutting related to the pandemic caused the perfect storm, thrusting this scenario onto ESPN before even they expected it.

But ESPN executives aren’t naive, the shift from a traditional media model to digital has been in progress for years — which is why ESPN launched their subscription streaming platform ESPN+ in 2018.

The problem?

There’s a few.

Since launching in 2018, ESPN+ has added over 8.5M subscribers, which is not nearly enough to offset the loss of over 20M cable subscription bundles — not to mention they pay ~$4.99/month compared to the cable cost of ~$9/month.

(Source / Statista)

The second issue is that it’s impossible to tell how many ESPN+ subscribers are actually enjoying the platform — viewership data isn’t released and over 50% of their added subscribers (4M+) purchased the Disney+, Hulu, and ESPN+ bundle deal.

Ok but why wouldn't they like it?

Just as ESPN wants to protect their business and prepare for the shift in media, so do cable companies and professional sports leagues — which is why they have specific stipulations that don’t allow ESPN’s greatest asset, live sports, to be streamed without a cable package.

Think about it this way — the US television audience is still close to 120 million, why would sports leagues do an exclusive rights deal with a streaming service like ESPN+ with less than 10M active accounts? Even if they offered more money, a sports league would decline because the demand for audience variety would trump the larger check from a brand recognition standpoint.

The legacy sports media content creation and distribution model has been showing cracks for years — ESPN is attempting to make changes before it shatters completely.

The addition and continued development of a subscription based digital offering is a good first step, but in the end, the entire model is breaking — as media rights continue to climb and cord-cutting accelerates in response, a reduction in headcount won’t save ESPN.

ESPN needs to find more unique ways to funnel down a variation of their most valuable asset, live sports, to fans through newly created digital mediums. As the largest sports media network in the world, they should be at a significant advantage to do just that.

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