Taking the pulse of ESPN
Taking the pulse of ESPNPublished June 26, 2017
In the spring of 2014, ESPN’s top executives sat in a conference room on the Bristol campus and agonized over a key financial decision.
They debated whether to commit $12.6 billion for the rights to the NBA through 2025 — a staggering increase that was nearly three times higher than ESPN had been paying annually.
The network’s top money people — Sean Bratches, who ran sales and marketing, and CFO Christine Driessen — did not like the proposed deal. Along with CTO Chuck Pagano, they wanted to keep the NBA, but warned about cracks that were appearing in ESPN’s subscriber base, which was more than 96 million homes at the time. That subscriber uncertainty made such a huge cost increase needlessly risky, they argued.
Just wait, they said. After all, ESPN still had two years left on its NBA deal. See how the market looks then before making such a big decision.
ESPN President John Skipper, who sat across the table, disagreed. Supported by programming head John Wildhack, digital head John Kosner, and Executive Vice President Marie Donoghue, Skipper warned that NBC and Fox were waiting in the wings to steal ESPN’s NBA package. The price may seem high, but sports rights are worth whatever somebody is willing to pay for them. And he was convinced that both networks would pay as much as ESPN, if not more, if given the chance.
SBJ media writer John Ourand speaks with Executive Editor Abe Madkour and senior writer Bill King about his reporting of the ESPN story.
Skipper’s message was simple and direct: ESPN needed top sports properties like the NBA, especially in an environment where pay television was shedding subscribers. It would be a strategic mistake to allow competitors to get such a premium sports property.
“You have to build a deeper moat,” he often said when discussing competition. In Skipper’s folksy Southern style, that meant keeping ESPN’s enemies at bay. It meant identifying the rights ESPN wanted — the NFL, NBA, MLB, MLS, college sports, tennis — and paying a dollar more than anyone else to get them.
Skipper prevailed and won important buy-in from Disney Chairman and CEO Bob Iger, who also believes that sports rights will hold their value even if the network loses subscribers.
|ESPN’s John Skipper (center) joined NBA Commissioner Adam Silver (right) and Wizards owner Ted Leonsis (left)in 2014 to announce their massive new rights deal.
The sum shocked outsiders. ESPN and Turner Sports committed to pay the NBA roughly $24 billion for a nine-year deal.
Skipper’s programming team was overjoyed. Sure, the rights fee was big. But the deal fit with ESPN’s strategy in the changing media world: secure the biggest sports rights with long-term contracts. The NBA runs through the 2024-25 season, and Skipper dismisses critics who hint the network may have overpaid.
“ESPN is undeniably stronger as a result of our NBA rights agreement. It brought us unprecedented access to NBA games and content at a cost that fully reflected its value in a very aggressive, competitive landscape,” Skipper said. “As we do for any negotiation involving a major, ascendant property, our approach centered around a disciplined appraisal of the overall value across ESPN and its appeal to sports fans, distributors and advertisers.”
The NBA was the network’s last major deal in a successful run of rights agreements, which includes deals as far out as the ACC, which runs through 2035-36.
These were heady days for ESPN. The sports network drove Disney’s stock price and delivered high single-digit profit growth for the company. Disney’s stock rose roughly 35 percent in the year before ESPN’s NBA deal became public (Oct. 1, 2014-Oct. 1, 2015).
But those go-go days didn’t last. ESPN lost more than 3 million subscribers in the year after its NBA deal, according to Nielsen. The subscriber losses especially spooked Wall Street. Seeking to soften concerns, Iger told analysts during an August 2015 earnings call that ESPN had seen “some modest sub losses,” an admission that sent all media stocks into a tailspin. Disney shares fell nearly 10 percent the next day, as Iger forecast that ESPN profit growth would slow.
The situation left ESPN in an unfamiliar place. Iger’s comments marked the beginning of a slump the company still is trying to overcome. It is looking to maintain profit margins by cutting staff, trimming production costs and shoring up its management team. But the growth has slowed, forcing the company to make tough decisions.
Two months after Iger’s comments, ESPN laid off more than 300 employees, mostly executives with long histories at the company. A year and a half later, it went through another round of layoffs, about 100 on-air hosts, analysts and reporters. Many of the people who were laid off blamed the size of the NBA deal — and other rights deals before it — as a main reason, a contention that ESPN executives vehemently deny.
ESPN’s subscriber base has seen a steady decline since the summer of 2011, when it was in more than 100 million homes. The most recent Nielsen estimates have ESPN in 87 million homes — a loss of 13 million subscribers over six years. With a current affiliate fee of $8 per subscriber per month, that’s more than $1 billion per year in affiliate revenue that ESPN is not getting.
Still a place for sports fans
ESPN still is far and away the biggest and most profitable company in the pay-TV business. Its executives are confident that its rights deals and affiliate relationships position it well for the digital future. Even with its challenges, ESPN still brings in enough cash to pay top dollar to acquire the rights it wants. That’s why ESPN was willing to commit to such a big increase for the NBA, whereas just a year before it did not even submit a bid for NASCAR.
ESPN executives know that the pay-TV model responsible for the network’s wild growth is under pressure. That’s why it is supplementing linear TV with over-the-top distribution and digital offerings. Of course, digital usage is nowhere near what linear TV provides yet. But ESPN executives confidently say they are better positioned for the media future than other networks.
ESPN’s key media rights
|Property||Length||Avg. annual value||Total value||Final season of contract|
|Australian Open||10 years||NA||NA||2021|
|BYU football||8 years||NA||NA||2018|
|College Football Playoff*||12 years||$608.33 million||$7.3 billion||2025|
|MLB||8 years||$700 million||$5.6 billion||2021|
|MLS**||8 years||$38 million||$304 million||2022|
|NBA||9 years||$1.4 billion||$12.6 billion||2024-25|
|NFL||8 years||$1.9 billion||$15.2 billion||2021|
|The Masters||1 year||NA||NA||Year-to-year|
|U.S. Open (tennis)||11 years||$75 million||$825 million||2025|
|Wimbledon***||12 years||$40 million||$480 million||2023|
|WNBA^||9 years||$25 million||$225 million||2025|
|American Athletic Conference||7 years||$18 million||$126 million||2019-20|
|Atlantic Coast Conference||20 years||$240 million||$4.8 billion||2035-36|
|Big 12 Conference^^||13 years||$100 million||$1.3 billion||2024-25|
|Big Ten Conference^^^||10 years||$100 million||$1 billion||2016-17|
|Mid-American Conference||13 years||$8 million||$104 million||2026-27|
|Pac-12 Conference#||12 years||$125 million||$1.5 billion||2023-24|
|Southeastern Conference##||20 years||$300 million||$6 billion||2033-34|
NA: Not available
* Figure takes into account the $215 million annual payout ESPN has committed to the “contract” bowls — the Rose, Sugar and Orange — in addition to the playoff package.
** Total shared deal with Fox is worth a combined $600 million.
*** Terms were not disclosed, but people familiar with the agreement said the 12-year deal has a value of about $480 million.
^ As ESPN renegotiated its NBA deal in 2014, it opened up the WNBA deal as well, and committed to pay the women’s basketball league a rights fee of about $25 million a year starting in 2017.
^^ ESPN/ABC and Fox share the league’s football inventory, while ESPN/ABC is the exclusive provider for men’s basketball.
^^^ As part of their deal with the Big Ten, ESPN/ABC and Fox will each air approximately 25 football games and 50 basketball games each year, beginning in fall 2017.
# Total shared deal with Fox is worth a combined $3 billion.
## Figure is an industry estimate on the latest SEC deal.
Source: SportsBusiness Journal research
“We recognized the early signs of a shift in the industry, anticipated its impact on our business, and adapted quickly with a strategy that reflects the evolving market,” Iger said in May on Disney’s second-quarter earnings call.
As evidence, executives point to the popularity of ESPN’s app, which averaged a monthly audience of nearly 23 million unique users who spent 5.2 billion minutes on it. They also point to the direct-to-consumer offering it is launching this fall through its BAMTech investment. The ESPN-branded service will generate revenue through a mix of subscriptions and advertising by targeting niche sports from college, tennis, soccer, rugby and cricket. At least initially, all programming will be original — none will be simulcast from ESPN.
ESPN executives say these types of moves are part of the company’s long-standing culture, and align with the company’s history as a first-mover — as it was among the first TV networks in internet video, mobile, HD and 3-D.
“We continue to make sure that the company pivots into the transformation, and doesn’t build a wall around incumbency,” said Burke Magnus, ESPN’s executive vice president of programming and scheduling.
ESPN executives still see their company as cutting edge and genuinely are surprised by the glee that people take in ESPN misfortunes these days, seemingly cheering every subscriber loss. It marks a stark contrast from nearly 40 years ago when ESPN was created by sports fans for sports fans. ESPN was the epitome of cool through the 1980s and ’90s, developing stars and popularizing their catchphrases.
The move to jettison on-air stars like John Clayton and Trent Dilfer, who were part of the April layoffs, has thrown the company under a media microscope and surprisingly turned consumer sentiment against it. In May, The Ringer published a 1,600-word story with the headline, “Why Does Everyone Want ESPN to Fail?” ESPN’s fortunes have become cocktail party chatter in the sports business, with most conversations starting with questions about what’s happening in Bristol. Some talk about it with a sense of smugness; others with concern.
ESPN’s executives still see Bristol the same way, with a workforce that is filled with sports fans who want to serve sports fans. This was evident earlier this month during ABC’s telecast of the NBA Finals Game 5, when a couple dozen millennial employees watched the game in two Bristol conference rooms, swiftly cutting real-time highlights for ESPN.com, sending out alerts for mobile users and updating ESPN’s social feeds.
“We always have been the little engine that could,” Magnus said. “That’s the culture that exists here to this day.”
Digging the deeper moat
ESPN’s strategy of investing heavily in the rights it prioritizes has been effective so far. The only property it wanted and didn’t get was the World Cup, which went to Fox in 2015.
But according to interviews with more than 30 sports business executives inside and outside of Bristol, many critics believe the way that strategy has been employed suggests that ESPN is an undisciplined negotiator, often spending more than it needs.
These critics bring up a litany of deals where they believe ESPN could have negotiated better.
Examples go back to 2008, when ESPN outbid Fox Sports by a massive $100 million over four years to bring the BCS from broadcast to cable. At the time, ESPN’s subscriber base was growing, and the network was flush with cash. Still, the bid was viewed as an example of ESPN’s penchant to spend more than it needed. Would the BCS have moved to ESPN for $50 million more? What about $25 million more?
ESPN executives don’t focus on the total payout. Instead, they look at the overall benefit for the ESPN brand and stress the deal to bring a major college championship to cable TV was profitable — even at that price. By convincing the college conferences to hold their football championship on cable television, it became easier to convince other properties to make a similar move, leading to the Rose Bowl moving to cable in 2011.
“We’ve placed our bets,” Magnus said. “We have the strongest portfolio of anybody in the business by a wide margin.”
Several critics also questioned ESPN’s NFL renewal in 2011. The eight-year, $15.2 billion deal ($1.9 billion per year) for “Monday Night Football” was so much higher than expected that critics contend it set the market for sports rights way too high, and cast the die for every overheated rights deal that followed, like the NBA and MLB.
The deal, which involved then ESPN President George Bodenheimer and Iger, was cut at a time when ESPN’s distribution footprint was at its highest, around 100 million homes. During negotiations, ESPN executives viewed the pay-TV business as mature and did not expect growth. They saw no signs of cord cutting or subscriber losses. Critically, several sources say that the NFL deal financials were modeled on subscribers remaining flat.
|ESPN lost “Sunday Night Football” to NBC, so it dug in deeply for “Monday Night Football.”
Plus, ESPN had to worry about far more than just the broadcast networks, as the seller’s market was boosted by competition. Broadcasters tried to replicate ESPN’s success: NBC relaunched its Versus sports network as NBC Sports Network in January 2012, and Fox replaced its Speed channel with Fox Sports 1 as part of a heavily hyped August 2013 relaunch.
To keep these competitors at bay, ESPN decided to, as Skipper put it, build a deeper moat. And that was when rights really began to get pricey.
In the spring of 2011, months before ESPN completed its NFL deal, NBC thought it had a deal with the Pac-10 worth $225 million per year. NBC already carried Notre Dame football, and the deal would have given the network’s sports channel a foothold in the college marketplace. Before NBC and the Pac-10 signed their contract, Skipper, who ran ESPN’s programming group at the time, called Fox Sports’ Randy Freer and came up with a unique and rarely seen bid — a combined offer of $250 million per year. The Pac-10 ended up spurning NBC and signed a deal with ESPN and Fox.
A year later, ESPN beat NBC Sports to the punch again — this time with MLB. While NBC Sports executives were in London for the Olympics, ESPN and MLB executives met privately to cement a deal that NBC wanted.
|Disney Chairman Bob Iger gave his blessing to ESPN’s rights deals, opting not to wait until other players made the first move to set the market.
Even though national MLB ratings had been dropping significantly leading up to the deal, Skipper again saw an opportunity to keep a marquee package away from a competitor. Plus, he liked the sheer number of hours MLB provided, especially in the summer months.
The deals kept adding up. In May 2013, it signed an 11-year, $825 million deal to take the U.S. Tennis Association’s U.S. Open from CBS. In April 2014, ESPN agreed to pay $100 million for one NFL wild-card playoff game. In May 2014, it committed at least $37.5 million per year for Major League Soccer (up dramatically from its previous annual payout of $8 million per year).
But it wasn’t just about sports rights where ESPN committed the cash. The network’s reaction to competition also led to significant pay increases for several on-air personalities — paying some studio hosts well into seven figures — to keep them from going to Fox Sports 1 or NBC Sports Network.
ESPN insiders acknowledge those deals overvalued some of their on-air personalities and played a big part in ESPN’s decision to lay off more than 100 hosts, analysts and reporters earlier this spring.
Distribution takes a dive
The increased spending on rights and talent came as the sports network’s subscriber numbers declined. Investors have kept an aggressive focus on ESPN’s subscriber base, and during Disney’s earnings call in May, for example, five of the first six questions to Iger were ESPN-related issues.
ESPN’s subscriber losses outpace the rest of the pay-TV industry. Since June 2011, the network has shed 13 million homes, according to Nielsen estimates. By comparison, the overall pay-TV industry is 9 million homes smaller, according to Nielsen.
ESPN executives calmly explain that their subscriber losses recently have become aligned with others, like Fox Sports 1. Since the beginning of the year, FS1 has lost 1.5 million subscribers, a figure that is bigger than either ESPN, which lost 1.1 million subscribers, or ESPN2, which also lost 1.1 million.
Distribution executives place much of the blame for ESPN’s subscriber loss on Disney, rather than ESPN. Distributors’ complaints go back to a 2010 deal Disney made to allow Apple’s iTunes to sell individual ABC shows to consumers for 99 cents. ABC was the first big broadcaster to license its content in such a way. Iger joined the Apple board the following year.
At the time, distributors were irate. Some still are. They wanted programmers to hold the line on the cable business a little while longer and were furious that it was Disney — a group that commands the biggest license fees — that was first to make a move.
ESPN’s affiliate group met with distributors in the aftermath of the announcement and got an earful. At the time, distributors warned that ESPN — the network that commanded the highest license fee — stood to lose the most if its parent company was going to sell its programming on the cheap outside of the cable bundle.
They pointed out that even though ESPN was one of the most popular cable channels, most subscribers did not watch it regularly. Non-sports fans who wanted to watch ABC’s entertainment programming would have more of an incentive to ditch their pay-TV subscription. Add in Disney’s 2012 streaming deal with Netflix and its 30 percent ownership in Hulu as factors that hastened the cord-cutting trend, and distribution executives complained that it seemed to them like Disney was encouraging cord cutting.
“It was akin to pouring kerosene on a cord-cutting fire,” one distribution executive said. “Everybody could see where the industry was headed. But if Disney took longer, would it have been a 20-year process instead of 10? It’s hard to know.”
Distributors started creating low-cost packages as a retention method to keep their customers from cutting the cord. Many of those packages do not include ESPN, a move that surprised many cable veterans who assumed that the network’s contracts would not allow cable operators to keep ESPN off those packages. Standard cable contracts mandate that channels have to be in a certain percentage of homes — called “minimum penetration thresholds.”
Around 15 years ago, though, ESPN took those clauses out of its deals in exchange for convincing distributors to pay a higher license fee. Several distribution executives describe the move as a good one for ESPN at the time, as it made sure that the channel not only had the highest affiliate fee in the business, but its annual increases were bigger than other channels’ entire fee.
In 2016, for example, distributors paid ESPN $7.24 per subscriber per month, according to Kagan. In 2017, that fee increased to $7.89, an increase of 65 cents. Only 13 channels make more than 65 cents per subscriber per month, including four Disney-owned channels — ESPN, Disney Channel ($1.49), ESPN2 (98 cents) and SEC Network (72 cents).
Even though ESPN’s distribution is smaller, the network still is making more in affiliate revenue thanks to those increases. ESPN executives insist they like that trade-off, and distribution executives even privately agree that the 15-year old arrangement has been good for ESPN.
ESPN has made up some of that distribution with deals for digital video players, like Sling TV, Hulu, PlayStation Vue, DirecTV Now and YouTube TV. But those subscribers add up to around 2 million subscribers, which does not come close to offsetting the amount lost from traditional pay TV.
“All these new distributors … have concluded that launching new platforms without ESPN is very challenged,” Iger said in May. “We’ve seen really nice growth there but it’s nascent.”
As the biggest sports media company in the United States, ESPN executives realize that they are seen as the industry’s bellwether. They grow frustrated at a narrative that paints ESPN as a declining sports media power, beholdened to an economic model that critics say is destined to fail. But Bristol remains undaunted. Sure, there may be bumps in the road. But they insist they are well-prepared for the future, regardless of what that future looks like.
“There are challenges,” Magnus said. “The challenges are different than we have had before based on an industry that’s transforming. The company’s still very strong, and we are well-positioned.”
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