If the faces you see on ESPN seem a little less familiar then they used to, you’re not crazy — they are different. The sports-oriented division of Walt Disney (DIS) is giving some of its long-tenured commentators the boot, in a sense, by virtue of not renewing their contracts.
ESPN’s leadership claims it needs to contain costs in light of rising expenses on other fronts. And, that’s basically true. It’s not a complete enough explanation for DIS shareholders, however.
Though it’s still a cash cow for its parent company, several headwinds have simultaneously converged that may well force the organization to either make some drastic changes to the way ESPN operates, or cut loose of it altogether while it still has some marketable value.
Another One Bites the Dust
Just this week, the infamous Keith Olbermann — star of the “Olbermann” show, which could never quite find a home on ESPN2 — learned his contract with ESPN would not be renewed.
Olbermann’s name was added to a lengthening list of high-profile names the sports network is parting ways with. Bill Simmons was out as of May. We learned in April that Bobby Knight’s contract was also not being renewed. More names are sure to be on the chopping block, too.
The reason? The unverified buzz is, Disney is less-than-pleased with the frothy salaries some of the on-air talent is receiving, especially in light of the burgeoning programming costs the network was being forced to digest.
Case in point: Last year, the National Basketball Association upped its annual charge for broadcast rights to its basketball games from $485 million to $1.47 billion. ESPN agreed to pay it, because it had to, but it’s not as if ESPN or Disney have an extra billion dollars laying around to toss in the NBA’s direction.
Other leagues are sure to be applying similar pressure and/or threatening to look at other partners. As an example, last month the NFL agreed to — simply as an experiment — let Yahoo (YHOO) broadcast one of the two overseas games to an online-only audience. FOX and NBC, most threatened by such a switch, are clearly hoping the Yahoo/NFL test is a flop.
What’s Really Going On?
On the surface, it looks like it’s all about money. And, in some ways it is. It’s not just the simple matter of “paying on-air talent less so we can afford increases in other expenses,” however. This is about the convergence of several trends, all at the same time, and in the worst possible way for ESPN.
Not that most networks aren’t losing subscribers to a variety of alternative venues, but ESPN is losing far more than the average. Over the past four years, ESPN has given up more than 7% of its cable-television-supplied subscribers. The only channel to lose more viewership during that time is The Weather Channel.
Where are the viewers going? To alternatives, like Netflix (NFLX). When Apple (AAPL) rolls out its a la carte cable television service later in the year, look for even more defections from bundle-only cable television services that ESPN presently relies on.
It’s not just a challenging distribution model that’s proving to be a problem for ESPN and Disney, though. Professional sports is becoming less compelling as entertainment in the wake of Ray Rice, Adrian Peterson, and countless other scandals in recent years… from all sports.
Don’t misunderstand. Sports is still a huge business, and always will be. It’s just not the center of our culture anymore. Smartphones and tablets are, particularly among children who will soon grow up to become consumers.
Last but not least (and perhaps a blend of reason #1 and #2), there are more accessible and affordable forms of entertainment right now than ever before. These include mobile games, theme parks, online and traditional television, fitness activities, travel, and countless others. No longer is it a question of which game you’re going to watch. It’s a question of if you’re going to watch a game at all.
Bottom Line for ESPN (and Disney)
Given the complexity of the impasse, one solution for Disney would simply be to punt… divest ESPN and let someone else figure it out. That’s easier said than done, though. ESPN contributes about one-fourth of Disney’s operating profits. The parent company isn’t simply going to let that go, even if it should. It’s going to look for a solution. The question is, will it find one before it’s too late? (And, cutting talent salaries isn’t going to be enough.)
The knee-jerk recommendation would be for Disney to bite the bullet and take ESPN where all television is eventually going anyway — online, on an a la carte basis. That’s an unlikely outcome anytime soon, however.
Some number-crunching done by MoffettNathanson Research suggests a streaming-only version of ESPN would cost north of $30 per month, which would make it the most expensive premium channel in the world. That necessary high cost of such a service, though, underscores just how bloated ESPN’s expenses have become.
The only viable solution, really, is the simplest one — continue to cut costs while improving overall programming. They’re doing that, but they haven’t gone far enough, yet.
It’s neither easy nor endearing to cut popular programming, but ESPN should have walked away from the bargaining table last if the NBA was insistent on selling television rights for no less than $1.47 billion per year; the league’s games didn’t triple in marketable value in just a matter of months.
The NBA would have certainly offered the same deal to another network, and another network certainly would have bought it. The grass is always greener on the other side, though. Eventually, professional sports leagues will embrace the reality that networks — and dedicated sports networks in particular — are partners rather than adversaries. You don’t triple the price you charge partners in one year.
At the same time, ESPN could cull costs by whittling its venues down to one fantastic sports channel, rather than a myriad of hyper-focused channels. It may mean less revenue, but it will also likely mean higher margins.
And yes, it can also continue to cut talent salaries. Celebrity broadcasters aren’t nearly as marketable to competitors as they like to think they are.
The hard part about such a bold plan is recognizing the amount of time it would take to get measurable traction, and the recognition that revenue could ultimately take a hit. In the long run though, it’s better to remain reliably profitable. There’s no assurance that’s going to happen if Disney keeps ESPN on it’s current path.
And, if it’s not truly willing to make the tough choices, maybe shedding ESPN is the right move.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
