Dont buy ESPNs PR talk that its 7 million-household dip in subscribers is just a blip. Its for real, and the end of its empire will have widespread consequences for the way you watch sports and pay for TV.
Selling ESPN as a separate stand-alone service holds potentially disastrous economics, with one Wall Street analyst suggesting that ESPN alone would have to sell for more than $36 per month.
Your favorite sports team is massively overvalued right now. Its not that you ought to be losing sleep over Jerry Joness or Mark Cubans financesthey were rich before and will be rich after. But the popping and cracking noises emanating from the key support beam in our Temple of Athleticsthe TV sports businessforeshadow wild disruptions ahead for the world of sports.
Like the barking dogs that sense an earth tremor before we do, ESPNs annus horribilis is a harbinger of the Internets coming disintermediation of Americas half-trillion dollar sports industry. Just since mid-summer, the Disney-owned 800-pound linebacker of sports TV announced falling subscriber counts and weak ad revenues that led to a devastating media stock price rout. The network has elected to let some of its highest-profile talent go, has announced a round of significant rank-and-file layoffs, and then last month shuttered its prestigious Grantland.com sports journalism site.
Then, last week, ESPNs SEC filing revealed a bombshell: The company had lost 7 million subscribers over the last two years.
For more than 30 years prior, ESPN enjoyed an unbroken stream of growth and innovation on its way to becoming the immovable Gibraltar of the cable bundle. By pioneering the neat trick of partnering with cable television operators to drill directly into the wallets of almost all cable subscribersevery face-painting team fanatic and couldnt-give-a-flip, sports-hating HGTV obsessive alike paid the channels highest-in-the-industry fees, whether they knew it or not, in their cable billsESPN reached ever more Jordan-esque heights in revenue and profitability.
As the keystone of the bundlethe core multi-channel offering from cable and satellite operatorsESPN was able to jack the wholesale rates charged to cable operators each and every year while letting those same operators take all the heat for consumer rate increases. The networks bulging wallet allowed it to outbid competitors for all nature of sports programming rights, and sadly for consumers, its successful business model was quickly copied by new regional, collegiate, and team-owned sports networks.
The resulting fearsome sports arms race now is estimated by longtime cable TV and sports industry executive Leo Hindery to cost each cable household $35 to $40 per month. And, again, thats whether those households watch sports or not.
Appearing on Bloomberg TV last August, Hindery added that if you ask (the average subscriber) that question, Are you comfortable with that?, firstly theyd pass out at the question. They have no sense that theyre paying that kind of number.
Television sports rights fees have mushroomed so vastly that a study by the accounting firm PWC recently suggested theyd overtake tickets to the actual game as the largest source of revenue for sports franchises by 2018. Think about that: All those swells in the private boxes and all those regular Joes and Josephines in the cheap seats at all 2,430 Major League Baseball games and all 1,230 NHL hockey games, plus all the inflated playoff tickets multiplied across all professional sports in every single city? They still arent projected to add up to more than the cable cabal drains, IV-infusion-style, from our bank accounts month after month for sports programming.
But now the cable bundle is on the receiving end of massive blasts of the same disintermediating forces the Internet has brought to dozens of other industries. Basically, there were ever a sports bubble in the United States, it may have already existed in this last decade.
And that sports bubble is about to pop.
The transparency, direct access, and choice that consumers have come to love in the over-the-top world of Netflix and Hulu is the mortal enemy of the cable industry. Those places dont have the hide-the-ball billing and bundling practices that jack up prices and rebill millions of people monthly.
Somehow, when the Netflix movie cornucopia costs you $7.99 a month, realizing youre paying 40 bucks for tedious Major League Baseball games and sleep-inducing PGA golf tournaments seems like a lot-lot-lot of money.
As consumers figure out the con and start making value judgments, theyre throwing extraneous programming overboard like a balloonist dropping sandbags. Over the side goes premium pay TV, like HBO and Showtime, and out goes the bundle from more and more households. And for the record, only 12 percent of cable subscribers in a recent survey say theyd pay more than $20 per month for a stand-alone sports bundle, if such a thing were separately available.
So when Hinderys $40-per-month figure comes into a broader public consciousness, the likelihood of a look out below moment for the sports industry grows exponentially.
The economics of sports programming are intoxicating for networks when theyre growing. They negotiate rights deals up front, generally for a fixed cost, meaning the fees paid by every additional subscriber the network can generate drop right to the bottom line.
When ESPN was adding subscribers, the $6.50 per-month-per-subscriber it charges to every cable operator meant $78 of additional annual profit for each new subscriber. This is a wonderful thing until a network starts losing customers, at which point all the revenue from every lost subscriber is chopped right out of that same networks net profits.
Theres no easy fix for the networks. One possible solution for Disneyselling ESPN as a separate stand-alone or over-the-top serviceholds potentially disastrous economics, with one Wall Street analyst suggesting that to maintain its current margins, ESPN alone would have to sell for more than $36 per month. That pricing would cause a death spiral for the network, if the survey data is accurate. The math simply doesnt work.
Business, of course, only allows for mathematical impossibilities for so long before clunking the enterprise loudly to earth. So ESPN, the very nexus of celebrity sportscasters and athletes, the coolest network on the planet for true fans and the funder of franchise owner private jets across the nation, is in a budget-cutting frenzy. As are, rest assured, its competitors.
Out with jobs and high-priced talent. Out with non-performing web properties. In with shrunken subscriber and profit forecasts.
Everythings getting smaller, so far, except the programming deals for the leagues and teams. But as these subscriber-loss Jenga-nomics go to work, the whole sports tower starts to wobble like Wall Street did when sub-prime mortgages started heading south.
Its not much different.
This helps explain the mad scramble by major sports leagues to team up with the legally suspect fantasy sports gaming companies, led by evil twins Draft Kings and Fan Duel. Both companies are valued at more than a billion dollars by their venture capital and media industry backers, and both had been throwing money at the major sports leagues with ferocious abandon. But with both ordered to cease operations in New York State and Nevada for violations of state gaming laws, and with several other states pondering whether to join in on the gang tackle, their potential to be game changers is dead.
The sleazy way to sustain the bubble may no longer be an option.
This relentless pounding has led to an increasing tone of denial from executives in the cable and programming industries. Their recurring thesis is that sports is the glue that keeps the bundle togetherthat American consumers simply cant live without Cable TV As We Know It.
We are very bullish about our cable business, and we are very bullish about ESPN, said Robert Iger, CEO of Disney, ESPNs parent company. The bundle is not going away. Not only is it not going away, it is going to continue to grow.
Except that it isnt. No amount of wishing upon a star at the Disney offices in Burbank or the ESPN offices in Bristol, Connecticut, can hold back the forces of consumer choice that the Internet has unleashed. As a cable industry executive put it to Sports Business Daily recently, The cost of goods is going up and sales are going downthats not a good trend.
Every participant in the sports economyfranchise owners, athletes, programming networks, cable companies, and even the fans themselveshave benefitted from this broadband version of the hide-the-ball trick. That big fat $100 average household cable bill that everyone pays has served as a siphoning conduit of cash forcibly flowing from fan and uninterested non-fan alike.
The brazen economics of modern sports are being revealed and dismantled by the Internet, and the coming fumble-pile of desperate industry participants should make for some great viewing. Thatll be bad news for $30 million-a-year over-the-hill third basemen, the greater fools who pay them, and the unknowingly subsidized superfans who love them.
The rest of us will live in a world with a few more bucks in our pocketsand a few less braying Chris Berman-wannabes clogging up our iPad screens.