ESPN Can't Afford to Go On Like This

(Bloomberg View) -- ESPN, which laid off 100 people this week, has a multitude of problems, but the basic one is this: It pays too much for content and costs too much for consumers.

That didn't used to matter because, thanks to the way the cable industry “bundled” channels, cable customers were forced to pay for it even if they never watched it. Now, however, as the cable bundle slowly disintegrates, it matters a lot.

ESPN  -- “The Worldwide Leader in Sports,” as it likes to call itself -- is undoubtedly the most important channel in the history of cable television. Founded in 1979, it was airing professional basketball by 1982, and the National Football League by 1987, when its long-running Sunday Night Football franchise began. ESPN showed that major sports events did not have to air only on the legacy networks like NBC and CBS. No cable distributor could do without it.

Indeed, since buying Capital Cities/ABC and its ESPN franchise in 1996, the Walt Disney Co. has used the sports channel as a battering ram to force cable companies to accept price increases for other channels Disney owned, like ABC Family, Disney Junior and ESPNU. It also ruthlessly raised the cost of ESPN itself. Only a tiny handful of cable channels get more than $2 a month per cable subscriber; ESPN charges over $7 a month per subscriber. When you throw in the rest of the ESPN channels, that number approaches $10.

At the same time, the content providers -- the professional sports leagues and college conferences -- were every bit as ruthless in their dealings with ESPN. The $1.9 billion a year ESPN pays the NFL (for one game a week, and usually a lousy one at that) is twice what any other network pays to air pro football. It signed a 12-year, $7.3 billion contract for the rights to the college football playoffs. The NBA costs it $1.4 billion a year. Its new TV deal with the Big Ten will cost it $2.64 billion over six years. Its annual content costs more than $7 billion, according to SNL Kagan.

But then, starting around 2013, the model began to sputter. Over the last four years, ESPN has lost around 12 million subscribers, from over 100 million to 88 million, which costs it well over $1 billion in annual revenue. It remains immensely profitable, but it is no longer the reliable cash cow for Disney that it once was.

ESPN has responded with a series of cutbacks -- goodbye Chris Berman! -- of which the layoffs this week are simply the latest. In the scheme of things, though, the cost savings are chump change, and have served mainly to show ESPN's overlords at Disney (and Disney's overlords on Wall Street) that it is serious about righting the ship.

But it's a pipe dream to think that ESPN will ever make the kind of profits ($6.4 billion in 2014) that it once did, for two reasons. First, as is the case with so many other industries, the internet has both shined a light on the flaws of the cable model and exploited them. What was the main flaw of the cable model? It was that consumers had to pay for channels they never watched.

And now they don't. 

It turns out that there were lots of people, including sports fans, who resented having to pay for the most expensive channel in the bundle. The popularity of streaming led to “cord cutting,” but it also caused cable companies to begin offering less expensive “skinny bundles,” some of which don't include ESPN.

“You can take a Sling bundle that doesn't have ESPN,” said Richard Greenfield, who follows the media industry for BTIG. “You can get Dish or Verizon without ESPN.” I went to Comcast's website and found two bundles that didn't have ESPN. The ability to get cable television without ESPN or to stream sports without cable means that the subscriber losses are going to continue as inexorably as the drop in newspaper circulation or album sales.

There is a second way the internet is damaging ESPN. One of the things the channel has always done well is stitch together highlights of yesterday's games. But between Twitter, YouTube and who knows what else, highlights have become ubiquitous online. So has the kind of sports news and analysis that has long been the staple of ESPN's signature show, “SportsCenter.”

ESPN has responded by moving away from sports reporting -- most of the 100 people laid off this week were reporters -- and toward opinion, which is usually expressed with an absurd amount of vehemence, given the subject matter. But let's face it: There's only so much Stephen A. Smith a person can take.

Last year, Disney paid $1 billion for a stake in BAMTech, Major League Baseball's technology unit, which provides streaming services to a host of companies. It is widely assumed that Disney will soon start up an ESPN streaming service that won't require a cable subscription, just as HBO has. But as other industries have learned, gravitating your business to the internet usually means lower profits, often drastically lower. ESPN's problems are only going to get worse.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."

1. Disclosure: Last month, "Indentured," the book I co-authored with Ben Strauss, won the PEN/ESPN Award for Literary Sports Writing. Ben and I each received a check from ESPN for

2. It lost the NBA in didn't get it back until

3. It now has Monday Night Football; the Sunday game has moved to NBC.

To contact the author of this story: Joe Nocera at jnocera3@bloomberg.net.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.