Here’s Why All the Doom and Gloom About ESPN Is Overdone

Media watchers have been expecting significant layoffs at sports giant ESPN for some time now, and on Wednesday those expectations finally came to pass. According to multiple reports, the Disney-owned network let go more than 100 employees, many of them well-known names.

The reasons why ESPN had to take these fairly drastic measures are abundantly obvious to anyone who has been following the TV business. Like the rest of the industry, ESPN is a victim of “cord cutting,” as increasing numbers of people are either getting rid of their cable packages or signing up for alternative “skinny bundle” streaming services.

This trend has seen ESPN lose close to 15 million subscribers in the past several years, which has cost the company a significant amount of revenue. At the same time, the network is locked into paying billions of dollars every year for the rights to major sporting events.

There’s no question that this is all putting significant pressure on the network, and on its parent company, since ESPN contributes a substantial amount of money to Disney’s bottom line.

That said, however, some of the apocalyptic predictions about what this all means for ESPN are overdone. Is the company under pressure to cut costs? Clearly. Are traditional cable subscriptions likely to continue falling? Yes. But the network is not going out of business any time soon.

It’s true that ESPN has huge built-in costs because of the contracts it has signed for the sports rights, which require it to pay a total of about $8 billion a year. That’s more than just about any other media company pays for content — more even than Netflix, which is known for spending massive amounts of money to get the rights to movies and TV shows.

At the same time, however, ESPN also has contracts with cable and satellite companies that make it part of the core bundles those providers offer. The fees it charges have been going up steadily, and will continue to do so for the foreseeable future.

Plenty of subscribers are cancelling their cable or switching to services that don’t include ESPN. But the sports network continues to pull in the highest per-subscriber fee of any media outlet — about $8, according to industry estimates. And those fees are scheduled to continue increasing over the next few years.

There is one significant flaw in those deals, some industry watchers say, which has made the pain worse for the network than it might have been. During a round of negotiations with distributors in 2012, ESPN decided to push for higher per-subscriber fees, and in return it agreed to lower the bar when it came to being part of the core bundle.

Whereas ESPN’s deals used to require that it had to reach 90% of a distributor’s subscribers, the company agreed to lower that number to 80%, according to analysts. That meant cable and satellite companies could offer packages without ESPN to a larger number of subscribers.

These deals were seen as a way to guarantee the sports network’s future revenue growth, since they locked in higher per-subscriber fees. But ESPN was more vulnerable to the rise in cord cutting than it would have been had it not changed the terms of those deals, as cable and satellite companies started offering smaller bundles in order to hang on to customers.

According to some ESPN watchers, the network’s key mistake was that it never expected subscriber levels to actually fall. It expected growth to eventually slow, but it was unprepared for the significant losses that it has seen in the past couple of years.

Even with these changes, however, ESPN is still going to be pulling in billions of dollars in affiliate fees for some time to come, regardless of what happens to the subscriber levels at those carriers. And because of the massive interest in live sports in the U.S., it is arguably more protected from the shifting consumption patterns than just about any other content producer.

The network has also been cutting deals to distribute its content through a number of alternative streaming services, including Google’s new YouTube TV and Hulu’s streaming service, and is working on its own over-the-top offering as well, powered by BAMTech, the digital arm of Major League Baseball that Disney acquired a stake in last year.

That’s not to say ESPN won’t have to continue to make significant changes in the way it operates, as it has with the recent layoffs. The days when it was such a massive cash cow that it didn’t have to pay any attention to costs or spending are over, and core offerings like SportsCenter are under pressure from social media and other alternatives.

Overheated comparisons to the decline of the newspaper industry, however, are just that — hyperbole that lumps the sports network in with the decline of cable TV as a whole. The glory days may be over for ESPN, but it is still going to be a pretty good business for some time to come.

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