Economics / Human Resources / Organizational Strategy

Basic Economics Forces ESPN to Make Big Cuts

ESPN, the self-proclaimed “Worldwide Leader of Sports”, has landed in hot water recently for some very unpopular decisions. Controversial employee choices, overspending for broadcasting rights, and a consistent loss in cable subscribers have all been detrimental to ESPN and its parent company, Disney, is not pleased.

ESPN head John Skipper decided to not engage in negotiations with radio personalities Colin Cowherd, Bill Simmons, and Keith Olbermann. These rather polarizing figures weren’t short in the controversy department, but were viewer favorites none the less. Cowherd has moved on to Fox Sports and continued his show, “The Herd”, without missing a beat. ESPN made a conscious effort to create a change in culture, ditching controversial figures and attempting to get more family-friendly reporters in on the action.

Disney Holdings has built a world power of an organization through family friendly values, surprisingly allowing some very polarizing figures to stay at ESPN for so long. Leaders at Disney must decide whether ESPN will follow such a protocol of “family-friendly”, most importantly because of the differences between Sports Entertainment and cartoons. Bill Simmons, Colin Cowherd and Keith Olbermann are great personalities and interesting characters when discussing sports. However, they bring controversy to a network that is trying to minimize any problems. It was a bad move to remove these voices, in my opinion, but if ESPN wants to become more “family friendly” it was a necessary step.

A slight backtrack, but Bill Simmons is an interesting character who requires his own section. Simmons is easily one of the most popular voices at ESPN and created a pop-culture column called Grantland that has been very successful on the ESPN website. Simmons was suspended for three weeks in September 2014 for calling NFL commissioner Roger Goodell a “liar” on a podcast (1). Eight months later, Simmons was terminated by ESPN. Last week, Grantland was terminated by ESPN.

ESPN has made it very obvious to its reporters and on air personalities that there are strict standards that must be followed in terms of content voiced. While we could easily discuss ESPN’s conflict of interest with the NFL (a $15.2-billion-dollar contract) that often leads the network to not air any grievances on the NFL, we will focus on the reporting side (2). Quite simply, ESPN has demonstrated that their reporters, analysts and commentators are expendable.

Perhaps the more shocking terminations were of 300 ESPN employees last week, not on-air personalities. These people who had established careers at ESPN and were laid off to control costs. These terminations came from a company that preached a family-like culture and while these decisions were difficult to make, they sent a message to other media outlets. This loss in talent, both on-air and off-air, signified to the media world that ESPN is undergoing a culture change. Disney CEO Bob Iger said “the business model may face some challenges over the next few years” (3), hinting that these changes may have been forced.

The question is simple; Why? ESPN has its hands in nearly every major sporting event and some grasp in every major American sports league. With such an impact on American sports, how could the company begin sputtering? The answer lies in the All-Mighty dollar.

The numbers tell it all. ESPN bid an extra $2.858 billion on broadcasting rights for things ranging from Monday Night Football, the College Football Playoff and the MLS. ESPN practically doubled its payment to the MLB for yearly baseball coverage (3) and its incredibly apparent that these contracts will only continue to rise. Comcast (NBC, NBC Sports) and 21st Century Fox (Fox, Fox Sports) are also applying pressure with their own efforts to increase their own networks, adding more pressure to Disney and ESPN to maintain their current sports packages.

The flipside to buying these contracts is broadcasting these games, and ESPN’s cable presence has been steadily decreasing since 2011. According to the Wall Street Journal, subscribers to ESPN and its companion channels (ESPN 2, ESPN News, etc) has dropped 7.2% over the past 4 years (4). This is primarily due to rising cable prices and consumers’ desires to downgrade their packages to slimmed down, more affordable versions that do not include ESPN. While having 92.9 million subscribers, making $6.50 for every subscriber, doesn’t signify a dire situation, if trends continue to go towards online streaming and cheaper cable packages, ESPN could be in trouble.

Combining all of these issues, it’s a simple Profit calculation. Revenues have been dropping and costs have been rising. Profit naturally drops. Laying off employees appears to be ESPN’s direct reaction to the problem. However, in an industry so reliant on the personalities behind the cameras or behind the microphone, it’s incredibly difficult to justify their decisions to let these 300 employees go. These people never were over the airwaves and helped build the reputation of ESPN, and were tossed away for budgetary reasons. These people were void of controversy and were removed for nothing they had done. They were treated a fixed cost, and that goes against Disney’s focus of a “family friendly” environment.

I believe ESPN is going away from the only thing that made them relevant; on-air personalities. In the Internet Age, where streaming (legally and illegally) is very frequent, networks need to have the personalities that attract people. By losing arguably the two best talk radio hosts, Bill Simmons and Colin Cowherd, ESPN took a large hit on its radio listeners. The sport events will always be there, and streams on illegal third-party websites will only increase unless there is a reason to keep people watching your network. ESPN thought the game was more important than the people, and overpaid by a grotesque amount get those games. ESPN finds itself with some of the best sporting events to broadcast and no personalities to create a competitive advantage over the next network or website.

ESPN is not falling apart at the seams. The network still has millions of subscribers, launching initiatives for paid online streaming and continues to dominate in multiple sports markets. It is troubling that the network is encountering struggles however, and losing all these employees may cause them troubles in the future. Iger’s suggestion for a “culture change” could change the function of ESPN and currently the outlook is not very positive.

Roger SinClair

 

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