ESPN Is Staring At the Future Of TV - And It's Looking Bleak

At a time of stagnating household incomes, cable TV raised rates on sports broadcasting, assuming that the appetite for that kind of programming was both insatiable and not price sensitive.

Turns out that was incorrect - and the less expensive offerings on the internet exacerbated the problem. JL

Ira Boudway and Max Chafkin report in Bloomberg:

ESPN has been “over-earning,” with cable customers paying for the channel as part of their subscription bundle, whether they watch it or not. (But) young people aren’t consuming cable TV in the numbers they once did, and digital outlets still aren’t lucrative enough to make up the deficit.As subscribers leave the network, and often cable altogether, ESPN is stuck with rising costs for the rights to broadcast games.

The main SportsCenter studio at ESPN’s headquarters in Bristol, Conn., is a blue-lit box. The ceiling is as high as a cathedral’s, and there’s enough floor space to land a helicopter. Screens are everywhere. “We have about 150 different monitors in here and, of course, miles of LED lighting,” says Aaron LaBerge, the sports network’s chief technology officer, during a recent tour. The hosts’ desk faces a wall of screens that jut out and recede like a giant chest of drawers. To one side, there’s a six-panel touchscreen that can slide apart and come together with the push of a button; a more modest 84-inch touchscreen across the way displays an interactive bracket for the NCAA men’s college basketball tournament. The show’s producers can also summon virtual screens from the floor so that, say, the shooting stats of Oregon sophomore Tyler Dorsey can appear to viewers to float miraculously in the middle of the room. “It’s probably one of the most technically sophisticated broadcast and content centers in the world,” LaBerge says of the building that houses this studio and four others.

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ESPN broke ground on this $175 million, 194,000-square-foot facility, called Digital Center 2, in 2011. It was billed by executives as “future-proof,” capable of adapting to any possible change in the way people watch sports. At the time, ESPN looked indestructible. Its namesake cable channel had just topped 100 million subscribers and was posting record profits for its parent company, Walt Disney Co., even as streaming apps such as Netflix were growing rapidly. Ratings for live sports, unlike almost everything else on TV, were soaring. And ESPN had big games year-round—Monday Night Football, college football bowl games, Major League Baseball’s opening day, and the NBA playoffs, to name a few. A cover story in this magazine in the fall of 2012 dubbed ESPN the “Everywhere Sports Profit Network.”
Five years later the network’s profits are shrinking, and the 10,000-square-foot SportsCenter studio has already begun to look like a relic. The show’s formula, in which well-fed men in suits present highlights from the day’s games with Middle-American charm, is less of a draw now that the same highlights are readily available on social media. Viewership for the 6 p.m. edition of SportsCenter, a bellwether for the franchise, fell almost 12 percent from 2015 to last year, according to Nielsen. Keith Olbermann, the SportsCenter-host-turned-political-commentator, put it bluntly on a podcast last year: “There’s just no future in it.”
SportsCenter is only part of the problem. ESPN has lost more than 12 million subscribers since 2011, according to Nielsen, and the viewership erosion seems to be accelerating. Last fall, ESPN lost 621,000 subscribers in a single month, the most in the company’s history. The losses have helped depress Disney’s stock price—down 7 percent since August 2015, despite a big jump in the company’s film revenue thanks to a string of hits, including the latest Star Wars film, Rogue One. John Malone, the cable entrepreneur and chairman of Liberty Media Corp., has publicly suggested that Disney would be better off selling ESPN.

As subscribers leave the network, and often cable altogether, ESPN is stuck with rising costs for the rights to broadcast games. Programming costs will top $8 billion in 2017, according to media researcher Kagan. Most of that money goes to rights fees through deals that extend into the next decade. Last year profits from Disney’s cable networks, of which ESPN is the largest, fell for the first time in 14 years. The dip was small, about half a percent, but nonetheless alarming. Rich Greenfield, a media analyst at BTIG Research, says ESPN has been “over-earning,” with cable customers paying for the channel as part of their subscription bundle, whether they watch it or not. “It’s pretty clear that the years of over-earning are going to end,” says Greenfield, who’s made a name for himself as an ESPN naysayer. “The question is does it end slowly or fast.”
Greenfield’s analysis is popular, especially with new media types, but it makes people in Bristol touchy. “I’m really tired of being painted as some sort of failing, sinking ship,” SportsCenter anchor Scott Van Pelt told the Washington Post in September. “It’s not like we’re losing money, we’re just not making as much. It’s a giant difference.”
ESPN still towers over its rivals in cable programming. Short of criminal enterprise, few business models in the world have been as lucrative. A typical cable (or satellite) bundle costs about $100 per household. In simplified form, when a customer sends in a monthly payment, the cable company sends a cut to each channel included in this bundle. Some channels get paid more than others, and ESPN gets the most. Carriers pay an average of $7.21 per month for every customer who gets ESPN as part of a bundle, according to Kagan. Fox News, by comparison, gets $1.41; Bravo, 30¢.

Kosner.

Photoillustration: 731; Photograph: Getty Images

With almost 90 million homes still getting ESPN, that adds up to $7.8 billion per year. Sister channel ESPN2 chips in an additional billion, and that’s all before ad revenue (roughly $2.6 billion a year, according to Kagan) and revenue from the print magazine and website, which is the most trafficked in sports. Last year, Disney’s cable networks brought in $16.6 billion in revenue and $6.7 billion in operating profit—43 percent of Disney’s total and more than its theme parks and movie studios combined.
In some respects, the challenges facing ESPN are the same that confront every other media company: Young people simply aren’t consuming cable TV, newspapers, or magazines in the numbers they once did, and digital outlets still aren’t lucrative enough to make up the deficit.
But while most of ESPN’s TV peers have courted cord cutters—CBS and Turner Broadcasting, for instance, are allowing anyone to watch some of their March Madness games online for free—ESPN’s view cuts against the conventional wisdom in new media. “Everything we do supports the pay television business,” says John Kosner, the network’s head of digital and print media. The strategy, simply put: Defend the cable-TV bundle at all costs.CONTINUES BELOW

On a Tuesday in late March, the big news in the SportsCenter studio is New England Patriots quarterback Tom Brady’s Super Bowl jersey. After disappearing during the postgame chaos in early February, it turned up in the possession of a media executive in Mexico. ESPN has been chewing over the news all morning. “I’m sort of like, ‘Is this really a story?’ ” says Rob King, a senior vice president responsible for SportsCenter and ESPN’s news operation. “But it’s a story.”

Live Sports Costs You. Big League

National Football League/Monday Night Football
Annual cost: $1.9 billion
Term: 2014–21

Photograph: Getty Images

National Basketball Association
Annual cost: $1.4 billion
Term: 2016–25

Photograph: Getty Images

Major League Baseball
Annual cost: $700 million
Term: 2014–21

Photograph: Getty Images

At a standing desk in a corner office, King, 54, is staring at a screen that displays what looks like a stock chart. It’s ESPN’s “Producer Panel,” custom software for tracking what viewers are talking about on social media. A blue line represents the Brady story; a yellow one represents the upset by South Carolina over Duke in the college basketball tournament. King hits a few keys and adds Houston Rockets guard James Harden to the mix of trending topics. Harden made news the day before by wading into a debate about rest for NBA players; today he’s gaining ground on the missing jersey saga, which makes him prime fodder for the evening broadcast.
“One of the cool things about all this digital disruption is that you can know things about your fans,” says King, a former newspaper editor and 13-year veteran of ESPN who took over SportsCenter in 2014. “You don’t have to guess so much.” If you, loyal ESPN viewer, have ever sat in your living room wondering why you’re being subjected to yet another Talmudic discussion of “Deflategate,” King would argue it’s because that’s what you asked for.
Although he concedes that sometimes this approach to “social listening,” as he calls it, can lead to stories that seem overcooked, King points out that if ESPN ignores what’s happening on social media, it will simply lose viewers to Twitter and Facebook. “To me, it’s about respecting the audience,” he says. “Because they’re more sophisticated, and more ready to start digging into their own storylines, than we give them credit for.”
King’s team began using the social media monitoring software last year as part of a strategy to move SportsCenter, which broadcasts live for 14 hours a day, away from a commodity newscast involving scores and highlights and toward a chattier format that more closely resembles talk radio and cable news. In 2015 he installed Van Pelt, one of ESPN’s radio stars, in the midnight slot, as a competitor to traditional late-night fare. Along with highlights and updates, Van Pelt delivers straight-to-camera commentary à la Jon Stewart. If Van Pelt thinks that, say, too many NFL teams are relocating, he says so. Viewership of the midnight SportsCenter is up about 6 percent since 2015, according to Nielsen, even as other editions have seen their audiences shrink.
Earlier this year, ESPN expanded the experiment, replacing the generic 6 p.m. SportsCenter with a new edition anchored by Michael Smith and Jemele Hill, formerly hosts of the ESPN2 show His & Hers. Smith and Hill—the show’s first African American anchor team—devote long segments to athlete interviews that stray from the usual tell-me-about-that-play territory. “We are layering in personality as a defining character of a show,” King says. “We desire to make sure you have this relationship with the brand where you think, Yeah, those are my folks.”
To King, and to many in Bristol, SportsCenter’s evolution is an example of how ESPN has adapted to the future better than most media companies. “We actually accepted digital distribution as a natural course many, many years ago,” King says. “You’re not talking to a bunch of people who are wringing their hands over the notion that six months from now, somebody might develop a killer app and we have to figure out how to get into it.”
To illustrate his point, King searches in the clutter on his desk and picks up a black-and-red Sanyo flip phone with an ESPN logo above a 1-inch screen. The phone, which ESPN introduced in 2006 as part of a mobile plan that included scores and highlights, is often cited by outsiders as the height of corporate embarrassment. The device cost $150 million to develop, including a $30 million Super Bowl ad, and attracted a grand total of 30,000 customers. ESPN scrapped it after seven months, less than a year before Apple introduced the iPhone. According to the 2011 oral history, Those Guys Have All the Fun, ESPN’s then-President George Bodenheimer approached Apple Inc. Chief Executive Officer (and Disney board member) Steve Jobs at a Disney board meeting in 2006. “Your phone is the dumbest f---ing idea I have ever heard,” Jobs said.

College Football Playoffs (and Other Bowl Games)
Annual cost: $608 million
Term: 2015–26

Photograph: Getty Images

Southeastern Conference
Annual cost: $300 million
Term: 2014–34

Photograph: Getty Images

Atlantic Coast Conference
Annual cost: $240 million
Term: 2012–27

Photograph: Getty Images

On the other hand, that Super Bowl ad—in which a fan walks zombie-like through a city while staring at his phone, immersing himself in a world full of Formula One, basketball, bass fishing, and every other sport imaginable—foreshadowed how today’s fans consume sports. King sees the phone as evidence that ESPN, which initially thrived in the 1980s by embracing the unproven new medium of cable TV, is still in innovation mode. “There is a conventional wisdom that ESPN is going to be somehow disrupted by everybody else,” says Kosner. “But most of these things are opportunities.”

The Entertainment and Sports Programming Network first went on air on a Friday night in 1979. That evening’s lineup, beamed across the country via an RCA satellite, included the very first episode of SportsCenter and a slow-pitch softball game between the Kentucky Bourbons and the Milwaukee Schlitz. The network showed some live college sports, as well as reruns, and niche fare such as bowling and billiards, until it landed a deal with the NBA in 1982. The following year, then-CEO Bill Grimes persuaded Cablevision to pay a dime per household per month for the channel. By 1996 those fees had grown, and ESPN was calling itself “The Worldwide Leader in Sports.”

As sports ratings rose and ratings for everything else fell, networks of all stripes began bidding for the rights to games. ESPN spent more and more to stay ahead of the competition. “In a world where you have the ability to control when you watch something, live sports breaks through in a way that’s only going to continue to become more valuable,” John Skipper, then an ESPN executive who’s now the network’s president, told Variety in 2011. Since then, ESPN has agreed to pay $1.9 billion per year for Monday Night Football, $1.4 billion for NBA games, $700 million for MLB, and more than $1 billion for college football and basketball. To keep pace with the rising costs, Skipper negotiated higher fees from carriers.
The aggressiveness backfired. To make the deals, according to SportsBusiness Journal, Skipper agreed to relax the demand that carriers include ESPN in almost all of their bundles. Carriers, in turn, began offering customers “skinny bundles” that didn’t include the network. Millions of subscribers defected. On an investor call in November, Disney CEO Bob Iger called SBJ’s reporting “not factually correct.”
ESPN has made some modest efforts to cut costs. It jettisoned 300 of its 8,000 employees in 2015 and is expected to let the contracts of some of its on-camera talent expire this year. But mostly it’s tried to make up for subscriber losses elsewhere. “We spend a lot of time talking about the U.S. television industry, but the smartphone market worldwide has two and a half billion people,” says Kosner, the digital and print media chief. “That gives us a chance to create an indispensable sports service for anybody, anywhere in the world.” Kosner is planning to roll out a Netflix-like interface for a section of the ESPN app that’s limited to cable customers. It will be customized to user tastes and will put live games side by side with episodes of Van Pelt’s show and ESPN’s documentaries, such as the Academy Award-winning O.J.: Made in America. “The beauty of Netflix to me is that they’ve said, ‘We’re going to make our best stuff available to you anytime you want it,’ ” Kosner says. “They do it brilliantly, but it’s not rocket science.”

ESPN is also trying to make it easier for viewers at home to see everything that comes with their cable or satellite subscription. In a long, windowless room in the Bristol complex—a sort of man-cave laboratory—a row of couches faces six huge flatscreen TVs. LaBerge, the CTO, demonstrates how customers with a DirecTV set-top box can, with a tap of the remote, access a menu that offers all of the company’s channels (ESPN, ESPN2, ESPN News, etc.), plus an array of internet streaming options, including extra games, replays, and the O.J. documentary. In the future, says LaBerge, the network will tailor this menu to a specific viewer’s interests. “It could focus on your favorite teams, on things that we know you like.”
Rather than trying to reinvent the business model, ESPN’s futurists have focused on improving the experience for cable viewers. The Pylon Cam, for example, packs digital cameras into the football end zone markers to make it easier for viewers to see if a touchdown has been scored. There’s also something called Project Jarvis, named after the computer interface in Iron Man. Still in development, Jarvis is a large glass panel that will allow SportsCenter hosts to face the camera while they manipulate graphics via touchscreen. Today, if hosts want to, say, fill out an NCAA bracket on TV, they have to turn their backs to the audience. Jarvis involves motion trackers, lasers, and an ultraviolet projector. It may seem like a lot of effort to spare SportsCenter anchors a crick in the neck, but LaBerge says it’s worth it. “If we perfected it,” he says, “it would be used all the time.”

Major League Soccer
Annual cost: $75 million
Term: 2015–22

Photograph: Getty Images

U.S. Open Tennis
Annual cost: $75 million
Term: 2015–25

Photograph: Getty Images

Texas Longhorn Network
Annual cost: $15 million
Term: 2011-31

The executive consensus in Bristol is that the threat from cord cutting is greatly exaggerated. Although the audience for traditional satellite and cable is declining, there’s a raft of new services—including Google’s YouTube TV, Dish Network’s Sling TV, Sony’s PlayStation Vue, and a soon-to-be-launched one from Hulu—that are offering channel packages that look suspiciously like cable bundles, and that uniformly include ESPN. Aimed at millennials, these online services are designed for smartphones and devices such as Roku and AppleTV and cost from $20 to $50 a month. Even though these plans are cheaper than a traditional cable subscription, ESPN gets paid its usual $7 per subscriber by Google and the other newcomers, according to people with knowledge of the agreements. So far, more than a million subscribers have signed up, a figure not yet reflected in Nielsen data. “We think that this wave that we are seeing is really a signal of what is to come, and what the future will be,” Iger said on a February earnings call.

Other media companies, most notably HBO, have confronted cord cutting by offering their programming “over the top,” which is TV-speak for “on the internet.” More than 2 million people pay $15 a month for access to the HBO Now app, but that strategy doesn’t translate to ESPN. The network’s programming costs are far greater than those of HBO—the budget for an entire season of Game of Thrones costs around $100 million, or less than what ESPN pays for the rights to air a single Monday Night Football game—and ESPN’s customers are accustomed to getting the network at no additional charge as part of their cable package. If ESPN were to charge $15 a month for a standalone streaming channel, it would need more than 43 million subscribers to match the money it collects from cable carriers. HBO has about 35 million total subscribers in the U.S., including cable and over the top.
Last August, Disney made a more dramatic move, paying $1 billion for a one-third stake in BAMTech, a streaming business spun off by Major League Baseball that specializes in distributing live events for sports leagues and other media companies. The same day, Disney said BAMTech would launch ESPN’s first standalone subscription service. The announcement, followed by MLB and Disney’s decision to hire Michael Paull, the former head of Amazon.com Inc.’s digital video unit, to oversee BAMTech, raised the prospect that ESPN would finally offer its flagship channel to customers outside a traditional cable bundle.
Although ESPN executives acknowledge that this could happen years from now if cable continues to decline, the plan for now is more modest. In February, Iger characterized the new service, which doesn’t yet have a name, as “an add-on or adjunct product that consumers can buy on top of what is their normal multichannel package.” Executives at both ESPN and MLB say the offering will likely include a mix of baseball and hockey games—though not the marquee matchups that appear on national telecasts today—as well as competitive video gaming, international sports such as cricket and rugby, and college football and basketball games from outside the major conferences. “I think it’s a learning exercise more than anything,” says BTIG’s Greenfield. “This is really them starting to learn the direct-to-consumer business and dealing with customer service, churn, retention, and marketing.”
If a combination of hockey, low-wattage college sports, and cricket doesn’t quite seem worthy of the Worldwide Leader in Sports, that’s by design: ESPN doesn’t want its new product to draw viewers away from its very profitable cable channel. And, as Kosner notes, when ESPN began broadcasting in 1979, plenty of people doubted whether anyone would want to watch bowling at two in the morning. “I was in college when ESPN started,” he says. “I felt sorry for the people working there.”
He’s learned since then, he says, not to underestimate the appetites of sports fans. “There are tons and tons of sporting events available around the world that don’t make sense on U.S. basic cable. But that doesn’t mean there’s not a significant interest in them.”