The Fifth Commissioner

ESPN faces big changes to the sports TV model
December 28, 2015

THIS JUST IN, from the Injury Added to Insult Dept.: The man who began 2015 in perhaps the most envied role in sports media—as the president of ESPN, John Skipper is in essence a fifth professional sports commissioner—will end it with his right foot immobilized in a boot to hold in place his Achilles tendon, torn in a volleyball game at a Disney management retreat.

Already, before that fateful pop in his heel, Skipper had been having a year destined to miss SportsCenter's Top 10. In October he laid off over 300 employees, many of them beloved behind-the-scenes ESPN lifers, to cut costs. He calls it the hardest week of his career. He also shuttered Grantland, the esoteric sports and culture site founded in 2011 by Bill Simmons, whose long-time-coming divorce from ESPN was finalized in May. Another popular multiplatform talent, Colin Cowherd, defected to the competition at Fox Sports. Jason Whitlock headed there too, after his own editorial venture, The Undefeated, stalled.

And none of that seemed to resonate quite as much as the August afternoon when Skipper's boss, Disney CEO Bob Iger, told analysts on the third-quarter earnings call that ESPN had experienced "some modest sub[scriber] losses." (A later SEC filing suggested that ESPN had gone from 100 million subscribers at its 2010 peak to 92 million this fall.) The stock market has been known to reel when its articles of faith are questioned. Until Aug. 4 the market had believed, with only isolated pockets of doubt, that Disney's media networks business—of which ESPN is the major driver—was positioned for near- and long-term dominance. Disney stock had gone up more than 250% in the five preceding years. But one day after Iger's announcement, the market's fear had hacked a staggering $18 billion off the company's $205 billion market cap.

Skipper, armed with a master's degree in English lit, couldn't have missed the twist: ESPN, whose dimmer journalistic lights have long fashioned oversimplified, tough-to-shake narratives—LeBron is too soft! Peyton isn't clutch!—was now stuck with its own.

"ESPN, because of the position it holds in the landscape, it deserves scrutiny and attention," Skipper said, during a recent interview with SI (accompanied by an ESPN publicist) in his office at ABC's corporate headquarters in New York. But, he says, "That narrative is extraordinarily overwrought and fundamentally inaccurate. We just had our best year ever."

He was talking about success on all fronts, but as the Connecticut-based ESPN has a Greenwich patrician's aversion to discussing money, Skipper would not elaborate on the company's finances. So take it from Disney's latest SEC filing: In the fiscal year that ended in October, Disney's cable networks, led by ESPN, did have their best year ever in terms of revenue ($16.6 billion; 10% better than 2014) and operating income ($6.8 billion; up 5%).

But it's ESPN's future, not its present, that several media industry analysts have questioned. And the real issues are bigger than talent departures. The pessimists reason that abandonment of pay-TV service (cord-cutting, as it's known) will be sufficiently widespread in the next several years to gut the Worldwide Leader's business model, as well as those of regional or competing national sports TV networks. Were ESPN and its peers to slump substantially, it would rattle the worlds of sports and media like little in recent memory.

FIRST, A STEP BACK. Just how did we get here? Decades ago, before the flourishing of cable television and longer still before digital cable and streaming online video, the big networks could devote only so many of their broadcast hours to sports. Fans were often stuck following their teams on radio or in the papers.

But as technological advances brought pay television to more than 100 million homes, televised sports became omnipresent and broadcasters' best bet. Sports were exclusive—no competitor could televise the games to which your network had bought rights—and, with a few exceptions, sports alone necessitated live viewing. Sports had loyal, rabid audiences too, people likely to desert their cable providers if they couldn't find their games. So cable channels made every effort to buy rights from leagues.

Sports fans alone, though, did not push ESPN to more than $9 billion in estimated annual revenue. For that, it can thank what the industry calls the bundle. Your cable bill gets set like this: For every channel, each cable or satellite provider negotiates a fee with the channel's owner that it will pay for each subscriber who gets that channel. In 2016, according to estimates from media research firm SNL Kagan, ESPN will run cable providers more than seven bucks per subscriber per month—or more than $86 annually from 90-plus million people. Consumers have often wondered if the bundle provides value. But broadcasters and distributors naturally love it.

Where does the money go? Some of it goes into the pockets of Disney's shareholders. Some of it goes to pay ESPN's 8,000 employees, producers and writers and hosts and cameramen among them. But a lot of it goes into sports. ESPN pays $1.9 billion a year to the NFL, $1.4 billion to the NBA and more than $600 million for the College Football Playoff, among many other deals.

NBC paid $4.4 billion to broadcast the Olympics from 2014 to '20, and will pay $7.7 billion more to broadcast the Games through '32. Yahoo paid a reported $20 million to stream one Bills-Jaguars game in October at 9:30 a.m. Eastern. Local deals can be just as eye-popping: Time Warner Cable agreed in '13 to pay the Dodgers an annual average of about $300 million to televise their games; earlier this year the lowly Diamondbacks sold the rights to their games to Fox Sports Arizona for an annual average of $80 million.

Thanks to increased competition among traditional players—the recently launched Fox Sports 1 and NBC Sports Network, for instance—and deep-pocketed digital concerns, sports rights have gotten dauntingly expensive. Many broadcasters are paying double compared with deals negotiated a decade ago, far outpacing inflation over the same period. Are rights now too costly? "I think everyone in this business has been saying that for 30 years," says Mark Lazarus, chairman of the NBC Sports Group, which has recently paid reported sums of $400 million annually for NASCAR and $150 million for the English Premier League. "We keep buying them and creating value for our partners and ourselves." But, he says, "Everyone's being a little more selective these days."

THE MUSHROOMING of the sports media business has had consequences everywhere—it birthed $30 million--and-up annual salaries for baseball players (not to mention similar-sized checks for league commissioners) and funded the construction of countless new stadiums. TV money was the driving force behind the mad scramble for conference realignment in college sports, and it may soon be the central issue of a 2017 NBA lockout. The steadiness of guaranteed rights fees has also limited team owners' exposure to year-to-year volatility in ticket sales and sponsorships—so you could blame the sports-TV boom for tanking, too.

The sports world has watched nervously in recent years as bundled pay-TV service has lost some of its shine. Netflix, the leading streaming video service, has added 16 million domestic subscribers since 2012, which was the last year U.S. pay television added rather than lost subscribers, according to research firm MoffettNathanson.

Skipper says ESPN wasn't surprised. "I think we had a pretty good awareness that there is some strain on the large-bundle pay TV business," he says. "We've had pretty good insight on that for several years and have pretty accurately forecast where we thought that would be."

The power players of sports media have so far responded to changing consumer tastes in every way except one: the way they get paid. Cord-cutting is not yet a viable option for committed sports fans. Most rights holders don't make their games available for live online streaming in their home markets, and those that do—most NBA teams and, starting next year, 15 MLB teams, including the Yankees, Tigers and Cardinals—require consumers to have an existing subscription to a video provider. The same goes for the streaming sites and apps controlled by NBC, Fox, and ESPN. (WatchESPN, ESPN's streaming outfit, had a gangbusters college-football season, with a 53% increase over 2014 in total minutes viewed.)

"I'm quite confident we will figure out how to adapt to the new world.... But it would be reckless to abandon the most successful business model in the history of media, which is what we have, willy-nilly," Skipper says.

ESPN will not be going the way of newspaper chains anytime soon. The multiple threats to its established way of doing business—higher rights fees, new cable and digital competitors, cord-cutters—are not existential ones. But they may well cut into ESPN's margins, which have long been the industry's envy. Analyst Rich Greenfield, of BTIG Research, recently downgraded Disney stock because of cord-cutting, saying that ESPN "appears poised to become Disney's most troubled business."

Skipper was picked for the job in 2011 thanks to his reputation as an executive equally savvy with business and creative affairs, the perfect president to imagineer a future for the empire. He gave life to Grantland and Nate Silver's FiveThirtyEight in spite of their negligible bottom-line significance. But the company has laid off hundreds of employees in two of the past three years—and these are still boom times.

"I believe that we are navigating our way through these challenges," Skipper says, "and the report that we have problems we can't figure out is inaccurate." His contract, extended this year, runs through 2018. What might life be like in a reined-in ESPN? That's one thing the ever-curious executive hopes he never has to find out.

ESPN has laid off hundreds of employees in two of the past three years—and these are still boom times.

THE YEAR IN HOT TAKES

"Not [just] soccer ... women's sports in general aren't worth watching."

—Andy Benoit, SPORTS ILLUSTRATED, on Twitter (Andy would like us to convey his sincere apologies)

PHOTOANTONIO HERNANDEZ/ESPN IMAGES PHOTOJOE FARAONI/ESPN

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