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Reports of ESPN's demise have been greatly exaggerated

Daniel Roberts
Senior Writer
Reports of ESPN's demise have been greatly exaggerated

Disney (DIS) reported first-quarter earnings this week, and the numbers were fantastic across the board—well, almost. Profit was up 32% to $2.9 billion, an all-time quarterly record for the mouse house. It primarily has "Star Wars: The Force Awakens" to thank.

The force was not as strong with Disney's television division, of which ESPN is the largest piece. Operating income at the division fell 6% (even though revenue rose 8%) and subscriptions to ESPN were down. But the screaming headlines ("ESPN's woes gatecrash Disney's earnings party," "ESPN woes cast shadow") misrepresent the situation just slightly. As Disney CEO Bob Iger said, "Predictions that many have made are more dire than they should be." Yes, that is a self-serving assessment, but he is not wrong.

Lost in the headlines are some points that, while minor, collectively add up to a reasonable explanation for the channel's numbers this quarter: Ad revenue fell at A&E, another network in Disney's TV division (meanwhile, ESPN ad revenue grew 25%); costs at ESPN were higher than in the same quarter a year ago because of the timing of the College Football Playoff games, which in 2015 were played in Disney's second quarter; and ESPN didn't show NASCAR events for the first time, after NBC replaced it in 2015 as the TV rightsholder.

Disney CFO Christine McCarthy said that if not for the timing of the college football games, the loss of NASCAR, and the rising value of the dollar, operating income for ESPN this quarter would have grown as much as revenue did.

Sure, those may sound like excuses, and the fact that CEO Bob Iger addressed ESPN on the earnings call in as much detail as he did suggests that he's rattled, and feels pressure to defend the network. But he said that since the quarter ended, ESPN has actually seen an "uptick" in subscriptions.

ESPN is facing the fight of its life as cord-cutting proliferates and as paid cable subscription is a harder sell than ever. No one disputes that. But the idea that the "worldwide leader in sports" is going away any time soon is silly. And there is a lot that ESPN is doing right.

For starters, it has seen promising results from its new deal with Dish Network (DISH), which lets users pay $20 a month to stream ESPN using Sling TV. Iger specifically called out the Sling option as showing positive signs that young people are choosing to pay for ESPN, and he added that Disney is aiming to get ESPN included in other similar packages. (To be sure, it's easy for him to say that now, and second quarter's results will reveal whether it's true; a recent BTIG survey begs to differ with Iger: it found that 85% of 1,600 people polled would not pay $20 just for ESPN if they could buy it as a standalone channel.)

The Sling product is a bone—albeit a small, cautious one—thrown at cord-cutters. ESPN, and other subscription cable networks, still can't completely unbundle themselves and offer their channel over-the-top (like, say, HBO Go) because it would kill their business. Or so they still believe. But they are inching closer to the day when that may be viable.

As for subscribers, the sports network still had 92 million of them at the end of 2015. It is unclear how many of those people see the channel as indispensable, but just one year ago the network enjoyed the highest ratings ever for a cable program when 33 million people tuned in for the College Football Playoff championship game in the first year of the new CFP system. (This year, ratings for the game fell 15% but were still the third-best since ESPN began showing the championship in 2011.) Even those who do not pay for cable recognize ESPN instantly as the authority in sports broadcasting. And competition is scant.

When Fox Sports launched the Fox Sports 1 network in 2013, the media trumpeted it as a new competitor to ESPN. That hasn't been the case. FS1 has struggled with rollercoaster ratings (especially in its MLB programming) and talent changes. The network has been in the news repeatedly lately for negative reasons—broadcaster Colleen Dominguez is suing it for age discrimination, to name one example. Off the television screen, multichannel-networks (MCNs) that produce social sports videos, like Whistle Sports or the PGA Tour's Skratch TV, have been hailed as the future. But the difference in brand recognition is still vast. None of these is exactly nipping at the heels of ESPN. That is: if ESPN is stumbling, it isn't because there is a single clear successor threatening to take its place.

Another flawed narrative about ESPN that the media has embraced recently is its talent drain. Last year, all at once, some of its biggest television talents departed. Bill Simmons, Colin Cowherd, Keith Olbermann and Jason Whitlock all left. But shedding these expensive talking heads will make ESPN stronger, and it is a trend that the network ought to embrace: out with the expensive names, in with young, more diverse talent. The network also shut down Grantland, the Simmons-led home for longform storytelling. It was sad news for journalism, but a necessary business decision for a site that had low traffic and was losing money. Similarly, the company's brutal round of 300 layoffs last October was painful, but necessary to slim down and save money. Another example: last year ESPN announced that its award-winning morning show Mike & Mike would re-locate to Manhattan; ESPN president John Skipper then reversed that decision and kept the crew at headquarters in Bristol, Conn., likely to save additional cost.

Some say ESPN has been slow to innovate and adapt as eyeballs shifted to mobile devices. If that was the case, now it has woken up. Last year, it merged its two separate apps, one for scores and news and the other for streaming live games, into one unified mobile experience, recognizing that people want it all in one place. This year, it announced a landmark deal with Chinese tech giant Tencent to be the exclusive sports provider across Tencent's extensive mobile apps and products, and to produce live basketball programming specifically for Tencent customers. It was a smart move overseas that will prove lucrative.

The subscriber trend at ESPN is certainly not pretty: steadily declining year after year. But the network is merely facing the same defining moment that all television networks are in the OTT and cord-cutting era. The truth? No other sports property is anywhere close to ESPN, and it's going to be around for a long time.

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Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology. 


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