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ESPN Layoffs Are A Sign The Channel's Worst Nightmare Is Finally Coming True

chris berman espn
chris berman espn

A. Messerschmidt/Getty Images

ESPN is reportedly planning to fire hundreds of people for the first time since 2009.

The company is still in great shape. It's still the most valuable media property in the world. It's still crushing its competitors. And it's still printing money.

But the rumored reason behind the layoffs — the soaring cost of broadcast rights eating into the company's profit margin — is a real concern for the future of the company.

ESPN is such a monolith because it charges the highest subscription fees on cable, in addition to ad revenue. It can justify those subscription rates because it controls a massive chunk of live sports broadcasting rights — a finite commodity that is getting more and more valuable as TV audiences for other types of programming continue to fragment into smaller groups.

The broadcast rights to live sports are going up for two reasons: 1) live sports is the only thing you have to watch live in the DVR era, and 2) the rise of NBC Sports, CBS Sports Network, and Fox Sports 1 has made bidding more competitive.

In the last 24 months, ESPN has agreed to huge rights deals with a bunch of leagues and events. Some of the highlights:

That doesn't include smaller deals with specific college sports conferences, golf tournaments, and NASCAR.

It's costing ESPN more money to put sports on TV than it used to. And slowly but surely, competitors are starting to out-bid them for big properties.

wayne rooney manchester united celebrating a goal
wayne rooney manchester united celebrating a goal

Michael Regan/Getty Images

ESPN lost to the two biggest soccer properties in the business recently

ESPN has been outbid for three major properties in the last two years.

NBC won three years of English Premier League rights for $250 million (quadruple what Fox/ESPN was paying).

Fox won the English-language rights to the 2018 and 2022 World Cups for $425 million (double what ESPN was paying).

And NBC retained the Olympics for an eye-popping $4.4 billion after ESPN launched an unsuccessful bid.

This isn't as big as losing, say, Monday Night Football. But it's an ominous sign.

If those three fledgling corporate competitors plan to survive, they are going to have to chip away at the mighty heap of top-tier live-sports programming that ESPN currently owns. And they're going to have to overpay to do so.

The nightmare scenario for ESPN is that it gets locked in an escalating arms race with competitors that are willing to out-spend them for broadcasting rights. It will be forced to prioritize, sports TV will become more fragmented, and eventually the hegemony that ESPN has enjoyed for years will disappear.

It will become one of many mid-sized players in the live sports business, and it won't be able to charge cable providers $5 per subscriber like it does now.

That's the worst-case scenario, anyway.

Why sports broadcast rights are going up, up, up

ESPN started in 1979 as a small niche network. It lost tens of millions of dollars in its first few years. Its programming was "replete with truck and tractor pulls, slow-pitch softball, women's billiards, rodeos and college swim meets," as The New York Times put it at the time.

The key turning points in the history of the company came in 1987 when ESPN paid $153 million for three years of partial NFL rights (just eight games per year).

After that they began acquiring rights to all the big, popular sports that people want to watch, turning themselves into a $40 billion company in the process.

ESPN president John Skipper told The New York Times last week, "We feel that sports rights are the most valuable commodity in media."

The numbers back that up. In the DVR/Internet Era, live sports are a reminder of the way the TV business used to work. Sports are the only thing you really need to watch live, and one of the last remaining arguments for why you need to subscribe to cable.

ESPN now charges cable companies $5 a month per subscriber, and ratings aren't cratering for sports the way they are for other types of programming. The NBA set record regular season ratings last year, and the NFL has accounted for 55% of all shows that were watched by more than 20 million people from September 2010 to January 2013, according to the AP.

Sports haven't gotten dramatically more popular in the last few years, but everything else on TV has gotten less popular — lending new value to the consistent and predictable audience that watches live sports.

Acquiring the rights to sports is the key to everything for ESPN and its competitors. And everyone knows it.

ESPN and its competitors have to pay more for the right to air sports, and profit margins are plunging (and prompting layoffs like we saw this week) as a result.

Michael Phelps and Bob Costas

NBC Sports

NBC barely broke even with the 2012 Olympics. That is going to become more and more common as the these networks fight for scraps of live sports.

With each rights deal that NBC Sports, Fox Sports 1, and CBS Sports strike, ESPN loses the very lifeblood that makes it valuable, and its authority to charge such monster cable fees erodes.

What's going to happen?

It looks like ESPN will be OK for the short-term future.

Many of the rights deals they signed in the last year extend to 2020 or later. So the big sports games that are on ESPN now will be on ESPN for a while.

But it's logical to think that their piece of the live sports pie will continue to shrink. NBC Sports and Fox swiped soccer from under ESPN's nose by paying much more than ESPN was paying. These companies need a foothold — they need to give people a reason to watch in their early days — so second-tier sports are more valuable to them than they are to ESPN.

But over a long period of time, these smaller companies chipping away at ESPN's cache of broadcasting rights will make a difference. First it's hockey, then soccer, then the UFC, then smaller college conferences ... it's not inconceivable that one of these days NBC or Fox is going to stage a coup for something big.

It took ESPN 30 years to become a $40-billion juggernaut. It may take just as long for it to be cut down to size.

But the groundwork is there.

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