ESPN made 2 critical mistakes, and now it's paying the price

john skipper
john skipper

(REUTERS/Rick Wilking )
ESPN chief John Skipper.

Last week, ESPN cut 300 employees.

Layoffs are always hard, but these seemed to be particularly painful for people at the company.

Charley Steiner, a former ESPN employee, said on Facebook: "This week, many of the men and women who provided the foundation, balance, direction and creativity to this iconic franchise were called into someone's office and occupationally and emotionally executed."

He said ESPN's cuts were "Not just fat. Not just muscle, but down to the bone."

Why did ESPN, still richly profitable, feel compelled to cut so many people?

John Ourand at Sports Business Journal has the best explanation.

He says it comes to down two big problems for ESPN.

  1. ESPN is losing subscribers.

  2. ESPN is paying an obscene amount of money for sports.

ESPN is losing subscribers because of a critical mistake it made in 2012 when it was negotiating carriage deals with cable companies like Comcast, Cablevision, and Cox.

According to Ourand, ESPN was negotiating for a $6-per-subscriber fee from the cable companies. To secure that high of a fee, ESPN had to be flexible on its "penetration benchmark levels," or the number of homes that cable companies guarantee ESPN will be in.

At the time, ESPN was guaranteed to be in 90% of cable subscribers' homes. To get $6 per subscriber, ESPN lowered that threshold to 80%.

When ESPN lowered the standard, it allowed cable companies to start introducing new cable packages that excluded ESPN. People are signing up for those cable packages, leading to ESPN's losing 8.5 million subscribers over the past four and half years, according to Ourand citing Nielsen estimates.

This falls in line with the numbers we collected recently. After three decades of growth, ESPN's place in the American home is slipping.

ESPN Chart
ESPN Chart

(Business Insider)

At the same time ESPN started losing subscribers, it started paying massive fees for sports.

ESPN Broadcast Contracts
ESPN Broadcast Contracts

(Cork Gaines/Business Insider)

ESPN is paying $1.9 billion annually to air "Monday Night Football," and other NFL content across its various platforms. That's $800 million more than the next closest competitor. Ourand says people are skeptical there was even another bidder within $500 million of that number.

After overpaying for the NFL, ESPN overpaid for the NBA, tripling its rate. It also doubled its rate for MLB rights.

A former employee said, "It’s been a total mismanagement of rights fees, starting with the NFL renewal ... We overpaid significantly when it did not need to be that way, and it set the template to overpay for MLB and the NBA."

That's why ESPN is cutting "to the bone."

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