ESPN, the so-called worldwide leader in sports television, laid off over 100 on-air employees Wednesday, causing both cheers and jeers on social media and in other news outlets. This layoff comes less than two years after the sports media giant let go of over 300 employees in 2015.
While many are surmising an underlying cause for these reductions, the simple fact is the company is shedding operating costs.
ESPN’s drastic cost-cutting measures come amidst worry that America’s cable and satellite TV subscription cancellation trend will continue. The network has lost over 7 million subscribers over the last three years, and that trend doesn’t appear to be reversing as “cord-cutting” becomes more prevalent.
ESPN subscribers come in the form of cable and satellite TV accounts. When a monthly TV bill is paid, over $9 of it is going to ESPN for its networks’ content. (in 2011, that number was less than $5). If you do the math, 7 million lost subscribers at $9 per month is over $756 million in lost revenue, and that loss necessitates cost-saving measures like layoffs.
That revenue pinch could hit close to home for those in Provo, as BYU is in a period of negotiation with ESPN for the rights to broadcast its football and basketball games after 2019.
The high cost of sports
Before getting to the contractual relationship between BYU and ESPN, it’s important to understand why households are dumping their monthly TV packages, and it’s all about sports.
Stewart Mandel, a writer at Fox Sports, tweeted Tuesday: “Folks, ESPN is not in this position today (because) of its politics or programming. It's (because) millions of (people) who may not even watch ESPN cut cable.”
That’s true, but also not true. Cord-cutting occurs when a household decides the value the TV package delivers is not great enough to justify the cost. The cost side of the value equation is primarily driven by ESPN.
ESPN’s monthly cut of the cable subscriber pie is multiples higher than its peers. TNT gets the second most revenue per subscriber, but is still well under $2.
The Los Angeles Times expects nearly $20 of every TV bill to be driven by sports channels and programming this year. Whether it’s ESPN, NFL Network, or even college sports conference networks, every subscriber is paying for those channels in their package. And as the biggest driver of cost, cord-cutting is related to sports whether the subscriber watches a single game or not.
Bottom line: The cost of live sports has driven the price of TV high enough that many would rather do without — and ESPN is scrambling to figure out a new model.
BYU and ESPN
In 2010, BYU signed an unprecedented independent contract with ESPN for football games through the 2018 season, with an option for ESPN to pick up 2019 as well. Tom Holmoe told the Daily Universe that this year, negotiations will begin on the next one.
“It’s a great relationship. Every year in the relationship, new things occur. It gets stronger, we have greater collaborations and new creativity. ESPN is changing as we watch. We’re changing, and together we feel good about each other. I really respect that company and the people that run it, the people that are the face and the talent, and then they feel really good about what we’re doing. We have had numerous opportunities and discussions about extending the contract, and with two years to go, this is probably about the time to start coming to fruition on that,” Holmoe said.
As the news about ESPN’s layoffs hit the airwaves and the web Wednesday, speculation in Utah immediately turned to what the cost-cutting at the sports giant means for its next deal with BYU.
The details of the Cougars’ current TV deal are not public. Estimates have been reported in the $1 million range for home games and additional payouts for neutral sites. When BYU played West Virginia last year, the schools received a reported $2.45 million for the game.
That puts the Cougars’ TV deal in the $6 million to $10 million range, which is comparable to what ESPN gave ACC teams in their 2010 contract. However, things escalated quickly from there in terms of the value of live sports on television.
Since most college conferences’ membership changed in the years since 2010, new TV deals were struck before old ones expired. Just two years after the ACC did the aforementioned deal, it renegotiated with ESPN for a deal that nearly tripled the per-team annual payout to $17 million per school. Last summer, the deal was altered yet again to include a conference TV network and additional revenues from it.
Overall, college athletic conferences have been frenzied in the last five years as TV contracts with ESPN have grown to the point that the SEC went from about $13 million per team in 2009 to an estimated $40 million per school under the current deal. And ESPN last summer, after the layoffs of 2015, ponied up unprecedented amounts for Big Ten TV rights.
So what does all this mean for BYU as it and ESPN belly up to the negotiation table this year for a new deal? Will the Cougars find an empty cupboard or will the college football programming money fountain continue to flow?
By the numbers, the value of the ACC’s sports grew from $6 million in 2010 to nearly $20 million per team per annum today. That’s a 233 percent increase in value. The SEC’s per-school value has grown by a multiple of three. That means as recently as last summer, BYU’s deal could have been worth triple what it is currently, putting the school into ranges upward of $15 million.
But this isn’t the summer of 2016, and the belt is likely a lot tighter at ESPN now. There’s a clear bubble in sports television revenues, and bubbles eventually burst. However, even with serious contraction of TV right values, it’s very unlikely the number will go down from the current contract. It’s still likely to rise healthily, just not stratospherically.
Even if the contract were continued only at the current rate, it still dwarfs the meager monies paid to former conference members in the Mountain West.
Holmoe says he isn’t worried. He continued in his comments to the Daily Universe:
“There is new media and every year there’s something new. We’re going to be with ESPN. I don’t think there’s anything right now that’s on the plate or in the near future that you can say is going to turn that upside down. ESPN has been so good to us. We’re going to be with them. It’s just a matter of what happens in the future, and I think we grow together. We’ve been able to do some things that with the new platforms that do not conflict with the contract. I think a great example is how willing they are to allow us to do things with BYUtv. So we have the best of both worlds to have both of those opportunities,” he said.
Not unique to BYU or even college athletics
The reality is BYU is a very small player in a very big, hundred-billion-dollar game of chess that ESPN and all other sports programming networks are playing now with their television providers. As cable subscribers continue to cancel their service, the model becomes more and more tenuous and the likelihood of a significant correction in TV revenues becomes greater.
The cascading effects of such a change would be remarkable. Consider what happens to NBA salaries if its TV deal were to collapse. One former CBSsports.com columnist and author Clay Travis expects it to happen.
If college football TV contracts dwindle, bowl payouts and conference revenue shares drop. Many schools have taken on great debt and risk counting on these funds. Pac-12 school California is already in trouble with the existing expected revenue. A drop would be catastrophic for a school in a state already hemorrhaging money.
Cord-cutting could even kill conference networks. The Pac-12 Network is already struggling to come even close to the revenues of its peers due to a lack of interest from TV providers. And schools like Cal have already spent the money that’s now not materializing.
Change is coming in sports television one way or another. The current revenue model isn’t sustainable as the cost of delivery has ballooned while subscriber dollars continue to fall. Something has to give. Those rights deals will cool, but are unlikely to crash. The good news is live sports remains the one DVR-proof tool for TV advertisers to capitalize on, and that’s not changing.
But correction is still imminent, and the trickle-down effects will be painful for athletes and college athletics departments that have glutted themselves during a time of unbridled plenty.
BYU is well-poised with a sound, frugal budget that’s already in the black. It provides a flexible and an in-demand product to ESPN, which is likely to continue appreciating in revenue, even if not at the unsustainable pace of major conferences.
Ryan Teeples, twitter.com/SportsGuyRyan, is a marketing consultant, full-time sports fan and owner of Ryan Teeples Consulting Inc. (RyanTeeples.com). He regularly contributes to publications across the web.