Here’s Why ESPN Is Looking at Layoffs Amid a Wave of Cost Cuts

March 8, 2017, 7:04 PM UTC
New York Giants v Miami Dolphins
Lamar Miller #26 of the Miami Dolphins carries during the first quarter of the game against the New York Giants at Sun Life Stadium on December 14, 2015 in Miami Gardens, Florida.
Photograph by Chris Trotman — Getty Images

Once upon a time, being ESPN was almost literally a license to print money for its owner, Disney. The network had a lock on some of the most lucrative sports broadcasting rights in the world, and a die-hard subscriber base that was willing to pay just about anything to watch those events.

Unfortunately for ESPN—and for Disney—times have changed, and are continuing to do so at a fairly rapid pace. Over the past few years, ESPN has lost more than 10 million subscribers, a decline that shows no signs of letting up. And that means belts are tightening at the giant broadcaster.

According to multiple reports from Bloomberg, Sports Illustrated and others, ESPN is looking at significant layoffs this year in an attempt to cut costs. The network has reportedly been asked by its parent company to cut as much as $250 million from this year’s budget. And that could mean some big changes at the network.

A source with knowledge of ESPN’s finances said that the $250-million figure was not accurate, but didn’t provide a more accurate one. Also, the source said the changes coming to the network were not being driven by cost-cutting but by a desire to serve its audiences better.

A spokesman for ESPN told Sports Illustrated in a statement that “today’s fans consume content in many different ways and we are in a continuous process of adapting to change and improving what we do. Inevitably that has consequences for how we utilize our talent.”

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If the cuts come to pass, this won’t be the first time ESPN has had to make large reductions—in 2015, it cut 300 jobs. But industry watchers say the pressure to do more has intensified over the past few months, as a decline in ad revenue from ESPN has contributed to lower revenue at Disney.

The bottom line is that the same math that used to work in the sports network’s favor not so long ago has started to turn against it.

Over the past few years, ESPN has lost close to 15 million subscribers, falling below the 88 million level from more than 100 million in 2011. That has meant a loss of more than $1 billion in subscription revenue. And as the network’s reach declines, advertisers are likely to start asking for discounts, and possibly moving their budgets to other outlets.

Meanwhile, ESPN’s costs have never been higher, thanks to the billions it is spending to keep a lock on those lucrative broadcasting rights. And they are the worst kind of costs—namely, fixed costs, which means the network is committed to paying a specific amount every year, in some cases for the next decade.

At its current level, ESPN is committed to spending more than $5 billion annually as part of these ongoing rights deals. Its deal with the National Football League alone costs the network almost $2 billion per year. Its deal with the NBA is worth $1.4 billion annually and lasts until 2026.

Doing those deals made eminent sense when sports was one of the few consistent performers in an industry in turmoil. But while it is still a bright light amid the carnage that can be found in other markets, its favored status is weakening, as sports fans are finding they can get the content they want in other places than ESPN.

The result is that ESPN is caught in a vise whose jaws are slowly closing. The bulk of its costs are fixed for the next several years at least, in some cases longer, and meanwhile its revenue is under pressure. At the current rate, it is losing about 3 million subscribers every year, although increases in affiliate fees have made up for some of those losses.

In addition to layoffs and other cuts, the network has been trying to diversify by signing up with a number of digital streaming services, including one just launched by YouTube and another that is coming soon from Hulu. ESPN is also launching its own streaming version at some point, although it won’t have all of the network’s content.

Disney CEO Bob Iger has downplayed the skepticism about ESPN, telling CNBC recently “there’s way too much pessimism about ESPN, because ESPN is still in demand from three constituents you want to be in demand the most from. One – distributors. Two – consumers and three – advertisers.”

Iger also said during the company’s most recent conference call that the deals ESPN has done with streaming services like Hulu and Sling TV “have already yielded some nice gains” for the entertainment giant. He told CNBC that a new subscriber on one the over-the-top services “is revenue neutral to us,” meaning the company makes as much as it would from one of its traditional distribution deals.

While these deals are filling in some of the gaps, however, the star that ESPN hitched its wagon to so many years ago—cable and satellite distribution of a handful of tremendously lucrative sporting events—is clearly in decline, and that doesn’t seem likely to change any time soon. And that could mean some significant changes at the sports network.

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