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The biggest sports story of 2022 is this: ESPN’s business model is officially dead.
That’s because the three big tech companies finally decided to get into sports media in earnest in 2022. Amazon took Thursday Night Football, Apple grabbed the MLS, and Google’s YouTube snagged the NFL Sunday Ticket. More sports deals will be forthcoming for the big tech companies, but 2022 was the year when the big tech takeover of sports became inevitable. The result will be the death of ESPN as a major player in sports. That death may take a decade, but it’s inevitable now: ESPN is on death row, just waiting for the official execution date.
In particular, the NFL Sunday Ticket deal was the death knell for ESPN, illustrating why the business model will collapse in a hurry. YouTube will be paying $2 billion+ a year for the NFL Sunday Ticket, the crown jewel asset for fan demand in a streaming era. If ESPN truly wanted to be a player in streaming sports going forward or thought the business opportunity was real, they had to buy this asset. But they didn’t. Because the ESPN business model doesn’t make sense in a streaming era and Disney didn’t want to increase their already massive streaming losses by investing billions in an asset they can’t monetize.
Put simply, if Disney executives believed ESPN was a viable business streaming asset they would have paid whatever it took to get the NFL Sunday Ticket. Because that asset is the one piece of content that fans must have. NFL games make fans sign up. The demand is that great. Yes, it was expensive for YouTube to purchase these rights, but I think it was brilliant of their executives to get this deal done, perhaps the modern day version of Rupert Murdoch’s Fox stealing away the NFL from CBS in 1994.
But, and this is key, it’s probably going to cost Google money in the near term and it’s a long range massive investment. It’s the kind of bet, frankly, that only a lucrative and highly profitable business can make. YouTube didn’t buy the NFL Sunday Ticket to make money in 2023, they bought it to make money in a decade or more.
YouTube, Not ESPN Rules For The Young Generation
I have three boys, do you know what the most important media brand is in their life? YouTube. There isn’t even a close second. Do you know how all three of my boys start off every morning? By going to YouTube to see highlights of last night’s games. In my generation, we started off the day with SportsCenter, now kids start on YouTube. (They watch these highlights, most often, on the league or team channels, not on sports network channels). And now sports fans of all ages are going to increasingly make YouTube a major part of their lives because the NFL Sunday Ticket is a must have asset for NFL fans living out of market from a favored local team. It’s not just highlights or talking about games that will be on YouTube, it’s the NFL games themselves.
I suspect the NFL Sunday Ticket audience will skyrocket with YouTube’s distribution assets too. Because I believe there are many fans who want to watch the games, but weren’t able to do so easily through DirecTV. (By the way, unless you live in a rural area and have no other options, why would anyone subscribe to DirecTV now? Sunday Ticket may not have been a money maker for DirecTV, but the satellite service has gone from 20 million to 13.5 million subscribers in the past several years. It, like ESPN, is effectively a dead business now.)
Yet most in media and sports media haven’t realized what all of this big tech sports rights purchasing means for ESPN’s business so let me explain it to you succinctly.
ESPN has spent billions of dollars renting sports rights for decades. Since its inception in 1979 up to the present day, ESPN has produced almost nothing of tangible, lasting value. They’ve just rented sports rights from the leagues with the money you pay them and put them on television, surrounded by mostly unwatched shoulder programming discussing the actual games. ESPN was the greatest beneficiary of the cable and satellite bundle, riding it to billions in profits.
But it was always a shell game and ESPN was always a middleman. ESPN didn’t actually own anything, it just rented. This is why ESPN has never really fit the Disney business model, which is about producing lasting original content that’s owned by the company forever. Pixar, Star Wars, Marvel, all of that is about owning content forever. Your grandkids will probably watch Marvel’s Avengers and Pixar’s Toy Story, no one cares about a game a day after it airs. And even if they did, ESPN doesn’t own those games, they just rent them. And the collapse of ESPN Classic has already proven the business model of re-airing old games doesn’t work, the sports audience always wants, by and large, to watch the new games.
If ESPN were smart, they’d have bought WWE and the UFC a decade ago. Then they’d have sports programming they actually owned, that is the leagues themselves. That would have fit the Pixar, Star Wars and Marvel business models that have worked well for Disney. Then instead of renting games to put on television, ESPN could have made ESPN+ the distribution model for the leagues, WWE and UFC, they actually owned.
But ESPN whiffed on that model in favor of renting games from the leagues.
Renting Sports, Not Owning Them, Doomed ESPN
Now don’t get me wrong, the middle man model made sense in the cable and satellite era. ESPN made billions renting games with the money they made off your subscription fees. But the streaming era isn’t about renting, it’s about owning and creating original content, while continuing to monetize the old legacy content you continue to provide for your customers. “The Office,” and “Friends,” retain value forever, Monday Night Football is worthless on Tuesday. That’s why the ESPN streaming service is antithetical to everything Disney is selling on Disney+ and Hulu. The Disney+ and Hulu shows are Disney property forever, nothing on ESPN+ has any lasting value and none of it actually belongs to ESPN. Right now Disney is camouflaging this reality by bundling the streaming services and selling them together — this is artificially inflating the subscriber numbers across the board — but consumers are getting wise to this streaming game, they’re binging new shows and then canceling until more content builds up they want to watch. Meaning streaming, unlike cable and satellite, isn’t a 12 month a year annuity business.
Back in 2014, there were around 100 million ESPN cable and satellite subscribers, each of whom provided the company with, at its peak, around $120 a year in subscription revenue across all the ESPN companies, ESPN, ESPN2, ESPNU, SEC Network, you name it. Significantly, a tiny percentage of the people paying $120 a year to ESPN ever bothered to watch the network. ESPN was using these billions of dollars in revenue to buy up top sports rights, ensuring the cable and satellite companies were terrified to ever drop them from the lucrative bundles of channels.
But then calamity arose, many people out there decided they no longer needed ESPN or cable and satellite subscriptions in general. And cordcutting began in earnest. Soon 100 million subscribers will dwindle to 50 million or fewer cable and satellite subscribers. The money from 100 million subscribers was able to pay for the NFL, the SEC, the NBA, the college football playoff, the NHL, you name it. The money from 50 million subscribers will be able to pay for far less original programming. And, significantly, it will also be far less desirable and more niche sports programming, further hastening the willingness of consumers to cut the cord.
Also keep in mind that streaming isn’t a sports panacea for fans. The reality is likely to be sports fans will have to pay more money for the sports they got for less money in 2014. That is, if you love the NFL you now need an Amazon prime subscription to watch Thursday Night Football. If you like the Sunday Ticket, you’ll need YouTube. If you want the MLS, you’ll need Apple. Eventually sports fans will try and save money. And one way they’ll save is by seasonal streaming subscriptions.
Right now ESPN is telling gullible water carriers in sports media that this collapse from 100 million to 50 million cable and satellite subscribers is no big problem, they’ll just make ESPN available as a streaming service and everything will be fine. That’s the story they’re selling, anyway. The problem is that will destroy the cable and satellite bundle and a comparatively tiny percentage of sports fans will be willing to pay $25 a month for ESPN programming. Indeed, most fans will sign up for subscriptions, if they do so at all, for relatively short periods of time — football season for instance — and then cancel the subscriptions for outside of football season. What was a 12 month subscription as part of the cable and satellite bundle will become a four month subscription, or less, for many sports fans.
Worst of all, as the NFL Sunday Ticket example proves, ESPN isn’t going to be able to afford the best sports programming.
As cable grew ESPN revenues increased and the quality of the games they could buy increased. Now the reverse will happen, as subscriptions collapse the quality of the games ESPN can afford to carry will decline, further accelerating the demise of the company because demand for lower tier sports will dry up. This was always the danger of being a middle man, when you don’t produce anything of value eventually the customer stops shopping with you.
And it’s already happening.
What Happens If Big Tech Company Comes After NBA?
This year ESPN lost the Big Ten. For the first time in 40 years there will be no Big Ten games on ESPN at all. ESPN simply couldn’t afford the Big Ten programming costs if they wanted to have a shot at keeping the NBA and the college football playoff. Soon ESPN will have to pay a massive increase for the college football playoff and the NBA.
Here’s a prediction, ESPN won’t be able to afford both, especially not an expanded 12-team college playoff. That matters because right now the college football playoff airs exclusively on ESPN and it’s the most watched programming by far on the entire network.
What happens if, say, a big tech company comes after the NBA? Without all the NBA programming, frankly, I’m not sure ESPN can continue to exist as a viable sports network. Which is why the future of ESPN probably looks like the ancient history of the network, get ready for a bunch more strongest man competitions.
That’s why you need to keep this analogy in mind, ESPN sold the larger public on the idea that streaming is the network’s future. That’s a lie and the smartest Disney executives know that’s a lie. Streaming hastens the demise of ESPN because in reality the cable and satellite business and streaming are two different business models. In order for one to grow, the other must be killed. But that’s not happening. Right now there are two sinking ships, the ESPN TV network and the ESPN streaming service. The cable ESPN is accelerating the demise of the ESPN streaming service and vice versa, instead of one ship sinking and the other rising, they’re both sinking and they’re both sinking faster than they would be if only one business existed.
Soon both these businesses, cable and streaming, will each be under water.
This cable and satellite collapse isn’t unique to ESPN, by the way, but the network does stand out here because most cable and satellite networks don’t cost very much to run. That is, MSNBC, CNN and Fox News will all suffer from the collapse of the cable and satellite bundle, but those networks are wildly profitable because the news isn’t that expensive to put on. Certainly not compared to what, say, it would cost to put on a 12 team college football playoff.
I can host an entire television show reacting to the news from my attic, that costs virtually nothing to produce and air.
But an NFL game or a college football playoff?
It costs billions.
Should ESPN Abandon Its Streaming Efforts?
Which is why the best idea from a business perspective, probably, is simply for ESPN to run their cable and satellite channel over the next decade wringing all the profit out as the business collapses and mostly ignore streaming. That way Disney can pour the remaining ESPN profits into other areas of the company that are more lucrative.
But ESPN is already pot committed to the streaming idea.
They’ve invested billions in a failing business model, one that hastens the destruction of the ESPN network, which actually makes them money.
Which means, unless new CEO Bob Iger admits the inevitable and pivots, that ESPN’s profits are going to vanish in a misguided attempt to bolster streaming revenues. The dwindling profits in the cable and satellite business will be spent on the streaming business, meaning all the profits vanish in the coming years. And as those profits vanish the quality of the games ESPN can carry will collapse too.
Because Amazon, Google/YouTube, and Apple are stepping into the fray to get the best sports assets.
The Disney executives have to see this too. Especially since they’re likely panicking over Disney stock being at an eight year low. (If you’d bought Disney stock in 2014, the stock now trades below where it was then. Meaning if you’d simply held the stock for eight years, you’ve lost money, especially factoring in inflation.)
Which is why I wouldn’t be surprised if they tried to sell ESPN to one of the big tech companies in 2023.
The problem with that idea, however, is this, would you buy a super expensive business with rapidly dwindling profitability that required a massive expenditure to retain its most valuable assets, that is, the games the network rents as a middleman? I wouldn’t. And I bet those tech execs won’t either, especially when they can just wait and buy up the sports rights assets out from underneath ESPN. Which is why I’d ultimately bet on Disney slowly pulling all their profits out of sports and redistributing them elsewhere while continuing to lessen their investments in sports rights going forward.
Which is exactly what Disney just did with the NFL Sunday Ticket rights.
If Disney believed in ESPN’s future as a streaming business, they would have bought the NFL Sunday Ticket rights. The fact they were nowhere near the bargaining table with the big tech companies is evidence that they know ESPN’s business is officially dead, which is the biggest sports story of 2022.