ESPN on Thursday began its latest round of layoffs, cutting ties with approximately 300 staffers and declining to fill an additional 200 open positions. The 500 roles represent about ten percent of the company’s domestic workforce. Today’s eliminations mark ESPN’s third mass headcount reduction in three years and the fifth going back to 2013.
The cuts arrive after a grim summer for sports media, one that saw NBC Sports let go of around 75 on-air and behind-the-scenes employees at its regional sports networks in Boston, Philadelphia, Chicago, Washington and the Bay Area. A few weeks later, Fox Sports laid off as many as 100 workers in a realignment it said was necessitated by the divestment of its RSNs a year ago.
Weeks after rumors of the layoffs began circulating, ESPN this morning began carrying out the orders. “For some time, ESPN has been engaged in planning for its future amidst tremendous disruption in how fans consume sports,” Chairman, ESPN and Sports Content, Jimmy Pitaro said in a public statement. “The pandemic’s effect on ESPN clearly accelerated our thinking on all fronts. Today, as a result of these circumstances, we informed our employees that we have made the difficult decision to reduce our workforce to create a more agile, efficient organization.”
ESPN employs roughly 4,000 people at its Bristol, Conn., headquarters and another 2,500 staffers around the globe.
While ESPN’s cost-cutting measures are a function of its having to square escalating rights fees with the steady decline of the traditional cable bundle, the root causes this time around were exacerbated by the coronavirus pandemic and a reorganization of The Walt Disney Co.’s media and entertainment businesses.
During the 134-day sports clampdown, when ESPN had to make do with airing replays of classic NBA games and long-form content like the Michael Jordan doc series The Last Dance, ad sales revenues at Disney’s media networks division shrank 41% to $1.12 billion. And while ESPN and sibling broadcaster ABC were able to claw back hundreds of millions in seemingly vanished ad dollars from within the NBA bubble and during the truncated MLB season, some losses were unavoidable. (ESPN missed out on airing 45 regular-season baseball games, a shortfall that was offset somewhat by the 14 Wild Card Games it and its sister nets aired under the league’s expanded playoff scheme.)
For all that, ESPN hasn’t been hit anywhere near as hard by the outbreak as have the brands housed in Disney’s other legacy divisions. After reporting a $1.96 billion loss in operating income for the third fiscal quarter, the parks unit in September laid off 28,000 employees. In its most recent 10-Q filing with the Securities and Exchange Commission, Disney said the “total net adverse impact of COVID-19 on segment operating income was approximately $3.5 billion.”
In the same period, when most of America’s movie theaters were still shuttered, studio entertainment revenue plummeted 55% to $1.74 billion. If the media networks unit has kept Disney’s head above water—despite the shrinkage in ad dollars, the broadcast and cable networks in Q3 generated $6.56 billion in total revenues, a decline of just 2% versus the year-ago period—the company’s reliance on pricey sports rights is at odds with a fading linear-TV ecosystem.
Isolating ESPN’s four most expensive properties—the NFL, NBA, MLB and College Football Playoff series—alone requires the network to cut annual checks worth $4.6 billion. Drizzle on the expenses associated with its various conference contracts and showcase tennis majors (Wimbledon, the U.S. Open), and that’s $7.5 billion in payments that must be dished out each and every year.
Oh, and: Those rights fees are only going up. Not only is Disney hell-bent on scratching out a second NFL package to air on ABC (a move that would put the company back onto the Super Bowl carousel for the first time since 2006), but there’s also the future of sports distribution to consider. ESPN already forks over $1.9 billion per year for the privilege of airing Monday Night Football; should ABC outbid Fox for Thursday Night Football—or, more to the point, should Fox move away from primetime football, having come to terms with the fact that affiliates don’t find tremendous upside in the 11-game slate—the company’s annual NFL bill will be in the neighborhood of $3.2 billion. And that’s before there’s any discussion of how ESPN+ will look to box out the likes of Amazon for the exclusive streaming rights—which is where the sports world, and the consumer, are heading.
And as much as the NFL is the one property no self-respecting sports colossus can do without, all that football strategy doesn’t take into account ESPN’s soon-to-expire MLB deal. Insiders say that Bristol is looking to shave down its baseball commitments to a single weekly national telecast, which would free up revenue for its bid to steal a hunk of the NHL rights from longtime hockey partner NBC Sports.
At the same time that ESPN finds itself budgeting for billions of dollars in additional rights-fee payouts, the business model that has long financed those buying sprees is shaking itself to pieces. After once reaching a little more than 100 million TV households in 2011, ESPN’s traditional distribution footprint is now down to around 83 million homes. (This figure excludes sidecar services like Sling TV, Playstation Vue and YouTube TV, which generate a fraction of the affiliate revenue of an old-school operator like Comcast or Spectrum.)
At an average carriage fee of $7.69 per subscriber per month, ESPN this year is on track to book some $7.5 billion in affiliate revenue. Nice work if you can get it, and that’s billions more than any other channel on the dial can command, but given that the pay-TV base is now shrinking at a rate of 8% per year—in 2018, the rate-of-change was 3%—it’s hard to imagine a scenario in which wired cable is still a viable business in 2030.
The erosion of the traditional distribution system and the consumer shift to streaming is what prompted Disney last month to accelerate its direct-to-consumer strategy, with an eye toward repositioning its entire media business around Disney+. As of the end of its third fiscal quarter, 57.5 million paid subscribers have signed on for Disney+, while ESPN+ has landed 8.5 million customers.
In transforming its media mandate, Disney will look to make transformative changes at ESPN and the rest of the company’s cable and TV networks. Today’s layoffs are a glimpse of what lies in store for the sports-media marketplace as a whole, as shakeups in production, distribution and the fundamentals of advertising are certain to create redundancies and upend the org charts.
-With assistance from Jacob Feldman.