Archive for December, 2015

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The financial news stories coming out of ESPN over the past several months have been quite negative. The Disney-owned cable network has endured several rounds of layoffs and reported  last week that it has lost 7 million subscribers over the past two years. This is of particular interest to the Big Ten, which will be negotiating new television contracts over the next year and has been banking on massive increases in rights fees. All of the Big Ten’s off-the-field moves during this decade, from conference expansion to adding a conference championship, has been leading up to providing the league with maximum leverage in this negotiation. The Big Ten Network has certainly been a boon, but the first tier national TV contract is still the Big Ten’s top priority both financially and in terms of brand exposure by a wide margin.

Many of the Big Ten’s financial projections during the conference realignment process were based upon the assumption that ESPN would offer a massive rights fees increase (which in turn would garner similar bids from other media companies, particularly Fox). However, should the Big Ten be worried with the recent turbulence at ESPN? Do the cost-cutting measures at ESPN mean that the network will pull back on what it could offer to the Big Ten?

John Ourand of the Sports Business Journal recently examined the race for the Big Ten rights and noted that the market may not be as “frothy” as it was when the Pac-12 secured a huge rights fee increase in 2011. However, he still expected “ESPN and Fox Sports to at least double the conference’s annual average payout and share the rights” despite the overall market factors (and he would have as great of an insight of what’s likely for sports media rights as anyone in the business).

I completely agree with Ourand on the likelihood of ESPN and Fox splitting the Big Ten rights (as I also predicted in my last post). This would have the effect of ESPN and Fox not having to each completely break their individual banks yet provide the Big Ten with much larger overall rights fees compared to one single contract holder. At the same time, I believe that the Big Ten greatly values the exposure the ESPN provides via its multiple platforms that can’t be matched by any other media company (even with pressures on the basic cable model). I don’t buy the notion that the Big Ten would walk away from ESPN completely – Jim Delany has set up this league to be like the NFL with multiple high profile media partners viewing it as an essential product. (See this article from Ed Sherman from this past March pointing out the presence of ESPN, Fox-affiliated BTN and CBS all at the Big Ten Tournament.)

At the same time, Big Ten fans shouldn’t pay attention to the arm chair observers (i.e. partisans from other leagues that would love to see the Big Ten fail to meet its expectations) that simply assume that ESPN cutting costs in its operations will mean that it will cut its spending on rights fees (and thereby the Big Ten). Ultimately, content is king, and ESPN in particular needs live sports content whether we live in a basic cable world or cord-cutting a la carte/over-the-top streaming world. If anything, retaining premium live sports programming becomes even more critical to ESPN as more people drop basic cable. It’s not going to sell over-the-top subscriptions like HBO Now with more Skip Bayless and Stephen A. Smith shows. The only way ESPN is going to get people to shell out $20 (or $30 or $40 or $50 or more per month) if it has to move to that environment is to have the broadest suite of exclusive live sporting events that large audiences want to watch as possible. That includes the Big Ten.

The adjustments that ESPN’s corporate siblings at Disney in Hollywood have already made years ago provide a template for sports programming expenditures in the future. Movie studios have already had their revenue and profits eroded by the Internet much more quickly than the television industry. Box office revenue is only being buoyed by ticket price increases (masking a general decline in attendance) while increases in digital streaming and downloads have not been enough to offset the decline in sales of DVDs and Blu-ray discs . It’s harder than ever to make money in the movie industry today.

However, that doesn’t mean that Disney has slashed all of its movie budgets. Quite to the contrary, Disney will greenlight massive production and marketing budgets for its tentpole franchises and brands, such as Star Wars, Marvel and Pixar, that dwarf the figures that have been used in the past even on an inflation-adjusted basis. Star Wars: The Force Awakens is estimated to have a production budget of $200 million and films of that size typically have marketing costs that come close to matching that number dollar-for-dollar on top of that. The Avengers: Age of Ultron had a combined production and marketing budget of over $340 million. When it comes to premium content, Disney isn’t skimping because those tentpole movies have downstream impact on the company’s business, such as merchandising and theme park tie-ins. (This classic Spaceballs clip is now literally the business strategy for all of Hollywood.)

Disney will also greenlight lower budget movies, such as documentaries out of its Disneynature unit. Other Hollywood studios have figured out that really cheap horror films provide the best returns on investment in the business, which is why consumers now get a steady diet of new horror movie releases throughout the entire year.

What Disney did completely cut, though, was its middle budget film division. Disney sold off Miramax in 2010 (less than a year after Disney purchased Marvel), which was the Oscar nominee producing machine of films such as Pulp Fiction. The prestige film business might provide nice publicity during awards season, but it doesn’t generate the top-to-bottom movie/merchandising bonanza of tentpole films like Star Wars or the pure ROI of low-budget movies. As a result, Disney has gotten out of the mid-budget film market entirely.

This “high/low” budget strategy while cutting out the middle is almost certainly what ESPN has in mind. Indeed, one the highest profile casualties of ESPN’s recent cost-cutting was the elimination of Grantland. In my opinion, Grantland had produced the best content on any ESPN platform over the past few years (particularly Zach Lowe on the NBA and Bill Barnwell on the NFL) with its mix of sports and pop culture analysis targeted to educated readers. The issue from ESPN’s perspective was that employing the talent to produce such high-level analysis was relatively expensive, yet its mothership website has been getting its most hits for fantasy football lineup recommendations. What is ESPN going to spend its resources on in the future: more top flight reporting on Outside the Lines that is getting marginal ratings, or more lowest common denominator hot take shows where the same broadcast can take up a couple of hours on ESPN2, get syndicated on ESPN radio affiliates across the country and be uploaded to the ESPN website as a podcast? It doesn’t take long to figure that one out.

Believe me – I don’t personally like these trends. Even though I’m a massive Star Wars fan and I’ve got my tickets with the exact seats reserved for opening weekend (along with buying the spectacular Chewbacca Illini T-shirt shown above that might as well have been custom-made for me), I’m also a large watcher of prestige films (and I have zero interest in cheap horror flicks). Grantland was one of my favorite websites and I can’t stand vapid talking head shows (whether news-based or sports-based). We need more resources dedicated to hard news and smart analysis. Unfortunately, the Internet’s business model doesn’t really reward that type of content compared to slideshow click-bait. As a result, prestige content producers may need to go toward an NPR-type funding model.

Putting my personal feelings aside, the high/low budget strategy still works very well for the Big Ten. As far as sports properties go, it’s definitely the equivalent of a tentpole movie franchise and, timing-wise, it’s the only tentpole of any kind available on the TV rights market until the next decade. That’s not hyperbole. Outside of the NFL (which is the undisputed king of TV sports), college football has consistently delivered the best week-in and week-out ratings out of any sport for U.S. viewers and the Big Ten has been at the top of those ratings next to the SEC for many years. This is not a property that ESPN can afford to lose (whether on the mothership cable channel or ABC, whose Saturday programming is heavily reliant on the Big Ten), and this is also not a property that Fox can afford to miss out on. Top tier sports brands like the NFL, Major League Baseball, NBA, SEC and Big Ten aren’t going to be the ones that are worried about cord cutting because they are all proven drivers of viewership on multiple platforms. Inexpensive sports rights with lower production costs and high ROI (think West Coast Conference basketball with Gonzaga games) will also be in high demand. The sports brands that should be worried are the ones that have relatively high production costs but lower viewership, such as Group of Five conference college football and non-major tennis and golf events.

At the end of the day, ESPN (and likely Fox with them) will end up paying top dollar for the Big Ten just as its Disney corporate siblings continue to pay top dollar for Star Wars films. Going forward, ESPN is in a position where it needs to keep its premium sports rights because that is the only way that it can maximize its value regardless of whether the world stays with basic cable (where such rights are needed to keep the basic cable subscriber fees high) or moves to an over-the-top environment (where such rights are needed to draw in direct paying subscribers). ESPN still paid a premium for more European soccer rights in the past month (as Ourand pointed out) and was still willing to sign up for massive deals with NBA and Major League Baseball when they were fully aware of the erosion of their basic cable subscriber numbers. The Big Ten has tentpole sports content and that will always be in demand.

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