Big Talent Under the Gun as ESPN Cuts Loom

ESPN’s last big round of layoffs took place in 2015 and stayed, for the most part, behind the camera. Its next round won’t be so deferential to talent.

The Disney-owned cable channel is set to reduce personnel in the coming months, with the bulk of cuts coming from the on-air ranks. The move is indicative of the growing pressure ESPN feels as the cable ecosystem evolves, and of how the network plans to adapt in response.

According to Nielsen research, ESPN had 87.4 million subscribers in March, down from more than 100 million six years ago. Subscriber erosion has presented a challenge for all cable channels in the era of skinny bundles — low-cost network packages delivered via broadband, such as DirecTV Now — but ESPN, with its outsize presence in the cable landscape and the Walt Disney Co. portfolio, has been scrutinized more closely than most brands.

ESPN demands the largest affiliate fee of any cable network, averaging $7.21 per subscriber per month in 2016, according to SNL Kagan. It also boasts what may be the highest programming costs. The network spent many years aggressively pursuing — and driving up — sports rights fees. Its NFL, NBA, and MLB packages together cost the network $4 billion per year, in addition to what it pays for college football, golf, and other sports programming.

“ESPN has locked in contracts for all of its content, so it knows exactly how much its content costs are going up,” says Needham senior analyst Laura Martin. “It can’t control the amount of subscribers in the TV ecosystem. It has to figure out another way to get back to the profitability targets it sent the parent company through its budgeting.”

Sustained strong ratings for live sports have protected ESPN from the damage its cable cousins endured as delayed and digital viewing of entertainment programming became the new normal. But while other channels can manage change by loosening or tightening the programming spigot, ESPN’s options for controlling costs are limited as subscriber levels drift downward.

“One way to do that is to cut costs through people costs,” Martin says.

ESPN has shifted its talent priorities in the last two years. Gone are old, high-priced hands such as Chris Berman, Keith Olbermann, and Bill Simmons. Among the channel’s rising stars are Scott Van Pelt, who began hosting a special late-night version of “SportsCenter” in 2015; Michael Smith and Jemele Hill, who launched their own specially branded 6 p.m. “SportsCenter” last year; and “Mike and Mike” co-host Mike Greenberg, who the network is eyeing for a possible solo morning show. All four represent a type of personality that ESPN will value in the coming reorganization — they appeal to young or traditionally underserved audiences and are able to move seamlessly between television and digital.

Reprioritizing talent is part of a larger ESPN effort to pivot toward digital — and mitigate losses. In a February conference call following a fiscal first quarter that saw an 11% year-over-year decline in operating income for his company’s cable division, Disney CEO Bob Iger touted ESPN’s planned launch of a standalone streaming app.

“I can tell you our full intent is to go out there aggressively with direct-to-consumer [offerings of] ESPN and other Disney-branded properties,” Iger said. He also emphasized the strong presence of Disney’s channels — including ESPN — on the new skinny bundles, which Nielsen does not yet count in subscriber measurement or television ratings.

Disney, meanwhile, is at a crossroads, with reports circulating that Iger may extend his tenure as CEO beyond his planned 2018 exit, even as he fends off criticism over his participation in a business advisory council for President Trump’s White House.

Amid such distractions, the future health of ESPN looms large, threatening to overshadow success in other arenas such as feature films, consumer merchandise, and theme parks.

“Disney’s share price pivots on the health of ESPN,” Martin says. “If ESPN is not doing well, Disney’s stock price goes down.”

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