The ESPN Factor

Last week ESPN laid off about 100 people. The list included big names like Jason Stark, and people behind the scenes who are not recognizable to the general public. It was a strong signal that the sports landscape is about to change.

ESPN made billions at the sports gravy train. As DVR’s proliferated, ESPN benefitted because they controlled one of the last “DVR-proof” properties- live sports- and they charged advertisers and subscribers massive amounts for it. They also fought very hard to keep those properties, inking enormous rights deals with all the major leagues, except the NHL, and creating things like the Longhorn Network, a channel exclusively devoted to the University of Texas. But then a funny thing happened, technology went beyond the DVR to online streaming services like Netflix and Hulu. Suddenly, people started wondering why they had cable when they could just watch all their shows online and they started canceling it. This was a double whammy for ESPN as they get paid by the cable companies based on their subscribers, and they get paid by the advertisers based on their ratings. Fewer viewers hits both of those revenue streams and that is why 100 people lost their jobs last week. But this is just the start of something that will transform sports.

MLB and the other leagues are going to have to negotiate new TV deals in the future and they are going to have a harder time finding networks willing to shell out money for them. Cable companies, under increasing consumer pressure to lower costs, are going to aggressively question why they are shelling out big bucks for channels that relatively few people actually watch. (It’s true, there are a lot more sports haters than sports fans out there) This means that leagues are going to see a pretty significant loss in revenue from TV. And while things like MLB.com can certainly make some of that up, it’s worth remembering that MLB receives about $1.5-billion a year in TV rights right now. That’s 15-million subscribers at $100 a pop, or a higher number of subscribers than average viewers of the 2015 World Series, so don’t count on it.

This will have a profound affect on team revenues, but also on team valuations which are essentially multiples of those revenues. Payrolls should decrease and ticket prices will probably have to as well, as ticket sales and concessions become a bigger part of the revenue that teams earn. All of that could be a good result for the average fan. But, owners are not going to like this one bit. And owners who spent billions, only to see the revenues they based those investments on dry up, are going to agressively look to replace those revenues and that means new stadiums and expansion. I would expect that as the TV revenues shrink, owners will look to the taxpayer to give them better ballparks and new owners to give them fat expansion fees. So we could end up with a lot more teams in a lot of terrible locations, all to keep owners happy.

Teams would be smart to be very, very cautious throwing money around in the next few years because the future doesn’t look as bright as it once did.