Exploring the ESPN Business Model (Hint: It Involves Swimming In Piles of Cash)

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By now everyone knows that ESPN paid $100 million more than Fox could afford for the rights to the BCS games beginning in 2009. Cementing, to a great degree, ESPN's status as a post-season college football monopoly (they now control 29 of the 34 bowl games). And we've also noted that this increasing power has come without a great deal of criticism. To a large degree because ESPN now employs most of the people who are talented enough to raise criticism against the network. But we've never really seen their power broken down in a cogent article examining their business model. Until now. Enter Richard Sandomir of the New York Times. Read on. Be scared sports fans, very scared. Traditional broadcasters like CBS, Fox, and NBC have to balance out the cost of their programming with the advertising revenue they can garner from their programming. This has been the traditional business model for sports rights. And it is simple enough to comprehend, if you pay x for the event, then you have to be able to sell more than x in advertising dollars (or ancillary promotions and the like) to justify your bid. But ESPN doesn't just rely on advertising. Why not? Because every single person with cable is paying for the right to watch ESPN. This isn't a particular surprise, all of us have been doing it for decades, but when you see the money it produces, it's kind of mind-boggling.

ESPN cannot ignore the deep recession’s impact on advertising. But its subscriber revenue gives it an extraordinary cushion. ESPN charges cable and satellite operators an average of $3.65 a month per subscriber, the most in television, according to SNL Kagan, a research organization. Multiply that by 98 million subscribers, over 12 months a year, and ESPN’s financial armor adds up to $4.3 billion.

Put simply, if ESPN had to rely on the money they can raise from advertising, they wouldn't be able to blow the networks out of the water when they bid. But ESPN doesn't. In addition to the revenue they gain from advertising, they havea huge competitive advantage when it comes to their subscriber revenue. Every single one of us is already paying for the right to enjoy ESPN's sports programming with our cable package. And we're paying more for them than for any other network. Let's put that $4.3 billion that we're paying to ESPN into context given the current financial environment. It's a ton of money. For instance, let's check out a current competitor, say CBS Sports. At today's stock price CBS's market cap is less than the revenue ESPN gets from cable subscription fees. $4.3 billion vs. $3.97 billion. Why is this disparity significant? Well, because CBS's president is already acknowledging that if ESPN targets the NCAA basketball tournament he "can see keeping the Final Four and title game and the rest going to cable." So guess what? The Final Four and the title game could eventually end up heading to ESPN as well. (If ESPN wants it badly enough — it'll happen.) Sandomir doesn't press his argument about the business model further than pointing out ESPN's competitive advantage, but he could have. How far could he have pressed it? All the way to crowning ESPN as a virtual sports monopoly. Because, get this, ESPN's cable rate is only going to continue to rise and exacerbate the competitive imbalance between it and traditional broadcasters. ESPN is not just all-powerful when it comes to sports programming, they get stronger and stronger, while their competitors get weaker and weaker, each day. Already ESPN has recently outbid TNT for the full rights to the British Open, convinced the SEC not to start their own network by throwing billions of dollars to them , and is actively contemplating which sporting target will be next on their list. Why should sports fans care about ESPN's growing power? Because eventually monopolies stop serving the public and start serving themselves. ESPN has been a successful corporation for twenty-nine years. What they haven't been, at least not until recently, is a sports monopoly. In a network as large and all-powerful as ESPN, can the largest sports reporting arm in the country continue to report fairly when they control the product they report about? If players getting in trouble is bad for the leagues when it comes to advertising, won't it be bad for the networks that monopolize their content as well? Isn't this a huge conflict? It's why I firmly believe that we will not see a college football playoff: ESPN has too much invested in their lower tier bowl programming to advocate against the system they now control. Just you wait — the BCS really sucks up until it arrives on ESPN's network in 2009. Then, oh boy, through the ESPN looking glass, the BCS isn't so bad after all. Don't believe me? ESPN is closer to being a sports monopoly than we have ever seen in the history of sports. In fact, ESPN's competitive position in sports may be stronger than any company in any industry in America today. Except the very leagues they cover. And monopolies are notoriously prickly when it comes to criticism. (Witness another monopoly's response to ESPN's Playmakers television show). Indeed ESPN, a virtual sports monopoly, is now in bed with the production of events for other sporting monopolies (MLB, the NFL, and the NBA). Raise your hand if you've seen someone from inside these leagues criticize the league. (Better yet send me the link.) The point is the combination of a league monopoly with a content monopoly means legitimate criticism to a broad audience is going to be strangled into obsolescence. The only thing worse than one single monopoly is two monopolies operating in concert. As if that weren't enough sooner or later the fact that ESPN has the most money means they'll have the ability to purchase any sporting event they want. And that position is only going to grow in power. I defy you to find a legitimate competitor to them on the media horizon today. As Fox's chairman of sports television tells Sandomir, “It’s all money,” he said. “It’s all about the size of the check.” Assets and Subscriber Revenue Give ESPN an Edge in Rights Bidding [New York Times]