Sunday, October 30, 2016

ESPN and the Decline in Television

There is plenty of hand-wringing this weekend about what’s wrong with ESPN after reports that it it is having its worst-ever month, losing 621,000 subscribers between October and November. It’s a decline in sports as entertainment, according to Clay Travis at Outkick the Coverage, who points out that the decline in viewers and subscription fees could put not just the cable channel in a financially untenable situation, but also many of the team sports leagues that it broadcasts. There is plenty of separate evidence for the decline of sports television this year. The NFL saw an unexplained swoon in ratings this fall, and the month before, the summer Olympics had its biggest-ever decline in TV audience.

But ESPN is just one of the most successful TV channels on cable. The decline in cable is a trend hitting all cable channels. Tyler Durden writing at ZeroHedge puts the blame on HBO, which launched its online HBO Now subscription model less than a year, taking 1 million customers away from cable. The numbers don’t quite add up when you look closer. ESPN has lost 2 million subscribers in the last year, so the 1 million HBO Now subscribers so far don’t come close to accounting for the decline in cable and ESPN. Nevertheless there is something to this theory. The move by HBO and others to offer content on the Internet must have helped break the habit of premium cable subscriptions. TV subscriptions, like banking relationships, tend to be very slow to change. Five years can pass by between “I’m really paying too much for this” and the actions that actually terminate the subscription. Many people don’t get around to canceling until they realize they are moving, forcing a change whether they are ready or not. When a service has this much inertia, it is a healthy approximation to say that customers who finally break their habit are lost forever. In other words, after the 2 million subscribers lost this year, there will be at least as many more next year, and there is probably nothing the TV industry can do in the short run to turn the trend around.

It was just last year that television executives were saying publicly that they weren’t sure the declining TV audience was real. Now there is no question. Raw subscriber and viewer numbers are declining at a rate of more than 1 percent per year. Television’s influence peaked around 2004, after which its growth was slower than the rate of population growth. Now there is talk of cord cutters getting their television programming over the Internet. What television executives won’t tell you is that more than half of people who cancel television subscriptions don’t replace them with anything. They canceled because they stopped watching.

The decline in ESPN is ultimately just the decline in television. Television will continue its decline, and we can only hope that the process can go smoothly, but there is plenty of potential for trouble along the way. The tension in the financial arrangements behind cable channels are stretched to the breaking point as it is, with cable channels regularly cutting off content to cable systems as a negotiating tactic.

So what could happen to ESPN? With its audience shrinking, it now knows it overpaid for its current bundle of live sports broadcast rights. It will have to bid less the next time around. Every other broadcaster too will have to set their sites lower when budgeting for content. The sports leagues and any other business that depends on television for the biggest part of revenue will have to make adjustments of their own.

Suppose, however, the situation is worse than it looks, and ESPN loses so many viewers next year that it reaches the point where it cannot meet its licensing payment obligations. Money already budgeted by major sports leagues, promised to players, stadium owners, bondholders, and the like, won’t be there to make those payments. Could there be a large-scale lockout? Could teams or leagues go bankrupt? Might some football, baseball, basketball, or hockey franchises simply shut down? Obviously, that scenario can be avoided. I would think all the worst effects can be avoided if the parties involved have already started the process of tightening their budgets to avoid a crunch down the road.