ESPN made two critical mistakes, and now it's paying the price

Last week, ESPN cut 300 employees.

Layoffs are always hard, but these seemed to be particularly painful for people at the company.

Charley Steiner, a former ESPN employee said on Facebook, "This week, many of the men and women who provided the foundation, balance, direction and creativity to this iconic franchise were called into someone's office and occupationally and emotionally executed."

He said ESPN's cuts were, "Not just fat. Not just muscle, but down to the bone."

Why did ESPN, which is still richly profitable, feel compelled to cut so many people?

John Ourand at Sports Business Journal has the best explanation. He says it basically comes to down two big problems for ESPN.

1. ESPN is losing subscribers.
2. ESPN is paying an obscene amount of money for sports.

ESPN is losing subscribers because of a critical mistake it made in 2012 when it was negotiating carriage deals with cable companies like Comcast, Cablevision, and Cox.

According to Ourand, ESPN was negotiating for a $6 per subscriber fee from the cable companies. In order to secure that high of a fee ESPN had to be flexible on its "penetration benchmark levels," which is the number of homes the cable companies guarantee ESPN will be in.

At the time, ESPN was guaranteed to be in 90% of cable subscribers homes. In order to get $6 per subscriber, ESPN lowered that threshold to 80%.

When ESPN lowered the standard, it allowed cable companies to start introducing new cable packages that excluded ESPN. People are signing up for those cable packages, leading to ESPN losing 8.5 million subscribers over the past four and half years, according to Ourand, citing Nielsen estimates.

This falls in line with the numbers we collected recently. After three decades of growth, ESPN's place in the American home is slipping.

At the same time ESPN started losing subscribers, it started paying massive fees for sports.

ESPN is paying $1.9 billion annually to air Monday Night Football. That's $800 million more than the next closest competitor. Ourand says people are skeptical there was even another bidder within $500 million of that number.

After overpaying for the NFL, ESPN overpaid for the NBA, tripling its rate. It also doubled its rate for MLB rights.

A former employee said, "It's been a total mismanagement of rights fees, starting with the NFL renewal ... We overpaid significantly when it did not need to be that way, and it set the template to overpay for MLB and the NBA."

As a result of these shifts, ESPN is looking to cut costs, and thus it had to cut "to the bone".

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