The Short and Long Term Fall Out from the Predictable ESPN Chaos. How will Sports Business React and Adjust?

The news last week regarding ESPN cutting 100 of their highly recognizable talent was a shock to some but not all. If you had been paying attention over the past year, two years or decade this was an inevitable conclusion as the business model came to cross roads. How long could receiving revenues from forced subscriptions of products to customers and non-customers last?

Clay Travis of Outkick the Coverage has been very vocal in reporting the potential fallout from lost revenues. His articles and opinions were researched, fact based and put out there for all via the website and social media. While some took him seriously, there was a backlash from ESPN executives that clearly now was PR push. A recent article after the news broke was published on their site and tells the entire backstory: ESPN Fires Over 100 Employees

ALSD Editorial Director Jared Frank also wrote about this very topic over a year ago in a well thought out, heavily researched piece after an initial round of ESPN layoffs. He takes a look at the overall business model, short comings, and data involved into what got us to this point. Take in this quote from the article, written in 2015, to grasp how much of this problem was obvious yet largely ignored:

"The model is changing. We can be a participant in the wave and see where it takes us, or we can be left behind to drown in its wake. The sports and media industries can either continue to try to get ahead of the shift with over-the-top, live streaming services or risk being left holding the severed cord".

The reality is the answers were out in the open and began surfacing long ago. After the news had broken I went on a tweet storm of sorts as this has been a topic bugging me on many levels for many years. Not just the cord cutting in itself, but how overall the business model of cable subscriptions has been the core driver of stalled innovation for revenue generated by sports teams most treasured asset: its fans.

On the advice of an industry friend, I am going to walk through each tweet and hopefully provide some insight on how we got to this point and more importantly, how we eventually regroup and move forward.

----------------------------------------------------------------------------------------------------------

As I said above this is the start of an obvious conclusion. Receiving revenue from forced packaging to your consumers and non-consumers can not last forever. Nor can any business model that uses that very declining revenue to continue signing long term bloated contracts. When the subscription revenue from mostly your non-customers is your driving force, you were on borrowed time from day one.

And this is for the entire model itself and not just ESPN. As far back as 2009 regional sports networks started cutting back on expenses by running limited live programming besides professional games. If you lived in Pittsburgh, Sports Beat as referenced in the link, was an institution. The expenses included one or two guys sitting on an inexpensive set recapping Pittsburgh sports and taking phone calls. This was replaced by what I call VHS programming. Throw in a tape, any tape, and press play.

Eight years ago networks were already cutting back even the most limited of expenses on their most popular non game assets. Now we sit in shock as the model implodes on itself and wondering how we got here. I say it's not complicated if you paid attention..The key point is always that a market will correct itself. Eventually, if you are forcing higher cost packaging to drive increased revenues someone will find a better way for the consumer.

When Napster was first introduced the music industry reacted with terror. File sharing was going to allow those using the product to obtain free music from artists without paying a dime. While that in itself, of course, would represent a problem there was a second issue that falls solely on the shoulders of the industry. You had been screwing fans for years by forcing them to buy all your songs at once. Napster was not just a way for consumers to get a product for free. It was an industry innovating idea. There was a way now to connect to fans digitally and promote your product to millions for free. One phone call to Sean Parker with an offer of something like"Start charging fifty cents per song and you can keep ten cents" would have changed the industry forever. They would have bought into the digital retail infrastructure and all of its benefits like others industries such as airlines have, while keeping a majority of the profits.

Instead deathly afraid of losing the stranglehold on increased revenues from taking advantage of consumers the music industry pushed and is now paying a steep price in lost revenue thanks to Apple.

The parallel to sports is clear. You have an industry recently built on forcing consumers or non-consumers to pay for full subscriptions including products or channels they may not want. This additional revenue caused bloated contracts whether with leagues, franchises or bowl games. Beyond the obvious economics of the situation, there was a personal side to all of this. It was way too easy to run your franchise.

TV outlets could purchase rights from leagues for insane amounts of money. Leagues and teams would profit for doing little, and everyone got lazy as this lined owners pockets annually and also drove up franchise values. You could run a team without much care for the day to day and then flip it in 5 years for handsome profits.

The biggest difference between the music industry and sports is the sports business began correcting itself a decade ago which was largely missed. The secondary market exists largely because, as owners saw zero need to focus on other business assets within their franchise, the investment into retail, technology and modern brand innovation was lacking. Adding to that, teams forcing bulk purchasing on fans (like CD's) was not consumer friendly. Ticket sales, marketing, and integrated technology became stale for a decade.

The secondary market invested in technology, analytic-based ongoing market pricing and economic models that made sense for the consumers. The shortfalls of innovation from forced packaging allowed the ticket market to eventually correct itself. Phase two of this correction will happen with TV rights. Once the first check is bounced, bankruptcy is filed, or a deal not renewed the industry will once again be forced to run its day to day as a functional business unit.

Artists are touring again, and music is available for individual song purchase. Teams will utilize available infrastructure to move product and generate revenue as the secondary continues to evolve into a smarter consumer-friendly purchasing option.

It is the consumer who wins in both instances.

One of the main reasons for cord cutting is the ability to choose your individual product through digital or streaming outlets. This is the obvious answer to the question of why consumers are choosing this route. Like I talked about above the short conclusion is it is better for the individual consumer.

My point of this tweet is there are additional reasons of how and why the consumer reacted to the current landscape. The value proposition simply does not exist anymore and not just because of other similar better-packaged options. The consumer lifestyle has changed to instant gratification and not information provided as a time suck. They simply can live with an article they read on their phones, or highlights pulled from Twitter. Yes, in theory, those are other choices, but in reality, they are more reflective of lifestyle and value. It is free for them to consume how and when they want. The need for full consumption has ceased to exist unless provided in the format and value desired. 

The PR machine, as evident in the Outkick the Coverage article posted earlier, has been in full effect for some time now. One of my biggest complaints about the industry as a whole is the focus on PR vs. reality.

Publicly stating that everything is fine when common sense or awareness says otherwise is a mistake. In this day and age, you end up with egg on your face. Consumers are savvy, and the information is available at your fingertips. Reviews, social media, message boards, Facebook groups and other forms of communication have allowed for easy access to not only opinions but shared information and data.

I have had many conversations recently with industry contacts where we discuss how sports has evolved closer to politics than it has to an industry catering to its fans (consumers). Planting stories, over managing the press, inflating attendance figures, claiming minimal availability discounts such as student rates but selling online to mask inventory numbers or flat out self-promotion for little to no purpose other than ego or you next career move have become a standard mentality.

The problem is this might have worked in the 80's, but with the current information highway you end up on the wrong side of consumer opinion more often than not. Simply put it is not difficult to see the reality.

The result is a lot more damage to your brand and long-term financial health than benefit. It is more expensive to find new customers than it is to keep the ones you have. However, its damn near impossible to get back the ones who think, or know, they have been wronged.

In my rambling I kind of went out of order on twitter so I shifted a few tweets around when the content could be combined. That being said lets quickly dive into the overall ripple effect beyond league and teams rights from national cable agreements.

1. Understanding the Business Models: Local Sports Networks make a majority of their revenue from subscriptions. Their advantage is that it is not huge dollar amount per subscriber and is included in less expensive cable package offerings. National Networks such as ESPN carry higher rates per consumer, pay higher amounts to leagues for deals and therefore typically need those subscription dollars to operate as advertisements sold do not equal or surpass content rights plus expenses.
2. League Rights: Even with the league rights signed for long periods of time there are predictions that within four years there will not be money left to pay for these deals. That is reality and not a scare tactic. Large-scale deals have fallen apart before, and this is no exception. Until a more standard business model of advertising/revenue covering expenses, the current deals are at risk.
3. Local Rights: One of the more interesting factoids I see in ratings, such as the NHL, is the league leaders in the United States will typically average a 5 -6 rating. Meaning on any given night 95% of those who pay the bill are not consuming your content in the best case scenario. While leagues rights have received most of the press local rights have struggled in their own way such as the Dodgers disaster which derives from companies fighting forced packaging at inflated rates. The end result is some networks expanding their geographic regions. Or to put it more bluntly forcing more people to pay as part of their subscription to raise revenues. It may not be getting the press but local rights may not be far behind the national networks.
4. Bowl Games: Ticket Sales have long since been forgotten for many bowl games. ESPN needed content. College Football really likes money. College Bowl Games may be the first to crumble partly because of their need for TV money to survive and partly because most never bothered to learn how to sell tickets. Even if tickets sales increased through better modeling it may not be enough to keep most from folding. In fact, one of the first fall outs from changing media rights landscape could and most likely will be bowl games themselves.

The failure of this all might be me most heart breaking when the final nail is hammered in, not because of just the obvious of jobs lost and people effected, but how it could have been avoided.

I wrote about non-conformists before and I believe its more relevant in this post than any others I have written. Taking the easy way out can benefit you in the short term but there will be an expiration date if it doesn't make sense for the consumer. Take note that for various reasons in the next decade the average life span of a Fortune 500 company will be less than 15 years

The article cites an in-depth study by the Harvard Business Review on knowing when to reinvent. In sports media rights there could not have been and currently be more obvious signs. The difficult part to accept is that the current digital infrastructure has almost been developed to help these industries the most. Music, Sports Franchises and Artists all carry very specific and easily identifiable brands and digital or other modern tactics makes reaching consumers easier.

The irony is there has been a desire to maximize the media rights dollars while failing (or caring) to maximize all other revenue in the business model. Those dollars will come as long you begin to utilize what you never learned but others did. A readily accessible digital infrastructure. Do not continue to take your brand for granted by not utilizing the tools made available to revenue generating retail based industries.

I think this powerful quote from the HBR article sums up the entire sports media rights situation:

"Another important step is to conscientiously avoid getting caught up in present-day obligations. In a survey of executives from 91 companies with revenue greater than $1 billion across more than 20 industries, Innosight asked: "What is your organization's biggest obstacle to transform in response to market change and disruption?" Forty percent of survey respondents blamed "day-to-day decisions" that essentially pay the bill, but undermine our stated strategy to change." It was by far the most prevalent response. The next most popular answer, at 24 percent, was "lack of a coherent vision for the future." 

As referenced in the above tweet, I wrote a deep look at why teams and leagues are finally beginning to partner with the secondary market and its retail distribution network. As discussed, the overall issue with team business performance is the ease of dollars from media rights providing an outlet to run poor retail, marketing, technology and innovation.

The irony can be summed in a conversation I had with branding and revenue consultant Dave Wakeman last week on this very topic. In summary he mentioned that the problem with the team business model is they love economics when it raises prices but dislike the very same principles when the prices are lowered. In a sense they feel cheated.

The irony continues when you figure that ownerships have largely ignored retail transactional revenue while allowing management to bloat expenses through the most expensive way to move a product (sales and staffing) yet will then punish fans by driving up their season ticket costs because they are afraid of lost revenue.

"We don't care about revenue streams because our media rights deals lined our pockets and increased our franchise values. Unless you spend millions of dollars on infrastructure and marketing through the secondary each year. And make money doing it. Now we are mad. We don't want to invest you see. We just see that money and for some reason now want to grab it". Sounds crazy, right?

There are two dirty little secrets I will let you in on the secondary market:

1. We love the primary. Our websites and brokers are business men. A healthy primary is great for the economics as is better inventory control and a fair process. The economic model works better, and this includes limiting restrictions which, opposite of what of flooding the market with tickets does, it drives up consumer pricing based on inventory on the market.
2. We admit that in some instances the secondary may not be the best option for your business. But that is few and far between. Meaning each year out of the major sports leagues no more than a handful of teams can operate currently without a healthy secondary.

As business leaders, it is time to stop bloating your expenses with limited results. Stop worrying that you are going to be one of the 5 or 10 teams that lost money to some resale and realize that even if you see missed revenue in a single year, the long term sustainability of that is minimal. By embracing these outlets, you will save expenses and drive revenues for the long term. You will win way more than you lose. It is a suckers bet that you are not playing and should be.

This is a quick recap on some points I put out there later in the day, but there are two ideas I would like to a deeper dive into:

1. There has been a lot of superficial reasons thrown out there to as to why this has happened especially in regards to the timing. One of the most popular, because of our current political climate, is that ESPN has taken a left leaning reporting look of the country outside of their sports comfort zone and this has driven away fans. While I agree any nonpolitical programming that takes a side runs the risk of most likely losing viewers with opposite opinions as well as those that agree but grow tiresome of the rhetoric in the wrong platform, I assure you that only affected ratings and not cord cutters. The issue people seem not to realize is that cord cutting is not limited to those who do not specifically want ESPN anymore. That is the core issue. There are people who watch and DON'T watch ESPN that got sick and tired of paying for things they have no interest or do not see enough value in including ESPN and other channels. That is how the model works, and that is exactly why it is failing. ESPN is losing money from consumers and nonconsumers who supported a model that makes little sense in the long term.
2. When I say, there is no solution I mean with the current business model. It will never be the same. While I think the result will be less revenue and smarter business models, it is going to be up to the teams themselves to make the decision of when. Until then expect empty seats even in strong markets for the regular season and playoffs, expect to be hounded on the phones and concourse by young whipper snappers who have seen your name on a call sheet and expect those final years of checks to be cashed. When it changes, it will be quick, and the consumer will find themselves back in control

----------------------------------------------------------------------------------------------------------

So where do we go from here? Do we continue to wait for the inevitable or do we plan for the future, develop integrated business plans, get ahead of the curve and bring the industry back to the fans (consumers) where it belongs. I vote for the latter. How do we get there? Well, the for the complete answers we may need another article. For now, lets start with the following:

Integrated Business Modeling: Digital

I have written in a few articles about how the lack of overall focus on additional revenue streams for teams makes little sense overall. As stated throughout this piece the size of media rights has had a detrimental effect on ticket sales, but the reasoning is more of an outlier. Meaning, the changes could have been made, but ownership simply did not care to. A continuation of the media rights issue is that it stalled digital business planning. And not in the traditional sense.

There is money to be made through digital outlets beyond streaming or social and if you get enough of a following you can either co-brand your own through sponsorships or work with companies such as the youtube model to profit off of viewership. These are just a few of the examples, and that again could be its own article. However, the point remains that being handcuffed by high dollar media rights and funneling all content through their outlets, teams see less of a return on their own productions, and it is the fans who are missing out on their preferred channels.

While in the short term, of course, you win because the media rights are too high to pass up. In the long term, this strategy will become a necessity in adding additional revenues back into the fold beyond ticket sales and sponsorships.

Integrated Business Modeling: Retail and Consumer Revenues

I will not focus too much on transactional digital retail here because the value as a distribution channel has been discussed at length here and in an above-referenced article. What I do want to focus on is the overall consumer business planning and distracting from "one column excel spreadsheet budgeting."

For example, as I wrote about in this piece on the issues with suite renovation to smaller all-inclusive areas, the overall revenue planning has been poor for ticket sales. In other industries, you need to take into account the long and short term goals of all revenue streams combined. Too many times one category total will increase, but it wasn't compared to how it directly effected other revenues. The best example of this is how teams fail to focus on non-revenue shared sales as outlined in their Collective Bargaining Agreements.

Such is the case with cutting out the potential number of customers on your suite level, limited the number of revenue generating catering opportunities from concerts and including food/beverage therefore not gaining any revenues. These revenues are pure profit to your ownership group and should improve the long-term health of your team on and off the playing surface. Every aspect of your operation should be included in your budgeting including how the revenues are dispersed league wide. Failure to do so on a large scale is a disservice to your ownership group. It may hurt one side of the balance but overall if you embrace the entire model the dollars will come.

Content, Branding, and Digital Marketing

As mentioned above, being glued to media rights has in essence stalled other aspects of the business, mostly revenue drivers. One spot that is consistently overlooked is in the content marketing and branding segment.

As a humble brag, I hit the gym on most mornings around 5:00 am. It is early, and I need more than a little caffeine to get me going. So, one of the first things I do is open up my Pandora app and select an upbeat station to help me get through my workouts. I don't pay for it, and I deal with the limited skips and advertisements. What I have noticed is there are only a handful of artists who have embraced this model, and I hear their music daily Most others are purely offended that they may make a little revenue from this outlet. The smart ones have realized that they are getting their brand in front of millions of potential consumers at ease while making a little bit of cash too.

Teams content needs to be changed from quirky Twitter accounts with banter and ticket offers, to what the consumer wants. Highlights, behind the scenes, hard to find elsewhere information and digestible content. And they want it in the format they prefer. Yes, you may or may not get paid directly, but you get the brand out there at the cost of limited resources. Most national brands would kill for that much easy exposure. Sports and Entertainment outright fight it. But maybe instead of fighting what you don't understand, if you learn to embrace the consumer's wishes, the dollars will come.

Modern B2B

Until a few years back my career in sports was mostly on the B2B side which I learned was a struggle because I favored selling through relationships after using data, marketing and digital to bring leads to me. If you think some are behind the time with ticket sales, then there may not be a term for the current B2B efforts. Especially in premium, the industry continues to fight reality and for some reason would rather see empty suites, renovations and less non-revenue shared sales than modeling to decrease expenses and increase the bottom line.

As premium can be the driving force behind large revenue amounts at once and carries weight on revenue that is not shared with the league or players, it also may be the most important. And because of the size of the deals renewals are off the charts regarding importance. You are selling a professional ROI service and your customers expect professional and educational content as well as a seasoned relationship builder. Providing amenity based offerings through the wrong channels in the wrong way is common starting point in the industry.

For example, the constant posting of individual slightly above entry level promotions or pictures of the culture of your organization on LinkedIn accomplishes nothing within the B2B community. The exception being turning off professionals who may partner with you. The overall model needs a reboot.

Fixing your premium efforts should probably be the first step in reorganizing into the future. And the reality is you will save money. Cutting expensive staffing and shifting your resources to inbound marketing, digital efforts, data and a lean but experienced staff will show results instantly. .

The model is the future of B2B. Just like all the other outlets. Embrace the future and outlets the customers expect, and the dollars will come.

Technology and Data

Take this info from a blog post I wrote two years ago referencing an industry wide mobile and technology survey:

- 33% of teams still do not use a CRM system

- Only 17% of teams track concession sales data

- Only 28% of teams track social media data

At the time I wrote the post you could almost solve all of those problems for virtually nothing out of your budget. You could also invest about $250,000 annually to run a business close to how other customer and data centric businesses such as casinos or hotels do. Two years later you can no longer afford to be behind the curve. You can not wait forty five years after American Airlines implemented the first consumer based loyalty platform to dive into your own. You can not be the last industry full of consumer data to actually collect and utilize that very data. You can not be the last to make desired content hard to consume. You can not be the last to fully integrate with social when there are thousands of companies to do it for you.

And you can not be afraid to invest the dollars to make it all work. The easy way out is over. It officially set an expiration as of last week. It is easy to collect consumer data, do basic analyzing and then shuffle it off for some email marketing or a follow-up phone call. Instead of having reps at a game chase fans all over the concourse and offer gifts in exchange for something, invest in your platforms.

Trust me, they exist. In other industries such as hotel or casinos, they have invested in and utilized the tools to drive their businesses. To compete, they have to. For too long sports team were saved by the media rights pay outs. That will no longer be the case. Embrace the available tools and the dollars will come.

Make it Fun Again: Realize Why Fans Attend Games

Lets be honest. The game experience nowadays stinks. Instead of losing sleep every night because you think you may lose a few dollars on a handful or resold seats, realize that by running a smart business model you will win in the long run. Too many corporate seats needing expense filled deals to fill, too many empty seats from over pricing and limited digital infrastructure marketing, too many obvious but price undercutting promotions and a focus on thinking that fans will or will not pay based on how funny the in-between the whistle videos are. Let me let you in on a little secret:

If your prices are in line, your arena is full of engaged customers, your arena is loud, and the game is a good time none of that matters. We seemed to have lost the actual reason of why people give you money. To attend a live sporting event.

Its funny how we have gotten to this point. We fight for every dollar in one instance and over compensate our game day experience, while at the same time ignoring almost every other potential dollar and not driving our easiest revenues. Sponsorships as part of the game are important but only if you understand the experience is based on the fans and event itself and not your version of entertainment.

Too many times we have gotten cute with our seat filling marketing which is the result of poor planning from the start. The Netflix of sports is lazy and too inexpensive. Overcharging a season ticket holder and then discounting publicly often runs fans off to never come back. If you are not worried about every dollar in your premium department as stated above, why are you fighting for a minimal amount of additional dollars from your most loyal customers? Remember, it is 2017 and the era of information. They know about your discounts and they are not happy.

Additionally, renaming season tickets a "memberships" is the sports business equivalent of paper pushing. Yes, you need to treat your customers well. Yes, amenities are fine. No, thinking that a summer BBQ and trinkets as part of fancy renamed "year round" season ticket package will save a renewal over correct pricing and a great time at the game is not the correct market planning. Run your business first, price correctly, provide what the consumer wants and promote your brand through the channels preferred. The dollars will follow.

----------------------------------------------------------------------------------------------------------

Read Mike's other articles on similar topics:

The Dangers of Pricing off of Secondary Marketing Sales

The New World of Premium Seating

What did you Consider before Renovating your Suites

Why Bowl Games Need the Secondary Market

3 Reasons why Businesses are Gravitating to the Secondary Market

Non-Conformists are Moving the Ticketing Industry Forward

----------------------------------------------------------------------------------------------------------

Mike Guiffre, VP of Sales at TicketCity

512.721.1166 / [email protected]

Twitter: @mjguff