ESPN’s bad week

On Wednesday, Yahoo Finance’s Dan Roberts broke the news that ESPN would lay off more than 100 employees, many of them on-air talent and familiar names that sports fans would know.

And while people losing their job is always a tough story to cover, what this story captures from a strictly business perspective are the changes that media consumption are having at the Disney-owned (DIS) “Worldwide Leader In Sports.”

In a post on Thursday, Ben Thompson, a tech analyst who writes at Stratechery, noted that what’s happening at ESPN is really the transition from a company that once enjoyed a franchise in sports media and now, amid increasing competition, must act more like a business.

And, as Ben noted, none other than the Oracle of Omaha himself, Warren Buffett, wrote about this very issue with respect to the newspaper business back in 1991.

And the troubles are, really, no different for ESPN today.

Here’s Buffett:

The fact is that newspaper, television, and magazine properties have begun to resemble businesses more than franchises in their economic behavior. Let’s take a quick look at the characteristics separating these two classes of enterprise, keeping in mind, however, that many operations fall in some middle ground and can best be described as weak franchises or strong businesses.

An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company’s ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management. Inept managers may diminish a franchise’s profitability, but they cannot inflict mortal damage.

In contrast, “a business” earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management.

Until recently, media properties possessed the three characteristics of a franchise and consequently could both price aggressively and be managed loosely. Now, however, consumers looking for information and entertainment (their primary interest being the latter) enjoy greatly broadened choices as to where to find them. Unfortunately, demand can’t expand in response to this new supply: 500 million American eyeballs and a 24-hour day are all that’s available. The result is that competition has intensified, markets have fragmented, and the media industry has lost some – though far from all – of its franchise strength.

And so while for years ESPN’s standing as the “Worldwide Leader In Sports” was more than just a slogan, today the increase in sports rights, the competition from other sports networks, and the move by millions away from the traditional cable bundle have cut into the network’s franchise value.

For years, ESPN was, more or less, the entire reason someone was paying for cable at all. And its fees rose commensurately. Now, as the media landscape fractures and cable subscriptions fall, the biggest player is feeling the squeeze.

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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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