If you think George Steinbrenner has had it rough this summer, consider what has happened at ESPN. In its first major league baseball season, the total sports network has racked up losses faster than a ski shop in Miami.
It was with great fanfare last year that ESPN announced a four-year, $400 million deal to televise as many as 175 games a season. But far fewer viewers than expected have tuned in, and the cable company could lose $40 million by season's end. "Baseball is a substantial loss leader for us," says the network's president and CEO, Roger Werner. "Maybe by the fourth year we will break even."
ESPN also is expected to take a bath in the first year of its new, four-year, $450 million NFL football package, which starts in November. Combined baseball and NFL losses may eat up as much as $60 million this year alone. Says an executive with a competing network: "Those huge rights fees are shrinking ESPN's once formidable margins, the advertising market is flat, and politically it's almost impossible for them to raise subscriber fees. ESPN is going to find the future more and more difficult."
ESPN's future looked anything but difficult last spring, but the network got off to a bad start with baseball. Strike 1 was the lockout, which scuttled ESPN's plans to televise spring training games and promote its regular-season package. Strike 2 was the overall rating for the first 10 weeks of the season. ESPN estimated that it would get an average of 5.0 (or 2.8 million homes) for its Sunday night games; it wound up with a 3.0, a shortfall of 1.1 million homes. Audiences for Tuesday and Friday night doubleheaders also were disappointing.
By late May, ESPN had moved quickly to placate advertisers. The rate for 30-second spots was slashed. Buyers who had received ratings guarantees were compensated with free ad time. "So far we've given away $9 million worth of inventory," Werner confesses.
ESPN points out that it had no experience to draw upon when it made the 5.0 guarantee. And its ratings in the first half of the season might have been higher were it not for tough competition from the broadcast networks (May is a sweeps month, in which the networks trot out blockbuster programs, such as season-ending episodes of Twin Peaks) and the NBA and NHL playoffs (chart).
But ESPN may not have sufficiently considered that baseball is a game of mostly regional interest. The only people who really care about a Brewers-Indians game are from the Milwaukee and Cleveland areas. National telecasts of regular-season games have never done well. In recent years NBC's Game of the Week was a money-losing annoyance NBC had to put up with in order to get the profitable playoffs or the World Series.
Despite its losses, most TV observers believe ESPN's move onto the diamond is in its long-term best interests. The network got to where it is today partly by showing obscure sports. But to reach the next plateau and secure its future in a competitive market, ESPN had to play in the big leagues. Pro football and baseball programming brings prestige to the network and enhances its appeal to advertisers seeking to reach male viewers.
"These investments may flatten out the bottom line for a while, but ESPN needed them," says Larry Gerbrandt, a cable TV analyst for Paul Kagan Associates, a media research firm. "And even if they lose money on a given package, they will still be profitable as a network."
Werner, of course, is quick to agree. "Our [baseball] game ratings are 75 percent higher than those [for programs in the] same time slots last year," he says. "Daily ratings are up by any measurement, and ad sales for the first six months of the year have risen 70 percent. Baseball has made a net positive contribution."
Werner is aware that he will have to manage the transition to higher-stakes sports coverage with care. "We can handle a couple of loss leaders," he says. "On their own, they won't make ESPN unprofitable. But I doubt we can afford to take on any others."