Brocker.Org: Warren Buffett’s 1991 letter perfectly explains ESPN’s troubles



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On Wednesday, a brutal round of layoffs at ESPN resulted
in roughly 100 employees being fired
, including a number
of high-profile on-air talent and reporters.

The firings came after a long-term downtrend for ESPN’s fortunes
as a decline in subscribers and ratings have hit the company’s
bottom line.

The so-called “Worldwide Leader in Sports” has been
struggling to navigate its future in a world with streaming
services, readily available sports highlights, and sky-high costs
for rights fees.

As is many times the case with stumbling business models (see

Buffett’s Sears prediction from 2005
), the reason behind much
of ESPN’s current troubles was pretty excellently summed up
by Warren Buffett in a letter to Berkshire Hathaway’s

one comes from 1991
 and was pointed out by Ben Thompson at
, in a newsletter on Thursday.

“The economic strength of once-mighty media enterprises continues
to erode as retailing patterns change and advertising and
entertainment choices proliferate,” Buffett said.

Buffett noted that the media business had come to “resemble
businesses more than franchises in their
economic behavior.” These are two terms that Buffett uses to
describe businesses built to last versus those that are not.
Here’s a breakdown of the differences:

Franchise: “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.” With those advantages, Buffett
, a business can increase their costs without much
concern and tolerate poor management.

Business: “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,” Buffett
Additionally, the letter said, these businesses have
no room for poor management.

Essentially, ESPN for years was the only place to find things
like sports highlights and many live sporting events. While it
still commands a considerable number of live sports rights, the
need to watch programs like SportsCenter — once
ESPN’s flagship program — has diminished with the advent of
online highlights and social media.

Additionally, the once hard-to-find analysis provided by ESPN
has spread to a bevy of sports media start-ups and even well
researched posts on places like Reddit.

At the same time, ESPN draws a
large part of its revenue from cable carrier rights
essentially a fee paid by cable providers to ESPN to have the
channel on its air waves. With the rise of cord cutting, ESPN has
seen its subscriptions slide. Previously, subscribers needed
to have ESPN as part of their package in order to get basic
cable. With skinny bundles and a host of options beyond
cable, there are fewer subscribers to point to for ESPN to
justify the high fees.

Thus, looking at Buffett’s franchise definition, there is
both a close substitute for much of ESPN’s programming and the
need to have ESPN as part of a cable bundle has diminished.

Add in the fact that ESPN is becoming more dependent on live
sports rights, which means the leagues it contracts with
can demand even more in fees
, and there is a cost problem
brewing as well.

Now the layoffs most likely are marginal cuts for the network
that pays billions in sports rights every year, but they clearly
signal that ESPN’s business model is no longer unassailable and
prove that they have shifted from Buffett’s definition of a
“franchise” to a “business.”

“In the business world, unfortunately, the rear-view mirror is
always clearer than the windshield,” Buffett wrote.