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ESPN, Inc., the leading destination for American sports fans, continued its growth in 2002, led by major programming acquisitions and original programs, increased viewership, greater distribution of its domestic networks, and international network launches.
ESPN, Inc. is a pioneer among basic cable television networks, devoting its entire programming to a single subject: sports. By 2002 the company's flagship network, ESPN, reached more than 87 million households and televised all of the major professional leagues: baseball, football, hockey, and basketball. According to the 2002 annual report of ESPN's parent company, Walt Disney, ESPN was the number one basic cable network in terms of affiliate, national, and local advertising revenue. Considered by many to be the most successful basic cable network, ESPN delivered the hard-to-capture audience of young males to a wide range of advertisers. Cable system operators consistently selected ESPN as the number one cable network in perceived value.
Early History: 1978-80
ESPN, Inc. was the brainchild of Bill Rasmussen, an unemployed sports announcer. In the spring of 1978 Rasmussen was fired by the New England Whalers of the World Hockey Association as its communications director and play-by-play announcer. He began looking for a way to broadcast University of Connecticut basketball games through cable television operators in the state. At the time, satellite technology was a relatively new way of transmitting programming to cable operators. RCA had an underused satellite on which Rasmussen could lease time. With six of 23 active transponder sites fully available, RCA was eager for customers.
After discovering that it was cheaper to rent satellite time from RCA for 24 hours rather than for five hours, Rasmussen decided to offer 24-hour sports programming on a national basis. RCA offered Rasmussen an easy payment program, so he used his credit card to lease space on RCA's Satcom 1 in July 1978. He called his company Entertainment Sports Programming Network, Inc., or ESP Network for short. According to company legend, it became ESPN when the company's letterhead came back that way from the printer.
ESPN began broadcasting in September 1979 with limited airtime during the week and 24-hour coverage on the weekends. The company had signed up 625 cable system affiliates, reaching more than one million of a total of 20 million households that had cable at that time. Its first televised event was a slow-pitch world series softball game between the Milwaukee Schlitzes and the Kentucky Bourbons. ESPN's first sponsor was Anheuser-Busch, which purchased $1.4 million worth of advertising--a record for cable television. Through a deal with the NCAA, ESPN broadcast college football games as well as other sports. To fill airtime, ESPN would often broadcast the same games more than once. In March 1980 ESPN covered early rounds of the NCAA basketball tournament, which featured future NBA stars Larry Byrd and Earvin "Magic" Johnson. In September 1980 ESPN began broadcasting on a full, 24-hour basis. New programming included weekly boxing matches.
Becoming an Established Sports Network: 1980s
ESPN's early financing came from Getty Oil, which invested $10 million in the company in 1979 for a controlling interest. Getty hired Chet Simmons, president of NBC Sports, to run ESPN. After seeing its financing rise to $25 million with no profits in sight, Getty hired management consultant McKinsey & Co. to assess ESPN's future. McKinsey's lead consultant on the project was Roger Werner, who forecast that ESPN would become profitable in five years with another $120 million investment. Werner joined ESPN as its vice-president of finance, administration, and planning, and developed a new business plan. Up to this time ESPN's only revenue stream came from advertising. Werner proposed charging cable operators, who had been receiving ESPN programming for free, small monthly fees, starting at six cents per subscriber and gradually increasing to 10 cents by 1985. While this innovative system of affiliate fees eventually became standard practice among cable programmers, cable operators were not interested at first. Werner received help in convincing cable operators of the need to support ESPN from the company's new CEO, Bill Grimes, who replaced Chet Simmons in June 1982. Meanwhile, Werner was promoted to senior vice-president. When CBS Cable folded in October 1982, Grimes and Werner convinced major cable companies that ESPN could not survive without subscriber fees. About half of the major cable companies agreed to ESPN's rates.
By the end of 1983 ESPN was cable's largest network, with a reach of 28.5 million households. In January 1984 ABC, Inc. bought a 15 percent stake in the company, then acquired control of the company six months later. The acquisition of ESPN by ABC put the sports network on firmer financial footing and provided a foundation for its phenomenal growth in the coming years.
When college football on television was deregulated through a court decision in 1984, ESPN began broadcasting Thursday and Saturday night games. These college football broadcasts helped improve the image of ESPN's audience with advertisers, who began noticing upscale demographics among ESPN's viewers. When ESPN announced it would cover the 1986-87 America's Cup competition, advertisers quickly bought up all of the advertising time for the network's 70 hours of coverage of yachting's premiere event.
Following its acquisition by ABC, which was acquired by Capital Cities Communications, Inc. at the beginning of 1986 to form Capital Cities/ABC Inc., ESPN landed major broadcasting contracts from the National Hockey League (1985), the National Football League (1987), and Major League Baseball (1989). According to Cablevision, ESPN became part of the American consciousness when it broadcast the finals of yachting's America's Cup live from Australia in January 1987. The New York Times devoted a front-page story to the coverage, noting how people were hosting late-night and early-morning parties to watch the races, or gathering in bars to cheer on the American team. Two months later the National Football League awarded ESPN its first-ever package of games to be broadcast on cable television, which began in August 1987 with the televised broadcast of the inaugural game at the Miami Dolphins' Joe Robbie Stadium against the Chicago Bears. The four-year contract was renewed for 1990-93 at a cost of about $450 million to ESPN. In addition, ABC-TV paid about $900 million for its package of Monday night and weekend games.
ESPN also expanded internationally in the 1980s. The company began distributing programming overseas in 1983, and in 1988 it formally created ESPN International to launch networks in other countries. In March 1989 ESPN Latin America was introduced, followed by ESPN Asia in 1992. ESPN gained a foothold in Europe in 1993 with the launch of a redesigned Eurosport in partnership with European broadcasters TF1 and Canal Plus.
Expanding Its Brand: 1990-95
ESPN began the 1990s with a new president and CEO, when Steve Bornstein replaced Roger Werner. Werner, the former McKinsey & Co. consultant, was ESPN's president and CEO from 1988 to 1999. He left ESPN to become president and CEO of Daniels & Associates Inc., which owned a wide range of sports properties. Bornstein was formerly ESPN's executive vice-president in charge of programming and production and the network's second in command. He first joined ESPN in 1980 as a program coordinator.
Under Bornstein's leadership, ESPN extended its brand name in the 1990s by launching new networks, expanding globally, and signing contracts to broadcast games of major sports leagues. The brand expansion began in 1991 with the launch of ESPN Radio Network in conjunction with the ABC Radio Network. ESPN Radio began with 16 hours of programming per week and was offered to 200 radio stations. In 1993 ESPN introduced a second cable network, ESPN2, which began transmission on October 1, 1993. Billed as an alternative sports network, ESPN2 was expected to reach a younger demographic than ESPN. Its initial programming included college basketball games, arena football, volleyball, motor racing events, fitness programs, soccer, karate, kickboxing, and other sports, as well as two sports and talk shows. When ESPN2 was launched, it reached about nine million homes, compared to 61.7 million for ESPN. ESPN2 had agreements in place with 15 of the top 20 multiple cable system operators (MSOs) and was expected to reach 30 million homes within a couple of years.
ESPN's first contract with Major League Baseball was a four-year, $400 million package that was signed in January 1989 and began in 1990. It called for ESPN to broadcast 175 games, six games a week. The contract was baseball's first cable package since 1983. At the time ESPN reached more than 50 million households. After sustaining losses of more than $200 million on its baseball broadcasts, ESPN announced at the end of the 1992 season that it would not renew its contract with Major League Baseball, which expired at the end of the 1993 season. At the end of the 1993 season, however, the two sides reached an agreement for a scaled-back six-year contract to begin with the 1994 baseball season.
In March 1993 ESPN acquired the sports programming division of Ohlmeyer Communications Inc. Donald Ohlmeyer, the company's founder and CEO, had recently been named president of NBC West Coast. His company was known for developing professional golf's Skins Game, among other sports programs. It also produced the television coverage of the Indianapolis 500 auto race.
Another acquisition took place in 1994, when ESPN acquired an 80 percent interest in SportsTicker from Dow Jones. SportsTicker was a sports news information service. ESPN planned to use its sports feed to supplement other information sources for its recently launched online service, ESPNET, which was available at the time through Prodigy.
ESPN began developing its Extreme Games competition in 1994, and the first annual Extreme Games were held in June-July 1995. ESPN and ESPN2 broadcast more than 60 hours of Extreme Games, which included nine extreme sports such as in-line skating, mountain biking, skateboarding, sky surfing, and street luge racing. Television coverage also included a beach party and concert. In 1996 the name of the competition was changed to X Games, with more than 400 athletes competing in events that included bungee jumping and bicycle stunt riding. ESPN and ESPN2 carried about 35 hours of X Games programming in 1996. By 1997 the X Games enjoyed a range of merchandising tie-ins that included sporting apparel, music CDs, videotapes, and video games. Advertising for the annual event was sold out each year. The EXPN web site provided online coverage of a variety of extreme sports.
It was during the first half of the 1990s that ESPN began facing serious competition from Fox Sports. In 1994 a new contract with the National Hockey League, whose games ESPN had been broadcasting since 1992, split coverage of the 1995 Stanley Cup playoffs between ESPN and Fox Sports and gave Fox Sports the right to broadcast the 1995 All-Star game.
New Parent, Walt Disney: 1995-99
In mid-1995 Walt Disney Company acquired ESPN's parent company, Capital Cities/ABC, giving Disney an 80 percent interest in ESPN and full control of its operations. The Hearst Corporation, a passive investor in ESPN, retained the 20 percent interest in ESPN it had purchased from RJR Nabisco Inc. in 1990 for an estimated $170 million. In April 1996 Disney announced plans to combine ESPN and ABC Sports into a single operating unit under the control of Steve Bornstein. Although Bornstein became president of both ESPN and ABC Sports, he made it clear that the two would remain separate and distinct businesses.
ESPN gained another cable sports network in September 1997 with the purchase of the Classic Sports Network (CSN), an independently owned cable service that broadcast classic sporting events from the past. While financial terms were not disclosed, it was reported that Disney paid between $150 million and $200 million. At the time of the acquisition CSN had about 11 million subscribers and was expected to gain another four million in November when Time Warner Cable in New York City began carrying it. Analysts agreed that CSN would provide a good cable outlet for ESPN's and ABC Sports' extensive sports libraries. CSN was ESPN's fourth network. At the time ESPN reached about 71 million homes, ESPN2 was available in 52 million homes, and ESPNews reached five million households.
In 1998 ESPN committed to new long-term contracts with the National Football League and the National Hockey League. An eight-year, $18 billion television package with the NFL was announced at the beginning of the year that included ABC, CBS, and ESPN. NBC and TNT (Turner Network Television) dropped out of the package. ESPN's and ABC's parent, Walt Disney, paid more than half of the total package, or $9.2 billion. ABC retained its Monday Night Football package and ESPN expanded its Sunday night coverage for the full season. Annually, ABC would pay about $550 million a year and ESPN $600 million a year to broadcast NFL football games for the next eight years. Later in the year, in spite of ratings declines, ABC and ESPN agreed to a five-year, $600 million contract with the NHL to start with the 1998-99 season. The contract gave ABC exclusive national broadcast TV rights and ESPN exclusive national cable TV rights for NHL games.
ESPN launched ESPN: The Magazine in 1998 under the direction of John Skipper, president of Disney Publishing. Previously ESPN's only presence in print was Total Sports, an irregularly published magazine produced in association with Hearst. In its first year of existence, ESPN: The Magazine achieved a circulation of 400,000 and ranked second behind Sports Illustrated in number of advertising pages. Its target audience was males in their 20s.
In 1998 Fox Sports' regional programming approach was giving ESPN significant competition for advertising dollars. Fox customized its "Fox Sports News Primetime" broadcasts for each local market. Its regional approach to baseball resulted in larger audiences nationwide than ESPN, even though ESPN reached 12 million more households that Fox/Liberty's 22 networks combined. Fox/Liberty, Fox Sports Net's parent, was a 50-50 joint venture between Rupert Murdoch's Fox Sports and TCI Chairman and CEO John Malone's Liberty Media.
Toward the end of 1998 Steve Bornstein was named to the newly created position of chairman of ESPN. George Bodenheimer, who had been with ESPN since shortly after its launch in 1979, became ESPN's president. Bornstein retained the presidency of ABC Sports. Further management changes took place in March 1999, when Bornstein was promoted to president of ABC Inc. Howard Katz, ESPN's head of production, was named president of ABC Sports.
During most of the 1999 baseball season ESPN was involved in a dispute with Major League Baseball. Seeds of the disagreement began in 1998 when ESPN preempted three Sunday night baseball games with football broadcasts. ESPN chose to move the baseball games to ESPN2 and broadcast the football games on ESPN. At issue was whether or not MLB had the right to reject any proposed preemption. Under its contract with MLB, ESPN had the right to preempt up to ten games per season for events of "significant viewer interest." At the beginning of the 1999 season, MLB announced it would terminate its six-year contract with ESPN at the end of the season. ESPN responded by filing a lawsuit against MLB to enforce its contract. After much squabbling, the two sides reached a compromise agreement in December 1999. A new six-year agreement valued at $815 million extended ESPN's right to cover Major League Baseball through 2005. ESPN agreed to increase the number of regular games it broadcast from 90 to 108 on both ESPN and ESPN2 and to increase its studio coverage of baseball. ESPN Radio would continue to have regular and postseason broadcast rights. ESPN.com would be able to show daily four-minute video highlight packages, and the company's video games division was granted interactive rights.
ESPN's combination of Sunday night football and the Major League Baseball playoffs pushed the sports network to the number one ranking in prime time among cable networks in October 1999. Its NFL games were the top three rated cable shows for the month, with one game achieving a 9.5 rating and viewership of 7.3 million households.
Mixed Blessing for Disney: 2000-03
In Walt Disney's annual report for 2000, CEO Michael Eisner praised ESPN as "in a class of its own." Dubbed the "worldwide leader in sports," ESPN contributed $2.6 billion in revenue in 2000 and $824 million in operating income. ESPN was worth $20 billion, or 25 percent of Disney's market value, but it only provided 10 percent of Disney's total revenue, according to one estimate published in Forbes. ESPN reached 82 million cable households, and cable system operators paid ESPN 70 cents per subscriber to carry it. ESPN's fees were double those of CNN and four times those of MTV. By 2002 Business Week reported that ESPN's fees averaged $1.50 per subscriber, more than double those of CNN, with contracts calling for annual 20 percent increases.
Nevertheless, ESPN was facing significant competition from Fox Sports as well as regional cable networks and numerous web sites. For the period from October 2000 to March 2001 ESPN's ratings declined 19 percent from the previous year, reaching their lowest point in three years. ESPN's ad revenue in 2000 increased by 3.5 percent to top $1 billion, while ESPN2's ad revenue increased 15 percent. For 2001 ESPN's ratings in the 18- to 49-year-old male group sank by 14 percent from the previous year, while Fox Sports' ratings increased by 12 percent in the same group.
Adding to ESPN's woes was the high cost of its premiere sports contracts with the NFL and Major League Baseball. To offset some of its costs, ESPN dropped some high-priced contracts, letting NASCAR jump to other networks in 1999 with a $2.4 billion six-year deal. In January 2001 ESPN declined to sign up golf's Senior PGA Tour, which went to CNBC. In an effort to buy some low-cost viewers, ESPN acquired B.A.S.S., the largest fishing organization in the United States with more than 600,000 members, in April 2001. B.A.S.S. ran two fishing tournament series, both of which already aired on ESPN2, and published three magazines. ESPN also hoped to attract viewers with original programming, including a movie about controversial basketball coach Bobby Knight that aired in March 2002, and a new late-night sports variety show that launched in April 2002. A large-format movie produced with Touchstone Pictures called ESPN's Ultimate X Games wasreleased in May 2002. Other revenue sources included eight Zone restaurants and a new interactive channel on DirecTV. In addition, ESPN's wireless unit delivered scores and sports news to cell phones and personal digital assistants for a fee.
New contracts signed in 2002 included a blockbuster six-year contract with the National Basketball Association for $4.6 billion. The contract began with the 2002-03 season, with ABC and ESPN paying $2.4 billion and AOL Time Warner's TNT paying about $2.2 billion. NBC, which held the NBA contract for the past 12 years, dropped out of the bidding. ABC and ESPN also signed a six-year contract with the Women's NBA in June that called for sharing expenses and revenue without having to pay a rights fee. Under another contract with Major League Soccer to broadcast the 2002 and 2006 men's World Cup soccer tournaments and the 2003 women's World Cup, Major League Soccer agreed to buy time on ABC and ESPN to air the World Cup matches. As part of the deal ESPN2 agreed to broadcast 26 MLS matches on Saturdays, with ABC carrying at least three MLS games including the MLS Cup and MLS All-Star game.
In an interview published in Multichannel News in mid-2002, ESPN President George Bodenheimer identified three programming areas of growth outside of ESPN's major sports franchises. They were the X Games, with ESPN introducing the X Games Global Championship in the spring of 2003; outdoor programming, including the Great Outdoors Games and programming from B.A.S.S.; and NCAA national championships in 15 different sports. He also cited SportsCenter as a solid piece of programming for the network; it aired its 25,000th live edition in August 2002, more shows than any other television series. In March 2003 Bodenheimer added the presidency of ABC Sports to his duties following the resignation of Howard Katz.
In the final quarter of 2002 ESPN continued to enjoy a high position in the cable TV ratings. It jockeyed with Lifetime Television for the primetime ratings crown, losing the top overall rating spot in October but gaining the number one position among adults in the 18-34 and 18-49 age groups. It beat out MTV in the 18-34 age group and USA Network in the 18-49 age group. For the year 2002, ESPN led 13 other cable networks in double-digit increases in primetime ratings. ESPN's pro football games led the way, capturing 9 of the 10 highest-rated positions for individual programs. As a result, ESPN was up 15 percent in households, 20 percent among adults 25-54, and 24 percent among adults 18-49 for the year.
Looking to expand its brand and gain additional revenue sources, ESPN began broadcasting in high definition (HD) in March with a live cablecast of an opening game of Major League Baseball. Its new spinoff network, ESPN HD, was a clone of ESPN and provided an exact replica of ESPN's 24-hour programming. At first only select events were broadcast in HD, giving ESPN HD subscribers higher quality sound and image. What more could a sports fan want?
Principal Operating Units: ESPN; ESPN2; ESPN Classic; ESPNews; ESPN HD; ESPN Interactive; ESPN International; ESPN Original Entertainment; ESPN Outdoors; ESPN The Magazine; ESPN Radio; ESPN.com; ESPN ABC Sports Customer Marketing and Sales.
Principal Competitors: AOL Time Warner Inc.; Fox Sports Networks, LLC; National Broadcasting Company, Inc.; Universal Television Group.
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