ESPN scratches and claws to sustain its margins amid souring pay-TV economics

Daniel Frankel, FierceCableAt a time when platforms like Netflix continue to increase their spending on content, can the most expensive programmer in the pay-TV ecosystem keep cutting costs and stay in the bundle?

ESPN is certainly fighting to do just that -- but it faces some serious challenges.

According to Nielsen, ESPN's pay-TV subscriber base is down about 7.2 percent since 2011, and it has lost about 3.2 million subs in just the past year. It's down to about 93 million TV homes in the U.S.

Meanwhile, ESPN's programming costs are absolutely staggering. The network pays $2 billion a season to the NFL just for Monday Night Football rights alone, and it's now paying $1.7 billion a year to show NBA games, too.

It's no wonder the network is suddenly struggling.

And there doesn't appear to be a magic bullet outside the pay-TV ecosystem, a la HBO Now, that would recoup ESPN's revenue -- at least not immediately. Although ESPN is participating in low-margin OTT gambits like Dish Network's Sling TV service, Disney chief Bob Iger told CNBC's Squawk Box over the weekend that it would be at least five years before ESPN launches a truly direct-to-consumer extension.

Asked about a la carte pricing, Iger told Squawk Box that any discussion "would be conjecture at this point."

But even if ESPN goes a la carte, the company would likely have to charge upwards of $40 a customer to afford its massive overhead costs. Today, experts estimate ESPN charges pay-TV companies around $6.61 per customer to carry its content -- making it the most expensive channel in the pay-TV ecosystem.

That's why ESPN is currently battling Verizon in federal court over the telco's move to delete ESPN from Verizon's new skinny bundle. Indeed, Verizon (NYSE: VZ) revealed that a third of its new FiOS subscribers are subscribing to its "Custom TV" skinny bundle that does not include ESPN. For its part, ESPN argues that its contract with Verizon requires the telco to include ESPN on all of its bundles, even the lowest tier.

If other pay-TV operators emulate Verizon's winning bundling strategy, ESPN's case will be pivotal in determining whether its rate of subscriber attrition accelerates.

Perhaps in response to all of its struggles, ESPN appears to be cutting its costs by reducing the number of its well-paid, on-air personalities. The network opted not to renew the contract of aging, controversial journeyman Keith Olbermann, as well as prolific Grantland creator Bill Simmons, the latter heading to HBO.

And then there's the curious case of Colin Cowherd.

ESPN tried to keep the third on-air titan, a firebrand AM radio host, but he opted to sign a richer deal with emerging rival Fox Sports 1. Last week, Cowherd, a lame duck running out the clock at ESPN, was told by the network to immediately leave the daily AM radio show he has hosted for the last 12 years, The Herd, after he made unfortunate remarks about Dominican Republic athletes.

The comments drew notice on social media -- particularly from Dominican-native Major League Baseball players -- and Cowherd later apologized for them. But ESPN's harsh reaction reeks of a media company trying to tarnish a brand, and keep it off the air, before Cowherd becomes a Fox Sports 1 competitor. Cowherd, after all, had escaped punishment for plenty of seemingly greater on-air transgressions on numerous occasions over the years. Is ESPN exploiting the current social climate and trying to send Cowherd off to Fox Sports 1 as damaged goods?

Asked for comment by FierceCable, an ESPN rep said the network stands by its earlier statement: "Colin Cowherd's comments over the past two days do not reflect the values of ESPN or our employees. Colin will no longer appear on ESPN." The rep added that Cowherd's last day at ESPN would have been July 31 anyway.

Regardless of the controversy and the blood loss, ESPN still insists it has a vast stable of on-air talent and it will remain the leader in sports programming.

ESPN, after all, still has coveted sports programming contracts with the NFL, NBA, Major League Baseball, the NCAA and virtually every other major sports league. A number of these deals, including its Monday Night Football contract, extend out more than five years. In terms of access to live sports, emerging competitors Fox Sports 1 and NBC Sports aren't even in the same league. And, while it's distribution might have ebbed, the network is still in more than 90 million U.S. TV homes.

"While the business model may face challenges over the next few years, long term for ESPN ... they'll be fine. They have pricing leverage, too," Iger said. --Daniel