ESPN layoffs, and the creative destruction of sports capital

ESPN layoffs, and the creative destruction of sports capitalOn Wednesday, ESPN, the sports broadcasting behemoth, laid off dozens of employees. Some were highly recognizable on-air personalities. Others were lower profile reporters and journalists.

It’s a visible demonstration of the free market’s powers of creative destruction.

ESPN has decided it no longer gets sufficient return from its own marginal talent

It’s tough to think of layoffs as a business decision. The impact is so personal. Real people, with real families, are losing real jobs. They’re losing the incomes that came with those jobs. They no longer get to spend their days with some of their closest friends. It’s heart-breaking.

Still, from ESPN’s perspective, the decision is purely about return on investment. The company has decided it no longer gets sufficient return from its own marginal talent.

I’m using “marginal” in the economic sense. ESPN has three options, when it comes to its talent base: add to it, hold it steady, or reduce it. For decades, ESPN consistently added personnel. The thinking was that each new person brought value in excess of ESPN’s financial commitment to that person. In a growing business, it’s easy to justify bringing new people onboard.

When the business is no longer growing, or when costs grow more quickly than revenues, the calculus can change. Cable subscriptions are starting to decline. The licensing fees to broadcast live sports are growing. ESPN’s profitability is getting pinched. In this new reality, return on investment at the employee level looks different than it did in the past.

ESPN has to respond to countless competitors

In hindsight, it’s easy to see that ESPN’s model worked great in the cable television world of 10 to 20 years ago. You had enough channels to allow for specialized programming. But you didn’t have so many that you were competing much within your niche.

Yes, CNN had a sports network at one time. Fox has had sports offerings. But ESPN was dominant. It had a first mover advantage. Within the space of cable television, there weren’t enough avenues to meaningfully differentiate your channel from ESPN.

ESPN certainly could not have worked before cable. There were too few channels. You couldn’t dedicate a whole network to sports. And it’s also clear that it can’t work the same way in today’s media landscape. There are way too many choices, both on television and on the Internet.

Also, the United States sports landscape is changing. Soccer continues its steady growth in popularity, in part through MLS. We have Major League Lacrosse, and the ongoing maturation of eSports.

The sports themselves are changing. But so is the nature of sports journalism. Twitter is the preferred medium for breaking high-impact sports stories. Sports punditry is distributed across the web, from The Ringer to Bleacher Report to countless other sites.

ESPN isn’t the behemoth it once was. It has to fight battles on way too many fronts. The fact that ESPN must shrink to return to a profitable core isn’t a shock.

ESPN is releasing capital to be used more productively elsewhere

Wednesday was a sad day for the ESPN employees that got laid off. It was a sad day for everyone connected to those people.

But it’s a happy day for fans of innovation. ESPN had a sub-optimal personnel infrastructure. The network has now freed those people to find jobs where they bring more value. The network also freed the dollars spent in compensating these former employees. Those compensation dollars were not yielding a justifiable return. The market spoke this truth to ESPN’s management, which finally relented.

What happens to those dollars that ESPN no longer spends on employee compensation? They remain with ESPN’s owners, the largest of which is Disney.

What does Disney do with these dollars? Probably returns them to shareholders, in the form of stock repurchases or dividends. Disney might possibly invest those dollars elsewhere, say by building new theme parks or launching new film projects.

Even if the dollars go to shareholders, the shareholders will use them in any number of ways. The point is that the dollars are steered toward economic activity that will yield a greater return than ESPN was generating with them. That’s the important part. That’s the essence of the free market’s powers of creative destruction.

Layoffs are a visible cost that fuel a much less visible benefit

Layoffs are a real and visible cost of our free market system. The market decides which jobs are worth saving, and which must vanish. If we focus only on the cost, we lose sight of the real benefits the markets bring. As Henry Hazlitt said in Economics in One Lesson:

This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on the special group but on all groups. It’s the fallacy of overlooking secondary consequences.

In this case, we can focus on the layoffs. We can lament the pain that these layoffs inflict on the people who lost their jobs. And we’re right to make that realization.

At the same time, these layoffs are necessary to fuel further innovation. Our economy is different now than it was 10 to 20 years ago. Large sports networks cannot productively employ as many people. New jobs are opening up. Talent will be deployed in unexpected ways that will bring even more value.

We don’t have to restrict ourselves to sports here. The ESPN layoffs might not fuel a hiring spree at sports websites, or in support of nascent sports leagues. The resources might be deployed in a totally unrelated field, like theme parks or movies or anything else imaginable.

The ESPN layoffs are sad. It’s an end of an era. Some of the people affected will struggle to quickly find work that compensates them at the same level. It’s exactly the predicament that farm workers, and textile workers, and automobile workers have faced in the past.

These changes are sad for the people involved. As a society, we need to ensure that people don’t become destitute just because the market no longer values their skills the way it once did.

On the plus side, the ESPN layoffs are as clear a demonstration as we’ll find that the market is working. The wheels of innovation are turning. Yes, it’s uncomfortable when the costs are so visible. But those costs are the price we pay for the economic advancement we hold so dear.

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