What job cuts really mean for ESPN

The Disney-owned sports media giant is laying off 300 to 400 people. But it won't affect its fiscal future.

By Daniel Roberts, writer-reporter

ESPN's studios will be a little emptier after it lays off about 5% of its workforce.

FORTUNE -- The news this week that ESPN would be cutting 300 to 400 jobs reverberated across the media landscape. The sports network giant is one of the last remaining examples in the industry of all-out success and profitability. Even as newsrooms have shrunk and publications have folded, ESPN has hired, hired, and kept hiring for years. Et tu, oh Worldwide Leader in Sports?

The fact that ESPN would announce layoffs now was all the more shocking given that its corporate parent, the Walt Disney Co., No. 66 on the Fortune 500 this year with $42.3 billion in revenues, is in such healthy financial shape. Disney (DIS) made $5.68 billion in profits in 2012, good for the 32nd-largest profit total in the 500. The company's stock has risen 48% over the past 12 months vs. 25% for the S&P 500 (SPX).

The sports network, for its part, isn't talking much. It released a statement to the effect that it is narrowing costs in order to sustain growth: "We are implementing changes across the company to enhance our continued growth while smartly managing costs … It will make us more competitive, innovative, and productive."

One former employee that spoke to Fortune says, "Everybody gets pissed off because they look at the big Disney figure. I remember hearing a few years back a lot of people saying, 'Wait, the company made X billion dollars last year and they're cutting my salary, or they're implementing a [hiring] freeze, how could that be?'"

But, if anything, what is surprising is that ESPN was able to go until now without significant layoffs. The company has experienced hiring freezes, but it had not cut its workforce since 2009, when it laid off more than 100 people in its Bristol, Conn., headquarters office. The sports broadcaster basically sailed through a period when U.S. unemployment hit as high as 10%.

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In recent years ESPN has emerged as the biggest profit driver inside Disney. That kept it immune, to some extent, from tight scrutiny. But Disney has been working for some time to bring greater operational discipline to bear on its various divisions, and the process is finally catching up with ESPN. While 300 to 400 jobs is certainly significant, that size layoff represents a relatively small portion, about 5%, of ESPN's nearly 7,000 full-time employees overall -- about 4,000 of whom are in Bristol -- and a fraction of Disney's 150,000.

After years of expansion, ESPN, it seems, was carrying baggage it could stand to drop. One former staffer who spoke to Fortune confirms this. "There were a lot of times where you'd have three people who were all sharing probably two jobs," says the former employee. "That happened all around the building. There are people there from the '80s and early '90s, and they're starting to back up. For a while, ESPN was the only place that was growing. At some point, you run out of places for people to get promoted into."

The cuts, first reported by Deadspin, are being made across the board, but began with people in sales and technology. Sources within ESPN tell Fortune that more are coming. And not just at its Bristol, Conn., headquarters: nearly 20 staffers from the affiliate marketing office in Denver were among those given the pink slip on Tuesday. That office has been shut down because, as a current ESPN employee tells Fortune, it opened way back in 1981 when the cable industry was centered in Denver; over time that changed.

ESPN will also be shutting down Unite, a 60-minute show that premiered in August on ESPNU; ESPN's apparent hope for the show was to enter the social media space in a louder way and get access to younger male viewers. Similarly, Playbook, an offbeat section of espn.com meant for coverage of non-core sports, is closing down.

"It sounds like they're doing it over the next month," says one of Fortune's sources of the rest of the job cuts, "and that the production people are next. There's studio production and remote production, and there will be cuts from both, and people are telling me it will be more senior types."

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Along with its healthy profits, the sports network carries big costs: specifically, hefty rights fees, such as the $825 million it will shell out over 11 years to show the U.S. Open tennis tournament in its entirety, a deal that it just inked last week. Not to mention the billions ESPN pays to broadcast NFL and MLB games. A gargantuan new digital center that it has been building since 2011, which will house several studios and be the new home of the network's flagship SportsCenter, is set to open for business next summer and has also increased the fiscal pressure.

"They are making a huge deal out of that digital center" internally, says a Fortune source. "Your up-front costs on this stuff are so large ... So when people say, 'Really, you just paid $700 million for this deal, and you're cutting a guy who makes $35,000?' Well, yeah, but you've already committed the $700 million, there's no getting that back, so you've got to find the money somewhere."

Even despite these cuts, ESPN has said it is still in growth mode and will be hiring down the line. Sources say one area where it will add jobs is its just-announced SEC Network, which will offer 24/7 coverage of the football-crazed Southeastern Conference starting in August 2014. Today's job cuts may just be a way to raise capital for tomorrow's investments.