Will cable sports bubble burst?
TV: The broadcasting model for North American pro sports is facing a dramatic shift
In the late 1990s, ESPN was long past its cable upstart days, but it was still just as likely to broadcast a surfing event as it was baseball or football.
It needed a tent pole, though. And the way it found one helped it become one of the most powerful entities in the world of sports and provided a glimpse of how the broadcasting of live events would underpin the television business for two decades and make leagues, owners — and players — extraordinarily wealthy.
It also set the stage for a business that could currently be at a tipping point.
But back to 1998. ESPN’s parent company had just been bought by Disney. Executives were considering making a play for a full season of live NFL rights and a Sunday night package to complement Monday Night Football on Disney-owned ABC. It would cost close to US$9 billion over seven years, an extraordinary number in those days. Thanks, though, to an oddity in the way cable channels are distributed, ESPN thought it had figured out a way to make the numbers work.
ESPN charged cable distributors a per-customer fee, which was then passed on to households. They contacted the cable companies and asked, if ESPN were to hold NFL rights, would they agree to a 20 per cent increase in that fee? The answer was an across-the-board yes.
No cable company wanted to tell its customers that it had dropped the channel carrying a weekly primetime NFL game.
ESPN had one more trick: the 20 per cent increase would go up every year.
“Do the math,” one former executive recounts in Those Guys Have All the Fun: Inside the World of ESPN by authors James Andrew Miller and Tom Shales.
Thanks to the wonders of compound interest, a 40-cent carriage fee would quadruple over six years. Michael Eisner, the former Disney chief executive, was so excited that when the NFL deal was announced, he didn’t mention the 20 per cent increases because he didn’t want the cable companies to realize that to which they had agreed.
“Michael Eisner knew that the NFL was unlike any other programming and he used it to impose the most dramatic rate increases ever on cable customers,” an executive with cable giant Comcast says in the same book. “The NFL deal really made ESPN,” says another.
But the thing that made ESPN could yet be its undoing.
ESPN has lost more than one million cable subscribers in just the past two months. Although it still has a massive customer base of more than 88 million subscriptions, a sustained rate of decline like anything it has seen in recent weeks would cause major problems in short order.
When people talk about the sports cable bubble, this is exactly what they mean. ESPN and its competitors use live sports rights to boost the fees they charge to distributors; it’s now up to $7 monthly on average for the “worldwide leader in sports.”
The sports leagues, meanwhile, know that their content is so valuable that they keep increasing the fees for broadcast rights. ESPN is now paying almost US$3.5 billion each year just for the rights to the NFL and NBA and so it has to keep increasing the amount it charges to subscribers.
The accelerating loss of those subscribers, though, suggests that more customers have decided the cost for sports on cable has simply become too steep. One doesn’t need to be an economic forecaster to figure out that if subscription revenue dries up, the sports leagues will find it much harder to extract ever-increasing rights fees from broadcasters.
In Canada, the situation isn’t nearly as stark as what has been seen in the United States. When the federal government forced cable and satellite operators last year to provide a “skinny basic” television package at $25 monthly, there was widespread speculation that the drop in subscriber numbers for Sportsnet and TSN could be precipitous.
Keeping those numbers up helps sustain ratings against which the networks sell ads.
Rights fees here don’t approach the NFL monolith, but Rogers paid $5.2 billion for 12 years of national NHL rights and TSN is paying $200 million for a five-year CFL deal.
Canada’s major sports players have since their inception been bundled into various channel packages, so there remains a question over how many Canadians would actually pay for them if given a choice. So far, the evidence is most of them. The CRTC found that less than one per cent of households with television subscriptions moved quickly to the cheap package, but over time that number would be expected to creep upward.
Greg O’Brien, editor and publisher of Cartt.ca, a telecom and media news site, offers a few possible reasons for why the Canadian sports-broadcasting landscape wasn’t immediately changed.
Cable subscriptions here are cheaper relative to the U.S., for one, and none of the big players in a competitive market grew to ESPN-like dominance.
And the slimmed-down subscriptions are still in their infancy, so as customers consider them, they discover they don’t yet offer what they want.
“You might find that you could get rid of your current bundle to save $15 (monthly),” he says, “but then once you add TSN and Sportsnet to the basic package, it costs you another $20.”
Indeed, the CRTC has found that the bulk of its feedback on the skinny basic option is from Canadians who are angry that the $25 packages don’t include much, despite having “basic” right there in the name.
O’Brien doesn’t see a knifepoint poised over the cable-sports bubble, but nor does he see the industry remaining unchanged for another generation.
“It’s not going to fall off a cliff the way some people might think,” he says, but there is clear evidence that viewing habits are changing.
There are many theories for why NFL ratings in the U.S. dropped significantly in the early part of this season — lousy games and the presidential election being chief among them — but O’Brien notes there is evidence that NFL fans don’t really need to watch games anymore.
Between social media and various apps, someone can follow their team — or their fantasy team — solely on their phone.
“They put so much stuff online,” he says.
“I don’t know how many people are left who want to paint their faces and spend three hours watching a game.”
Brahm Eiley, of Victoria-based Convergence Consulting, says that with young people not watching TV sports to the same degree as previous generations, how broadcasters “deal with changing demographics will be a challenge.” A recent U.S. study of respondents aged 13 to 24 found two-thirds said YouTube was indispensable and more than half said the same of Netflix.
Slightly more than a third felt the same way about cable television.
But even with those pressures, he says, “we remain bullish on TV sports viewing for years to come.”
One of the reasons traditional broadcasters are somewhat insulated from a possible sports-TV thunderclap is that they provide a valuable service aside from paying sports leagues piles of money.
Even as sports leagues have experimented with non-TV options — the NFL broadcast a game via Yahoo! last season and is doing so on Twitter with certain games this season.
The Twitter games are averaging about 300,000 viewers this season, but NFL games routinely draw more than 20 million viewers on U.S. television. Major League Baseball, meanwhile, pioneered Internet-only streaming subscriptions almost 15 years ago — but the broadcast networks have the infrastructure that allows them to televise multiple live events at the same time across the content.
The Internet giant Amazon was recently reported to have met with various league executives, which led observers to imagine a world where, say, the NBA could broadcast its games through the Amazon pipeline to their customers.
All well and good cutting out the TV middleman, but someone would still have to produce the games. As O’Brien points out, a company like Yahoo! or Amazon could pull off the odd broadcast without a huge investment, “but are they going to want to send people to broadcast Denver-Milwaukee on a Wednesday night?”
Not now, almost certainly. Just covering one game requires a crew of several dozen people and all of their equipment. The cost is high enough that Sportsnet didn’t send its own people to certain NHL playoff series last year, preferring to pick up local U.S. feeds. But the four major North American leagues have their own television networks, each of which only broadcasts a few live games for fear of cannibalizing the most lucrative part of their business — the rights fees that they charge to broadcast networks.
Any of them could, in theory, bring the broadcasting of their games entirely in-house and parcel them out for different platforms or break up national rights into different regions.
In late October, the CRTC reported that the amount Canadians spent on Internet services had exceeded the amount spent on television subscriptions for the first time in history. It was also the first time in a decade that television providers had seen revenue drop year to year.
No one expects the trend to reverse. The major sports leagues are all locked into multi-billion-dollar rights deals that will carry them into the 2020s.
The questions that remain are what will the sports-TV landscape look like when those deals expire and will they be able to get anything like the money they did the last time around?
The cable-sports bubble is there. It has to pop, eventually.