ESPN and a la Carte Programming

Maryland TerrapinsEarlier this month ESPN announced that it would be providing some professional basketball and other programming available by a subscription basis on the web. This got the sports world buzzing. I follow several sports bulletin boards and sports fans have been looking for a glimmer of hope that sports programming will be sold a la carte. A large percentage of football fans (at least the vocal ones on line) say that they hate paying for the big programming packages to just get sports. They all say they would gladly pay for ESPN and a few other networks (depending upon the part of the country they live in).

Unless these guys all live in bachelor pads that only watch football and basketball channels they probably are ignoring the fact that their families probably prefer to watch something other than sports. But let’s just suppose that a genie came along and gave these guys their wish. What might an a la carte sports programming world look like?

ESPN is clearly the king of the sports programmers. In 2013 they had revenues of $11 billion, about $7 billion of which came from programming fees mostly from ESPN, but also from the other sports channels they operate. The remaining revenues came from advertising. It was reported in 2013 that ESPN was in almost 100 million homes and that their average fee to cable companies was about $5.50 per month per subscriber. And that number is growing rapidly and I have already seen fees of $6.00 in 2014.

What would it take for ESPN to go a la carte and sell at a premium price only to sports fans? It’s really simple math. If ESPN was to charge $15 per month they would need 40 million customers. At $20 per month it’s 30 million, and at $25 per month it’s 24 million? Might ESPN be able to do that? It’s at least conceivable that they could get those kinds of subscriber numbers, but it looks like a tall order. It’s hard imagining a third of US households signing up for an ESPN subscription at $20 per month. I am sure the folks at ESPN are quite happy with the current regime and will only contemplate a la carte if the wheels come off the industry.

ESPN is probably the only sports network that can contemplate such a scenario. Making a change this drastic would certainly upset their comfortable business model, but if they were able to get 20 million customers they could establish a new baseline and grow again from there.

My alma mater Maryland just joined the Big 10, partly due to a promise of higher revenues from TV. The Big 10 Network, along with the SEC network are the next two highest earning sports networks after ESPN, both expecting revenues of around $350 million in 2014. Let’s look what it would take for the Big 10 network to change to a la carte. Today they charge about $1.10 per subscriber in areas where they have schools and it’s reported that outside those areas the fees are closer to $0.25 per customer. If they were to charge $10 per month they would need 2.9 million customers. At $15 they would need 1.9 million paying customers, and at $20 they would need 1.4 million.

These are certainly lower numbers than ESPN needs, but they also have a much smaller potential universe of customers. One way to see how reasonable a la carte might be is to look at recent TV ratings for Big 10 football games. Let’s look at weeks 7 and 8 of this college football season. In week 7 the Big 10 had three football games that got more than 75,000 viewers. That was Michigan State vs. Purdue, Penn State vs. Michigan and Indiana vs. Iowa. In total the Big 10 games were watched by 5.0 million people that week. Week 8 was similar and the three games with more than 75,000 viewers were Rutgers vs. Ohio State, Michigan State vs. Indiana and Maryland vs. Iowa. In total that was 4.9 million viewers for the week.

And one has to suppose that a lot of Big 10 football fans watch more than one game, so I’m thinking one might discount those numbers by 40%. That means that the Big 10 has perhaps 3 million individual viewers per week. Is it reasonable that they could talk 2/3 of those fans into paying $15 per month for the network, or half of those fans into paying $10. That seems unlikely to me.

But you might ask, “What about basketball?”. There are a lot of basketball fans, but football is king. The weekly total viewers of a league for basketball is significantly smaller than football for most schools (except those that identify as primarily basketball schools like Georgetown).

Plus, one has to ask how schools stay relevant over the long haul when only homes willing to pay a la carte pricing will watch them. That means millions of homes (and potential future fans) are not going to grow up watching their product and identifying with a given university brand. I would love the idea of a la carte being available as I have described it. I would subscribe to both ESPN and the Big 10 network at those prices. But are there enough others out there like me there to support sports a la carte? I have serious doubts.

Tomorrow: The Total Sports Programming Bill

What We All Pay for Sports

Maryland TerrapinsI read an article this week in the LA Times that talked about how sports have jacked up the cost of cable TV everywhere. They cited the fact that the Pac-12 Network alone is going to get over a billion dollars per year in revenue, all gathered from people’s monthly cable rates.

There is no question that pro and college sports are driven by television revenues. Everywhere you look the numbers are huge. For example, the NFL gets over $4 billion per year in television rights. That’s $1 billion from ESPN, $1 billion from DirecTV, over $700 million from Fox, and over $600 million each from NBC and CBS. To put that in perspective, there are 100 million cable households in the country and that works out to each one of them paying $3.33 per month to get the NFL.

Now I will grant that the NFL is the most popular sport in the country and perhaps most households would not be upset by that number. But it’s only the beginning. There are also lucrative deals with television for college football and basketball and for major league sports like baseball, basketball and hockey. Additionally the cable bundles that people buy force them to buy more sports programming for other sports like golf, tennis, horseracing and even bass fishing.

When you add this all up the average consumer in a major metropolitan market that has all of the pro teams is probably paying around $15 per month to get all of this sports programming. That’s $180 per year. In more rural markets where there are not direct channels for baseball and basketball the bill is probably closer to $11 per month or $130 dollars per year. This is a heck of a deal for sports fans. Let’s face it, paying $180 to get a huge array of the sports is a great deal when you figure it would cost that much for two people to go to one pro football game.

But the problem is that not everybody is a sports fan. It’s been estimated through polls that maybe 40% of households are serious sports fans. If you do the math and if only the 40% of households that really want sports had to foot the bill that works out to $37.50 per month, or $450 per year, and that monthly number is climbing a few dollars every year. That’s where the rubber hits the road, because polls also say that a majority of those households would not pay that bill on an unbundled basis if they were asked to pay their fair share.

What nobody wants to talk about is that the wheels are slowly starting to come off the cable industry. A recent nationwide poll said that 21% of households were thinking of dropping their cable TV subscription. They won’t all do that, of course, but it is a very bad sign for the industry when that many people say they are thinking about it. We can certainly expect millions of households per year to ditch cable. The average cable bill nationwide is now over $90 per month and many households are deciding that they just can’t afford it.

And if the wheels come off the whole sports industry will have a major crisis. My beloved Maryland Terrapins have gone so far as to change their conference in order to make more money from television. They are getting a lot more money from TV rights to become part of the Big 10 network. That extra money more than covers the extra cost from having to fly to places like Minnesota and Iowa for all of its sports teams.

But what happens to Maryland and to all of the other major universities if in a decade those TV revenues are greatly decreased? It’s bound to happen, but nobody can really say when. But do the math. Cable rates have been increased about 7% per year for a decade, largely driven by programmers like the sports networks. If this goes on for another decade (and the current long terms contracts for programming suggests that it will), then the average cable bill is going to grow from $90 to $165 per month. Along the way to that kind of price a whole lot of households are going to drop out of the system. And when they do, pro and college sports are going to lose a lot of the revenues that have been making them so flush.

I think we can look out a few decades from now and foresee a very different sports world. It’s probably likely that major sports will go to a pay-per-view basis so that you are going to have to pay directly to watch the games that you want. This means that the teams with big popularity, like Michigan, Notre Dame or Penn State football, or teams like Duke or Syracuse basketball are going to probably do okay while teams with smaller followings will not. I think this breaks the sports model and that means that a lot of colleges will be dropping out of major sports altogether and that major league salaries are going to take a big downward hit. These are maybe not bad things in the big picture of life, but I know that if Maryland can’t afford to play football a few decades from now it will leave a big hole in my heart.