Sports and Cord Cutting

Maryland TerrapinsThere are two trends having to do with TV and sports that are headed in opposite directions. There is a continued bidding war where networks are paying records prices to lock down sports content. But we also have the cord cutters who are dropping off the network and reducing the size of the cable TV subscriber base. Somewhere soon those two trends are going to collide in a big way.

The sports programmers keep hammering cable operators with higher costs. Time Warner claims that they have seen a 91% increase in sports programming since 2008. Where is this increase coming from?

  • There are more new sports channels all of the time. There has been an explosion of sports channels over the last decade.
  • The programmers force bundles. For example, I have clients throughout the country who are now being forced to carry the SEC channel, although their customers have very little interest in southern college football.
  • The various leagues are extracting huge payments for rights to their content and this translates into the cost of sports programming growing faster than other programming.

Let’s look at an example of this. I am a Maryland Terrapins fan and they just moved this year to the Big10, largely to get a share of larger television revenues there. The Big10 will reportedly pay out almost $31 million per school this year, mostly due to revenues from the Big Ten Network (and some from bowl games). That network is carried by 60 million homes. They have expended to new TV markets by the additional of Maryland and Rutgers and the projected payments per school are estimated to grow to $44.5 million per school by 2017.

But even in the Midwest, no more than 5% of households, at most, watch the Big Ten Network very much. The two big draws on the network are college football and basketball. Most college football games on the network draw only a few million viewers, with some games getting far fewer than that. And basketball games in general draw maybe half of what football draws. And only the diehard fans watch the network the rest of the year when they show wresting, volleyball, baseball and all of the other Big10 sports.

So the network is pulling in huge dollars due mostly to a three months of college football and most of the rest of the year there are very few eyeballs on the network. Contrast this to ESPN which has a lot of programming that outdraws the Big Ten Network. ESPN has more viewers on a day-to-day basis than a whole season of Big10 football. And so a network like ESPN can make more money from advertising than they do from subscriber fees.

One has to wonder what is going to become of networks like the Big Ten Network as cord cutters cut into programming revenues. We recently saw ESPN agree to be on the Sling TV lineup which is going to be completely online. That will get them new subscribers from sports-loving cord cutters, but it’s also going to attract a new wave of cord cutters. And Sling TV is not the end game, but just the first volley. It seems like there are dozens of companies working to put packages of programming on the web.

The cable industry as a whole stopped growing a few years ago due to cord cutters. Instead of adding a few million new homes per year, the total number of cable households has held steady. But lately it’s finally starting to drop, and when there are real options online a lot more households are going to opt out of the big cable packages.

I’ve seen statistics that say that the average household only watches 17 channels out of the hundreds of programs on the typical cable lineup. When households start finding $20 and $30 dollar packages that give them most of the channels they want, it’s going to become easy for them to jump ship.

ESPN is probably going to make the transition to the web just fine because they are going to be included in most of the web packages. But networks like the Big Ten Network and every other regional sports network are not going to fare so well. It’s just a matter of math.

Let’s say the Big Ten Network wants to make $350 million annually from programming. If there are only 2 million homes willing to pay for the network then they need to charge $14.58 per month. With 3 million customers it’s $9.72, 4 million it’s $7.29 and 5 million is $5.83. Perhaps they can find one of those price points to make it work. But they won’t be operating in a vacuum and there are going to be lots of other sports channels trying to do the same thing and wanting to charge the same high fees. On an a la carte basis it is going to cost a sports fan a lot more than what they pay today for all of the channels, and that is where the rubber hits the road.

I don’t know what is going to happen any more than anybody else. But my gut tells me that the revenue collected by networks like the Big Ten Network are going to drop – slowly at first and eventually precipitously. At some point they will have to get on the web and reach a new stasis, and that probably means making less revenue than today. That’s not such good news for the Terps and the teams of the Big10.

A la Carte Programming and Sports

ESPN, Fox Sports, Comcast SportsNet, and regional sports networks like the Big Ten Network must all be lobbying hard against a la carte cable programming ever becoming a reality. Their business model relies on the practice where all cable subscribers must pay for sports even if they never watch it. Sports programming has become a significant chunk of what customers pay each month for cable TV and the rates charged for sports networks are growing at the fastest pace.

It’s not hard to see why sports programming is so expensive because the sports networks pay a lot of money to obtain exclusive sports content. Let’s look at ESPN as an example. It was reported in financial news that ESPN will pay over $3.5 billion in 2013 for sports programming.  That includes $1.1 billion to the NFL, $600 million to the NBA, $610 million for football bowl games, $360 million to major league baseball, $240 million for ACC sports, and many other smaller deals.

And the amounts that are being paid keep rising. It’s been reported that in 2014 the fee for the NFL will jump to $1.9 billion and for baseball to $700 million. The network just announced an eleven year deal for $770 million to broadcast the U.S. Open Tennis Tournament. And ESPN will be launching a new network for Southwest Conference Football in 2014 and the details of the amounts to be paid have not been announced, but one has to imagine they are huge.

How much does this all cost consumers? Not all cable companies pay the same amounts for ESPN since there are individual contracts with each cable company that span different periods of times. I’ve seen recent articles that say that the average monthly cost charged today for cable companies for ESPN is $5.13 per household, with additional monthly fees of $0.68 for ESPN2, $0.18 for ESPNNEWS and $0.18 for ESPNU. For 2013 those fees total to over $7.3 billion. A household getting all four of these channels would be paying $74 per year just to ESPN. And if they have a cable provider that carries all four of those channels there is a good chance they are also paying for other sports networks like FoxSports, Comcast SportsNet, the NFL channel, the golf channel, the Tennis channel and a bunch of others. And the fees paid for sports aren’t even always obvious since there is a substantial fee for the Olympics buried in the fees for carrying the NBC channels. It’s probably not a bad guess to think that the average cable household is already paying over $100 per year today for sports coverage.

And the fees are continuing to climb at a rate far faster than inflation. It’s been reported that a recent deal signed by Time Warner Cable has them paying almost $7.50 for ESPN by 2018 with a built-in annual 6.5% rate increase after that. This would put the cost of ESPN over $8 per household per month by the end of the decade, or almost $100 per year.

As I have written in the past, the whole cable industry is starting to see subscribership fray around the edges. It was just reported by Variety last week that all cable companies combined lost about 80,000 customers for the 12 months ending March 31, 2013. That doesn’t sound like a lot, but just a few years ago cable subscribers were growing by several million per year. Industry experts predict the number of cable subscribers will begin dropping more each year, much like what happened with landline telephones over the last decade. There are a lot of reasons for this including cord cutters who are dropping cable for programming on the web, and young households who just aren’t signing up for cable. But one contributing reason is rate fatigue, meaning that households are finding the rates for cable to be more than they are willing to pay.

So why would the sports programmers be sweating a change to a la carte programming? It sounds like a really good idea for customers to be able to buy just the programming they want. What sports lover would not love to ditch Lifetime Movies, and what sports hating household would not want to stop paying for ESPN?

The answer is simple math. If a la carte programming is introduced then buying what you want will be too expensive. Let’s just look at ESPN as an example. Let’s say ESPN went to a la carte programming so that only households who wanted it would buy it. The amount that ESPN would charge on a standalone basis would depend upon how many households they think would be willing to write a check for ESPN. Let’s look at the math. This assumes that the cable company would mark-up the channel by 30%. These are the resulting monthly subscription rates:

Willing To Buy              Rate Today            Rate in 2020

50%                                    $15                           $20

30%                                    $26                           $33

15%                                    $51                           $67

This table must scare the hell out of ESPN. We already know what a la carte looks like. HBO is sold a la carte and is in 30 million homes, or 30% of the US market for around $15. I look at this table and find it hard to think that 30% of homes would pay $26 monthly for just the four ESPN channels. There is probably no price point on this table that looks realistic in the market, and so the reality is that if ESPN was to be sold on an a la carte basis that they would have to cut their rates, meaning that they would have to cut the payments they are making to the various sports. And that would have a profound impact on the sports industry. For example, universities in the major conferences now rely on cable revenues to support their teams and one can imagine massive cutbacks in college sports if the TV revenues decline. Television fees are the main factor behind the huge salaries paid by professional sports.

And this same math is going to be the same for every other sports network – and as far as that goes, for every cable network. If a la carte programming comes to pass and people buy only what they want, they are going to end up paying as much as they do today for a smaller number of channels. Today’s regime of averaging the cost of hundreds of networks across 100 million cable subscribers has resulted in the wide variety of programming available to a cable household. It is my prediction that under a la carte programming that many of the networks we watch today would fold because they could not find enough buyers individually to support them. And maybe that is what should happen. Certainly, if the cable industry starts seeing total subscribers dropping by millions per year this will happen eventually anyway. There just won’t be enough money to support all of the networks. I can’t see any future where the amount of monies paid by ESPN and other sports networks to obtain programming rights doesn’t go down. It’s just a matter of math and time.