As some of you may know, I’m the father a two-year old twins (a boy and a girl). At this age, the Walt Disney Company is constantly vacuuming funds out of my wallet. In the past year alone, I’ve bought Lion King and Toy Story Blu-rays, movies tickets to see The Muppets, a dancing Mickey Mouse (complete with the ability to moonwalk, which is actually pretty sweet), Lion King dolls, Disney Princess books, Disney Princess clothes, Disney Princess purses, Disney Princess stage show tickets, Disney Princess toys and of course the granddaddy of all Disney wallet sucking experiences, a trip to Disney World staying in a Disney hotel complete with a Disney Princess breakfast at Cinderella’s Castle.
For all of the money that people like me spend on Disney toys, movies and theme parks and others that watch TV properties such as ABC and the Disney Channel, the Mickey Mouse-controlled subsidiary that provides more profit to the company than any other by a massive margin is ESPN. In fact, it’s not even close. Currently, ESPN is in close to 100 million households clearing over $5.00 per month from every single one of them in subscriber fees. This means that ESPN is making around $500 million in revenue per month and $6 billion in revenue per year before even selling a single advertisement. ESPN isn’t just the most powerful sports network in America. That would be vastly understating the network’s power. Here’s the real bottom line: ESPN is the most powerful media and entertainment company in America. Period.
It’s against this backdrop that we have to analyze the prospects of Fox, NBC/Comcast and, to a lesser extent, CBS becoming viable competitors to ESPN in cable sports world. Fox has just announced that it is forming a new national cable sports network, NBC/Comcast has rebranded Versus to be the NBC Sports Network, and CBS is trying to turn what was once a college sports-focused channel into a broader sports network. Certainly, it makes sense for all of them to try to get a piece of ESPN’s cable sports pie. As I noted here last year, there are three key factors in television viewership today:
- More old people watch TV than young people*
- More women watch TV than men
- More people are using DVRs
(* For TV purposes, “old people” are defined as people older than 49 and “young people” are between 18 and 34 years old. The only rating that matters for advertisers for a network prime time TV show is what it draws in the age 18-49 demo, while age 18-34 viewers command the greatest premiums. It doesn’t matter that people older than 49 actually have higher incomes – this is about simple supply and demand, where younger viewers are in shorter supply.)
As a result, the most valuable property on TV on per viewer basis is the program that draws the age 18-34 male that watches it live. This is what sports does more consistently and dependably than anything else on TV, which means that advertisers and cable providers pay a significant premium for sports programs even though their overall viewership numbers (outside of the NFL) generally aren’t that large compared to the average network prime time show or even the movie of the night on TNT or USA. As a result, ESPN is able to charge the highest monthly subscriber fee of any channel on cable by a significant margin.
The problem is that competing with ESPN is much easier said than done. Fox and NBC might be spinning their networks as “new competitors” where they just woke up yesterday and realized that ESPN needs some competition, but the reality is that they’ve been trying to compete with ESPN for decades to no avail. Cablevision created SportsChannel America back in the 1980s, which was a consortium of regional sports networks that bought national TV rights to NHL (in the glorious days when the Norris Division was alive) in attempt to create a competitor to ESPN. Many of those regional sports networks got bought by Fox in the 1990s, where they tried create a similar type of ESPN competitor by buying national cable rights to properties such as the Big 12 and Pac-12 along with creating studio programs such as “The Best Damn Sports Show”. That has been done a bit better than the old SportsChannel America, although it’s still been fairly lukewarm and the new national Fox sports network (dubbed “Fox Sports 1”) appears to be simply a vehicle to put air the national rights that it already has on a coast-to-coast network as opposed to through regional networks. In the meantime, NBC Sports Network has been in existence for quite awhile, with it initially being called the Outdoor Life Network. Comcast already attempted to rebrand the channel as Versus several years ago in order to try to position itself as a direct ESPN competitor, and it’s now doing a rebranding again with its recent purchase of NBC.
So, when I see sports fans that are exasperated with ESPN (for good reason)* cheering the prospects that someone is finally competing with the Worldwide Leader, the problem is that they’re falling for the spin that these companies are just starting from scratch with something brand new. It’s simply not the case. The core problem for any network that wants to compete with ESPN is the lack of access to what I call “Tier 1″ content, which I would consider to be the NFL, Major League Baseball, NBA, SEC and Big Ten. These are the properties that a network can use as tent poles to drive casual sports fans to flip over. “Tier 2″ content would be the other major college conferences, the NHL and the elite levels of golf, tennis and soccer, while “Tier 3″ is everything else. A network can fill airtime with Tier 2 and Tier 3 content, but can’t rely on that programming alone to break through to legitimately compete with ESPN.
(* Note that I’ll always consider this blog to be a Deadspin baby, as I was in one of the early sets of commenters on that site due to the graciousness of former editor and fellow Illinois alum Will Leitch. That original commenter group ended up spawning a whole bunch of blogs with much wider reach than this one, such as Kissing Suzy Kolber and With Leather. The point is that I’m well-schooled in the lampooning of ESPN, culminating in what is quite possibly the funniest story that I’ve encountered in all of the years of writing this blog: the comically insensitive ESPN college basketball commercial casting call that was real. I still laugh my ass off at that one. So, this post is not a defense of ESPN in terms of its editorial and promotional practices, which can be nauseating at times. However, ESPN is absolutely the best run media organization in the country when it comes to the business side. That side of the equation should be unquestioned.)
NBC Sports Network has been able to get Tier 2 and Tier 3 content, but nothing at the Tier 1 level (which has been the case for many years). As a result, the ratings lately have been nothing less than horrible. Viewership during the first quarter of 2012 for NBC Sports Network is down 22% compared to the same period last year and is actually at its worst levels since 2004, when it was still the Outdoor Life Network (meaning that the ratings this quarter right after the NBC re-branding are worse than at any point when the network was called Versus). Even worse is the rating in the target demo. Remember when I noted above that the whole reason why sports networks get a premium is that they are supposed to draw age 18-34 males? NBC Sports Network’s rating in that demo was 0.4 this past quarter. By comparison, Lifetime (yes, Lifetime) had a 0.5 in that demo. There’s no good way to spin those figures.
Fox has a better stable of sports rights to draw from with the Pac-12, Big 12 and international soccer rights such as the English Premier League and Champions League. However, that’s still a limited amount of content to power an all-sports network that’s aiming to draw a broad audience (not just niche fans) on par with ESPN. Fox still doesn’t have any Tier 1 tent poles.
In theory, NBC/Comcast and Fox could overcome these disadvantages by simply bidding more for Tier 1 content than ESPN. That sounds logical, but it’s not quite as easy in practice. First, there’s not much Tier 1 content available. The NFL decided to grant its own NFL Network a full season Thursday Night Football package, which means that the biggest potential tent pole of all is now off the table. The Major League Baseball package will come up for bid likely later this year (the current deals run through 2013), while the NBA and Big Ten will have their packages opened up in about 3 years (with their respective current deals ending in 2016). The SEC is locked up through the mid-2020s. That’s not very much out there and even if a network can get one of those packages, that can only take it so far. A viable ESPN competitor really needs 2 or more of those packages.
That gets to the second point, which is that the Tier 1 content leagues like being around other Tier 1 content leagues. As much as we believe that sports leagues will simply take the most money no matter who it comes from, the Tier 1 entities aren’t very interested in being pioneers on an upstart network (unless they actually own that upstart network a la the NFL Network or the Big Ten Network). It’s no different than really wealthy people generally preferring to buy houses in neighborhoods with other really wealthy people instead of going to a place where they’d clearly be the wealthiest people on the block. During a panel of top sports media executives at the recent MIT Sloan Sports Analytics Conference*, this was called “optimization instead of maximization”, meaning that sports leagues aim to optimize their media audiences and not necessarily maximize revenue. That might sound like MBA speak gobbley gook, but it’s really just a newfangled way of saying, “Don’t kill the golden goose”. For instance, the NFL could theoretically make the most money by keeping all of its games for the NFL Network and effectively charge whatever it wants for the channel, which cable providers would almost certainly have to pay. The Big Ten could do the same by sending all of its games to the Big Ten Network. However, neither entity wants to do that because that’s taking short-term revenue at the expense of long-term viability. The Tier 1 sports leagues got to that position because they are able to combine a passionate core fan base with interest from casual sports fans. League-owned networks and lower distribution channels can still draw the passionate core fan base, but the casual fan segment won’t move over and will deteriorate over time.
(* I highly recommend watching this panel discussion that features the presidents of ESPN, Fox Sports, NBC Sports, NFL Media and MLB Media. They go through a whole slew of issues, including rising TV sports rights fees, the impact of Internet streaming and on-demand viewing, league-owned networks and cable chord cutting.)
That’s really the toughest part of competing with ESPN: it provides the best platform by far for drawing casual fans, which is what the Tier 1 content providers need. The interesting thing is that the only successful cable bidder for Tier 1 content outside of ESPN and the league-owned networks has been Turner with the NBA (TNT), MLB (TBS) and NCAA Tournament (TNT, TBS and truTV). That’s notable because TNT and TBS are not sports networks and are instead positioned as broad-based general interest channels that are the cable equivalents of the Big Four (ABC/CBS/NBC/Fox) over-the-air networks. This means that TNT and TBS are able to draw in casual TV viewers in a way that, say, NBC Sports Network can’t, meaning that they are much more palatable to Tier 1 leagues.
As a result, the most realistic competitors to ESPN aren’t other all-sports networks, but rather the broad interest cable channels that draw high ratings such as USA (owned by NBC/Comcast) and FX (owned by Fox) alongside Turner’s TBS and TNT. At least that’s how I’d approach it if I were running NBC Sports or Fox Sports. It would take many years for an all-sports network to get the critical mass of content on par with ESPN2, much less the ESPN mothership, and that’s assuming that such network wins every competitive bid for Tier 1 and Tier 2 content until the end of this decade. That’s simply a losing battle. However, TBS and TNT have shown that they can make a dent on ESPN’s chokehold over cable sports rights and have been rewarded with higher rights fees as a result. They are able to incorporate Tier 1 sports into their other entertainment programming that draw high ratings, which means that they are getting casual fans (not just the hard core fans) to tune in. My belief is that it would be easier to sell rate increases for USA and FX adding on premier sporting events than to try to get brand new rights fees for separate new sports networks. I don’t blame NBC/Comcast and Fox for trying their current all-sports plans because those ESPN-type rights fees are so enticing, but I think that in a few years, they’ll end up retreating and focus on beefing up the sports content on their general interest networks instead. That’s where they can draw out value that ESPN isn’t able to provide.
(Image from American Progress)