Archive for July, 2013

(Note: In case you’ve missed it, I had Q&A with Burnt Orange Nation on conference realignment with a Big 12 and Texas focus last week. Here are parts 1, 2 and 3.)

One of the major topics that has been on my list to address this summer is whether there is a sports TV rights bubble, which has turned out to be prescient with a recent blog post from Patrick Hruby at Sports on Earth and a front page article in today’s Wall Street Journal (subscription required) addressing the subject. Both pieces are well-written and informative and generally come to the conclusion that sports TV rights are heading upward in a bubble-like manner. Hruby provides a lot of background on the cable subscription model that is funneling massive amounts of revenue towards sports while pointing out the risk of that collapsing with more people “cutting the chord” to reduce costs and the rise of Internet streaming options, such as Netflix, Amazon and Hulu. Meanwhile, the Wall Street Journal looks at the sports rights fees situation from the perspective of the cable operators themselves that are dealing with the rapidly rising costs of sports networks (particularly new regional sports networks). These stories play into the broader increasing calls for a la carte pricing for cable (meaning that a subscriber would purchase only the channels that he or she wants as opposed to paying for large packages). I’ve written previously about why sports have been increasingly and disproportionately valuable compared to other types of programming since they are watched live and, as a result, viewers will watch commercials in a way that they no longer do with other types of shows that they watch on their DVRs or online streaming sites. That’s generally common knowledge at this point. However, here are a few thoughts on some items that I believe a lot of “sports rights skeptics” are glossing over:

(1) The values of sports TV rights overall have never, EVER dropped – While past returns are not a guarantee of future success, as any financial adviser in CYA mode will tell you, we’ve seen the “We’re in the middle of a sports TV rights bubble!” story on a consistent basis ever since the 1980s, yet they have never dropped overall. Deadspin had a great comparison of quotes from “bubble” articles from 1989 and 2013 and you could hardly tell when either one was written. Now, certain properties might not have enjoyed the same increase in rights as others (see the Oympics, where NBC actually is paying about the same or even less on an inflation-adjusted basis for the 2016, 2018 and 2020 games as it did for the other Games that it has broadcast during this century), but the marquee sports properties (NFL, NBA, Major League Baseball and power conference college football) have been rising in an unfettered manner for nearly four decades straight. Once again, that doesn’t mean that this will continue on in perpetuity, but on the flip side, it’s simple-minded of observers to argue that the rapidly rising sports rights fees being paid out today must indicate a bubble.

(2) Bundling is the real culprit of rising cable prices – I appreciate Hruby spending a quite a bit of time on the bundling aspect of the cable subscription model, which I believe is a larger cause of increased cable prices more than anything. A lot of sports TV rights critics love to point out that ESPN is receiving $5.00 per subscriber per month from every cable household in America, whether they watch it or not, but that isn’t necessarily an unfair deal considering how much high value sports programming that it provides. There’s a fairly substantial segment of the population that wouldn’t bother subscribing to cable at all without access to ESPN, so it behooves any cable operator to pay whatever price it takes to keep the Worldwide Leader on the air. However, when ESPN’s parent Disney uses that leverage to force cable operators to buy 10 or 20 other commonly-owned channels to have any access to ESPN at all, that’s where you truly see large scale increases on your cable bill. Turner, Fox, Viacom, Comcast (which is both a cable network owner and a cable operator) and other cable network companies take the same tact, where they will only allow operators to carry their most popular channels, such as TBS, TNT, FX, MTV and USA, if they pay for larger bundles of channels that might not otherwise survive in the marketplace on their own. To me, bundling is the real market inefficiency right now when it comes to cable pricing: cable operators are being forced to give money and channel space to a whole host of channels simply to have access to the most popular ones that have common parents. This is distinct from the individual consumer-based complaint of not being able to pick and choose individual channels on an a la carte basis, which is something that I don’t believe would ever legitimately fly. Americans definitely like the idea of a la carte pricing (after all, it’s “un-American” to have to pay for channels that you’re not watching), but their actions show that they would still rather have all-you-can-eat buffet pricing.

(3) Netflix and other streaming websites are all-you-can-eat buffets just like cable (as opposed to being a la carte) – Further to the last point, we’re seeing a rapid rise in the popularity of Netflix-style on-demand streaming. While a lot of cable detractors point to the popularity of streaming as an indicator that support for a la carte is gaining traction, it’s really the opposite. Think of what Netflix (or Amazon or Hulu) actually does for the consumer: it aggregates content from a whole slew of providers and provides an all-you-can-eat (as opposed to pay-per-view or a la carte) price to access such content. I can’t only ask and pay for the Disney shows being streamed on Netflix any more than I can try to get only the Disney-owned cable channels from DirecTV. The entire value proposition of these streaming sites is you can get an entire universe of shows from a whole variety of sources (including Netflix itself with its in-house productions like House of Cards and the resurrection of Arrested Development), which is much different than a la carte pricing (where you receive a limited set of programs from a single source). In fact, the main reason why Hulu was formed in the first place was that the major TV networks were failing to gain traction with streaming their shows on their own respective websites. Consumers ultimately wanted to go to one place online to watch all of their favorite TV shows, which is an Internet mirror of the experience of turning on the TV and flipping through the channels with a remote.

By the same token, the business model of The Asylum, which is the B-movie studio that produced last week’s Twitter-fueled SyFy sensation Sharknado!, is actually based upon producing as much inexpensive filler content as Netflix desires. Seriously – Netflix explicitly asks the studio to produce cheap and terrible movies in order to create the perception that the website has a vast library of content. From the linked Pacific Standard article (which I highly recommend reading in its entirety):

At surviving brick-and-mortar stores like H. Perry Horton’s, renters gravitate toward the big-studio releases shelved at eye level. But on Netflix, “You click through and see all the titles—new Hollywood releases mixed in with direct-to-video,” Davis says, all crammed into a grid of thumbnail posters. Filtering in low-budget films with the high-budget versions “fuels this perception that there’s a wealth of new content.” And in the endlessly filterable world of Netflix, where your preferences are sorted into hyper-specific genres, a full page of results for horror films with nightmare-vacation plotlines makes you feel like Netflix is tailoring its product just for you. “The bottom line is that it’s there, and you saw it,” [DePaul University assistant professor Blair] Davis says—even if you didn’t actually watch it.

Much like the vast number of cable channels that people are paying for but never watch, Netflix is providing a ton of movie titles that subscribers are also paying for and never watching. Sounds like basic cable, no? Netflix is simply a horse of a different color when compared to cable – the underlying buffet approach of providing lots of content that you’ll never end up watching is the same with only the delivery system (Internet instead of cable or satellite) being different. Of course, $9.99 per month for Netflix streaming is a helluva less daunting than paying $100 or more per month for cable service, so it’s easy to see why it has gotten so much traction so quickly.*

(* If you have young children like I do, Netflix streaming is right next to food, water and shelter on Maslow’s hierarchy of needs at this point. There are still a lot of limitations on the movie and TV show offerings on Netflix streaming right now, but the suite of children’s programming makes it indispensable to parents.)

So, Netflix and the like might very well encroach upon the territory of cable operators, but the point is that no one should mistake the rise of streaming with a desire for a la carte pricing. The likelihood of most Americans having the desire or tolerance to try to choose a customized lineup of channels on an a la carte basis is fairly small. Besides, the economic underpinnings of the cable industry mean that a la carte pricing would likely kill all but a handful of the most popular cable channels (i.e. only the basic cable lineup from circa 1990 would survive), which destroys the overall desirability of a la carte in the long-term. Instead, what people really want is the same type of buffet access to content at a lower price point, whether it’s via cable or the Internet.

(4) Sports streaming is inherently different than movie and TV show streaming – The rise of streaming websites is undeniable and flattening the content distribution universe. However, what I think a lot of observers miss is that the desire to stream movies and TV shows is inherently different than streaming sports. Specifically, the single biggest attraction for streaming movies and TV shows is that it’s on-demand: a viewer can watch the content whenever and wherever he or she wants.

Now, the “wherever” component still applies to streaming sports, as you can use the Internet to watch games on your tablet or smartphone. That’s huge for convenience for any sports fan that’s away from home. Yet, a key distinction is that the “whenever” advantage of streaming doesn’t apply to sports. While many people have made the connection that fans generally watch sports live, which in turn makes them attractive to TV networks since that means that such fans are much more likely to watch advertising (thereby increasing revenue all around), they seem to have a blind spot that this is a large deterrent to a mass movement to watching sports online. The typical sports fan doesn’t have a preternatural need to watch a replay of an NFL game on Tuesday where the outcome has already been determined – the entire value of sports is that there are a lot of people that want to watch the exact same event at the exact same time. That happens to be exactly what television has done (and probably will always do) better than the Internet.

In essence, the convenience of streaming sports is primarily based on mobility, whereas the value from streaming movies and TV shows is based on both mobility and time-shifting ability. While a broad sports streaming platform like ESPN3 could turn into a “Netflix of Sports” (if it hasn’t already), it isn’t clear that it could ever really be a more desirable option for the standard run-of-the-mill sitting-at-home-on-the-couch viewer compared to live television in the way that Netflix/Amazon/Hulu can very much be the preferred vehicle for such viewer simply because on-demand viewing is such a game changer for movies and TV shows compared to sports.

Of course, that’s not to say that sports entities are going to be in the clear and enjoy massive media rights profits forever. In my next piece, I’ll take a look at some factors that are dangerous to sports leagues and teams that not even the “sports rights skeptics” are paying much attention to right now and could kill the proverbial golden goose.

(Follow Frank the Tank’s Slant on Twitter @frankthetank111 and Facebook)

(Image from Apple Insider)