Posts Tagged ‘Sports TV Rights’

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It has been a couple of days since the news broke from Sports Business Daily that Fox is poised to enter into a deal with the Big Ten for 50% of the packages that are currently on ABC/ESPN (football and basketball) and CBS (basketball)… for up to $250 million per year for 6 years. Once again, this is just for half of the Big Ten rights that are up for grabs, which would provide for 25 football games and 50 basketball games on over-the-air broadcast Fox (“Big Fox”) and FS1. As observers such as Matt Sarzyniak have noted (who has a great post on the overall dynamics of the Big Ten deal), that amount is approximately the amount that the Pac-12 receives for its entire non-Pac-12 network package. In effect, we’re about to enter into a world where Rutgers and Northwestern are going to earn significantly more TV money than Florida State, Oklahoma, USC and even Alabama and Notre Dame. The Big Ten schools were already ahead before through its creation of the BTN (which everyone should remember how bold and risky that move was a decade ago compared to taking guaranteed money from ESPN), but the gap is going to be blown through the roof if the conference ends up with around $500 million per year for its TV rights without even taking into account the BTN portion. I have had plenty of critiques of Jim Delany and the Big Ten leadership over the years, but their management of TV and media properties has been pitch perfect for the past ten years and far beyond the capabilities (both quantitative and qualitative) of the other power conferences.

Some further thoughts:

  • I have seen a lot of scuttlebutt online that this indicates that the Big Ten might be leaving ESPN entirely, but personally don’t believe that for a second. For several years, I’ve been predicting that Fox and ESPN will ultimately split the Big Ten’s rights going forward and that is still the most likely outcome. ESPN reportedly “lowballed” the Big Ten in its initial offer, yet that is not necessarily outcome determinative since ESPN did the same thing ten years ago (which eventually spurred the creation of the Big Ten Network) and the parties still eventually got a deal done. It would have been difficult for ESPN to unilaterally come in with a massive offer several weeks ago with the continued cost-cutting throughout its organization and the possibility that this might be the time when the sports rights bubble (to the extent that there actually is a bubble) is going to pop. Essentially, ESPN bet that there wouldn’t be anyone willing to pay the Big Ten’s high asking price (just as it bet that the BTN wouldn’t be successful)… and it looks like they’re going to lose that bet badly.That being said, I’ve written many times before that ESPN’s supposed financial woes are being completely misinterpreted by many sports fans. The reason why so many Disney investors are spooked by any cord cutting and ESPN subscriber losses is because ESPN is, by far, the most profitable media and entertainment entity in the entire world. Note that I said “media and entertainment entity” – this is not just about sports networks. Let’s put it this way: ESPN currently delivers monthly subscriber revenue to Disney that is the equivalent to the domestic gross of Star Wars: The Force Awakens every single month guaranteed… and before they sell a single ad. Disney has relied upon ESPN to deliver monopoly drug dealer profits for years to prop up their entire business. Now, ESPN is “only” making oligopoly drug dealer profits.

    All of this is to say that ESPN still makes a ton of money that is far, far, far beyond what Fox, NBC, CBS, Turner or any other entity with sports interests could ever dream of. Even in cost-cutting mode, ESPN still needs to invest in core properties in the same way that the rest of the cost-cutting Disney organization will authorize massive budgets for Star Wars, Marvel, Pixar and Disney Princess movies. ESPN leadership can now go back to their overlords at Disney and say, “Look – we tried to get the Big Ten on the cheap and that clearly isn’t going to happen. We have now already let Fox into the door to becoming a top tier sports network competitor and we can’t let someone else, especially NBC/Comcast, to get even more traction on top of them. We need to the funds to pay up here.” Anyone that thinks that ESPN can just plug in more SEC or ACC games into its lineup is fooling themselves. The Big Ten provides a massive lineup of football games in the best time slots on ABC and ESPN and have consistently garnered the best ratings of any of the conferences next to the SEC. The people at ESPN aren’t dumb – they know the difference between a short-term administrative cost cut and a long-term investment in their core product… and the Big Ten has been a huge part of their core product since almost the beginning of the network.

  • By the same token, let’s not pretend that the Big Ten wants to get away from ESPN. I have seen some Big Ten fans profess a desire to leave ESPN entirely, but that would be as short-sighted for the conference as it would be short-sighted for ESPN to let the Big Ten go completely. The fact of the matter is that if you were to show the exact same game on ESPN versus FS1, the viewership on ESPN would be magnitudes higher. We have already seen a track record of Major League Baseball, Big 12 and Pac-12 games where similar games on ESPN crush the ratings on FS1. There has to be great concern that the notion that “fans will just find the channel if they want to watch a particular game” isn’t necessarily completely true. ESPN is, and will be for the foreseeable future because the stranglehold that they have on sports rights overall, the “default channel” for sports fans. Just walk into any sports bar across the country and, outside of NFL Sundays, the vast majority of TVs are going to be tuned into the ESPN mothership. A game that is shown on ESPN literally gets a ratings bump, whereas that same game on FS1 gets a ratings discount.This greatly matters to the Big Ten, which is trying to position its TV deals in the same way that the NFL has over the past few years. Money certainly matters, but long-term money (the proverbial golden goose) is directly correlated with exposure… and no one can provide exposure like ESPN. Indeed, even with the increase in cord cutting and falling numbers of subscribers, every single other media company in the United States would kill to have ESPN. We have already established that they have the top-rated and most profitable TV network, but it goes beyond just that aspect. Who has the #1 sports news website? ESPN. Who has the #1 sports radio network? ESPN. Who has the #1 sports mobile app? ESPN. Who has the #1 streaming sports network? ESPN. Who has the #1 sports podcast network? ESPN.

    That is what a lot of Big Ten fans that care too much about supposed “SEC bias” on ESPN are missing: there is simply no replication for the multi-platform 27/7 exposure that ESPN provides.* Many other companies have tried to apply the ESPN playbook for years and years (see the CBS and Fox efforts to build their own sports websites and radio networks with only a fraction of the audience of ESPN) and have failed. When a Big Ten game is on ESPN, it gets promoted on (a) Mike and Mike on TV, radio, streaming audio and podcasts simultaneously, (b) SportsCenter on multiple networks several times per day, (c) ads on ESPN’s websites and mobile apps, (d) countless other TV, radio shows and podcasts for an entire week, including the all-important College GameDay for college football fans. Other than Inside the NBA on TNT (which is powered by the on-air brilliance of Charles Barkley, there is not a single cable TV platform in any sport that has anywhere close to the audience that ESPN has for even one of its minor shows, much less SportsCenter, GameDay or Mike and Mike.

    (* Note that it isn’t an accident that ESPN is a master of corporate synergy considering that it is owned by Disney, whose entire existence is based on leveraging its brand across countless platforms. I have never heard of someone that likes Universal Studios, the Jurassic Park movies and NBC call themselves a “Comcast Fan” or a fan of Fox shows and movies call themselves a “Fox Fan” (which is distinct from a Fox News Fan that is an entirely different breed), but you will find millions of Disney fans that travel to Disney parks, watch Disney movies and TV shows and buy Disney merchandise with the Disney branding being a the predominant factor. My sister is a prime example of a Disneyphile. Disney and ESPN simply are masters at synergy via corporate culture that can’t really be replicated even if you followed the exact same playbook elsewhere… and believe me when I say that every one of their competitors have tried.)

    At the end of the day, the Big Ten still needs the exposure that only ESPN can uniquely offer. It’s instructive that out of the 4 major pro sports leagues and 5 power college conferences, the only one that doesn’t have a presence on ESPN is the NHL (which has by far the most limited fan base of that group). Just because the Big Ten could theoretically live without ESPN doesn’t mean that it actually wants to do so at all. That’s why I believe that time will heal wounds due to mutual interests and a deal will get done between the Big Ten and ESPN for the other half of the TV rights that are currently in play. The Big Ten won’t take a lowball amount from ESPN, but I think they know well enough to provide a bit more leeway for ESPN’s bid in acknowledgment of their superior platforms for overall exposure compared to Fox. Both the Big Ten and ESPN need each other here.

  • In looking at the imminent Fox deal with the Big Ten, this seems to be set up to put a weekly football game on both Big Fox and FS1. This will end up being quite a boon for Fox’s college football game inventory quality. From a personal standpoint, I just hope that it improves that actual college football game production quality, which I have found lacking compared to ABC/ESPN and CBS. (I think that NBC’s Notre Dame productions have quality visuals, but the commentary is the college football equivalent of listening to Hawk Harrelson’s calls of White Sox games.) Regardless, if this means that most or all of the games that would have ended up on ESPN2, ESPNU or ESPNEWS are on Big Fox and FS1, then that’s an upgrade in terms of viewership exposure as long as the Big Ten keeps its presence on ABC and the ESPN mothership.Further to what I’ve stated before, I don’t think Fox is as flush with funds as much as ESPN (because absolutely no one is as flush with funds as ESPN), but Fox certainly has a lot more incentive to make a bold move with it being in the upstart position. In particular, FS1 has had a rocky history in its short life. On paper, FS1 has the best sports rights outside of ESPN on paper with MLB, Big 12, Pac-12, Big East, NASCAR, Champions League, FIFA (World Cup), UFC and USGA (U.S. Open) properties, but it doesn’t seem to have a cohesive brand even compared to NBCSN (which seems to have become the yuppie/hipster sports network largely relying upon the NHL, English Premier League and Olympics), much less ESPN. At the very least, the Big Ten may push Fox over-the-top in terms of being a legit college sports destination that it hasn’t quite been up to this point.

    Realistically, Fox can never achieve the synergy that ESPN can provide, but there are strong potential cross-promotional opportunities between Fox’s over-the-air NFL package and the new Big Ten coverage along with the clear connection between BTN (which is 51% owned by Fox) and the rest of the Fox organization. The NFL broadcasts on Fox are by far the strongest on the network (which ought to be the case since they are also by far the largest ratings drivers for Fox), so let’s hope that the Big Ten can receive at least comparable quality in terms of treatment.

  • The reported 6-year timeframe of the Fox deal is unusual compared to the much longer-term deals that the other power conferences have signed. In fact, the Big Ten will end up back at the negotiating table before any of the other power conferences once again. On the one hand, this presents some risk to the Big Ten since they are not locking in today’s high rights fees into the late-2020s or even 2030s. On the other hand, every time that the Big Ten has bet on itself, it has ended up succeeding, whether it was with the formation of the BTN or taking its rights to the open market in a period of uncertainty for sports programming values with decreasing cable subscriptions. By the same token, Fox may be hedging on cable subscriber fee uncertainty itself, as Dennis Dodd had suggested.In any event, the short length of the TV deal means that conference realignment talk might cool down in the immediate term, but will pick up a huge amount of steam in the next 5 years. Whether it’s a coincidence or not (and I tend to think “not”), the end of the 6-year deal term in 2023 is shortly before the expiration of the Big 12’s grant of rights agreement in 2025, which makes any possible damages for a Big 12 defector to be much lower and/or negligible compared to a Big Ten windfall. The same usual suspects of Texas, Oklahoma and Kansas as Big Ten candidates. It will also be interesting to see how schools in other conferences (particularly the ACC) are going to adjust to an environment where each Big Ten school could be receiving nearly $60 million per year in media revenue starting in 2017 (as estimated by Awful Announcing), which would lap the SEC’s revenue (much less any of the other power conferences). A few million dollars per year difference in TV revenue may not have been enough to sway the most valuable schools (e.g. Texas, North Carolina, etc.) to switch conferences, but when we’re looking at an eight figure annual gap, it could change the dynamic quite a bit.

The announcement by Jim Delany at the end of 2009 that the Big Ten was exploring expansion was leading to this moment of a new TV contract. Nebraska added a national name brand for football, while Rutgers and Maryland added two massive media markets based on the East Coast. This isn’t the end, though. I still believe that ESPN is going to end up with the other half of the rights. It will be interesting to see what happens with the CBS basketball package (which hasn’t been talked about as much) since that provided great exposure and time slots for the Big Ten (such as the Big Ten Tournament Championship Game leading into the NCAA Tournament Selection Show) even if the contract value itself pales in comparison with football. Digital rights are going to be a much more significant factor in this new contract compared to 10 years ago, while some second tier sports such as hockey, baseball and lacrosse could end up seeing more telecasts beyond the BTN with multiple other networks. The Big Ten’s new Fox deal is a great start and it’s a sign of great things once we get the final overall media rights picture for the conference.

(Image from Detroit Free Press)

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The new college football season is finally upon us! Let’s get to some quick hits on college sports business news from the past few weeks:

(1) Sports TV Rights: Bubble or Not? – Even before the broader stock market swoon over the past two weeks, cable companies have been getting hammered by investors due to continued decline of the basic cable model due to cord cutting.

This potentially has a large impact on sports fans, particularly college sports fans, since so many off-the-field issues are directly related to cable rights fees for sporting events that have largely grown unfettered for the past decade. Conference realignment doesn’t happen if the Big Ten Network isn’t formed and becomes enormously successful. Major League Baseball, NBA and NHL franchises are buoyed from attendance peaks and valleys by massive regional sports network deals. The NFL receives more rights fees from ESPN for Monday Night Football and DirecTV for Sunday Ticket exclusivity than from its over-the-air network partners that are showing higher profile games than the former and are actually producing the games for the latter.

This begs the question that has been circulating quite a bit these days: is there a sports TV rights bubble that is about to pop?

It’s a lot more complex question than many observers give it credit for. On the one hand, cord cutting is accelerating with a major complaint being that non-sports fans are having to pay higher cable and satellite bills for sports networks that they do not watch. As a result, cable subscriptions rates are going down, which drags down the subscriber fees that networks such as ESPN depend upon. On the other hand, sports programming is one of the few (if not only) exclusive draws to cable and satellite television in the first place, so the relatively inelastic demand from sports fans is arguably even more important to cable networks than ever. In essence, when push comes to show, cable networks may rather lose the more price sensitive cord cutters than lose the higher paying sports fans.

Even with the impact of cord cutting becoming clearer in recent months, cable networks are still charging ahead with large sports rights deals. In early August, NBC and Comcast ponied up a 100% increase in rights for English Premier League games compared to the last deal that was signed only two years ago. The St. Louis Cardinals similarly just scored a doubling of its rights fees from Fox Sports Midwest on the regional sports network front.

It’s an interesting paradox: sports rights fees are arguably both the largest cause of cord cutting and the largest hedge against cord cutting. A non-sports fan is rightly going to question the wisdom of paying for cable when he or she can get the same lineup through a less expensive combination of Netflix, Amazon Prime and/or Hulu (plus maybe even HBO Now). By the same token, sports fans are more dependent upon cable than ever. Cable is no longer just a repository for surplus niche events, but now is the home (whether in whole or part) of the NCAA Tournament (including the Final Four), the College Football Playoff and nearly all bowls (including the bluest blue blood brand of the Rose Bowl), and MLB, NBA and NHL playoff games. More importantly, sporting events are exclusive and unique – a viewer can get news coverage as easily from an over-the-air network or Internet as he or she can from cable, but an over-the-air Ohio State game is not a replacement for a Michigan game for a Wolverines fan.

As a result, I don’t see complete doom and gloom for ESPN and sports networks in the future. For all of the alarmist articles about ESPN’s supposed impending demise over the past few weeks due to employee shuffling and Disney’s earnings reports, ESPN is still the single most valuable media and entertainment property on Earth. The reason why investors are scared isn’t because ESPN’s revenue and profit levels are bad, but rather that they have set such an insanely high bar financially that anything that deviates from that bar is worrisome. To put it into perspective, ESPN is still averaging about $6.61 per subscriber per month with over 92 million subscribers, which translates into $7.372 billion per year before they sell a single advertisement. That is over $614 million per month in just subscriber revenue (once again, we’re not even talking about the commercials that ESPN sells), which is more than the domestic gross of any movie released by Disney in history (and in fact, more than the domestic gross of any movie in history except for Avatar and Titanic). Just think about that: ESPN is generating revenue from just subscriptions that is more than what Disney grosses domestically from any Marvel, Star Wars or Frozen movie every single month… and once again, before they sell a single advertisement.

To be sure, the incredible amount of money that ESPN is generating that is propping up the entire Walt Disney Company (and national and regional sports networks are similarly propping up companies such as 21st Century Fox and Comcast) is exactly why investors are so spooked by any deterioration of the basic cable model. When Disney has been able to set ESPN on auto-pilot and generate more revenue than a new Star Wars movie without lifting a finger every month, both companies and investors start taking that seemingly endless cash flow for granted.* Still, there’s so much money at stake that cable networks are unlikely to stop investing in sports since they are what will keep such cable networks relevant regardless of whether the industry moves from a basic cable to a la carte or over the top environment. Hence, the Big Ten will still likely rake in massive record-setting cash for college sports deals when it signs its new TV contract(s) over the coming year.**

(* Speaking of Star Wars, Disney just announced that it is building a new Star Wars Land built at both Walt Disney World and Disneyland. I’ll admit that I’ve had schematics created in my head for a Star Wars Land ever since I was 3 years old with a Millennium Falcon ride and fully operational Death Star. So, this is as exciting to me as it is to my uber-Disneyphile sister.)

(** Just my semi-educated guess: look for the Big Ten to split its first tier rights between ESPN and Fox, where the ABC/ESPN package will effectively be the same as today, but the games that are currently on ESPN2/ESPNU/ESPNEWS getting sent over to Fox/FS1 with some provisions for better game picks if they are carried nationwide over-the-air. The BTN contract is locked-in going until the 2031-32 season, so that won’t be changing. I don’t believe that the Big Ten is truly interested in selling all of its rights to solely Fox, as exposure is still extremely important the conference in the same manner as the NFL. In fact, the NFL TV rights model is a good template for what the Big Ten wants to do, which is to ensure that it’s getting exposure and revenue from several of the top media players instead of just one.)

(2) House of the Rising Sun Belt Expansion (and Contraction?) – As much as the college football world is most interested in whether the Big 12 and/or its individual schools (i.e. Oklahoma) will decide to get back into hot conference realignment action, the Sun Belt has made the latest expansion move by adding Coastal Carolina as a new all-sports member. On paper, Coastal Carolina seems like a fairy good addition for a Group of Five non-power conference since it’s a school with a rising enrollment and solid TV market and recruiting location in the Myrtle Beach area. The Sun Belt may also be turning its focus back on being an all-sports conference as Commissioner Karl Benson has hinted at the league dropping football-only members Idaho and New Mexico State. Those two football programs might soon be joining the homeless UMass as independents against their will (unlike Notre Dame, BYU and Army). If that occurs, it’s going to be tough since there isn’t any natural home for those schools and independence is effectively a death sentence for those schools for more than a couple of years. UMass will be hoping for the AAC to lose a school or two to the Big 12, which would then open up a spot for them. In turn, that could open up other spots down the line for Idaho and New Mexico State. As much as the powers that be in college sports probably like the general slowdown in conference realignment, there are several schools out there that want and/or need chaos.

(3) Illini Coaching Dumpster Fire – As many of you know, I’m an Illinois alumnus and fan. I’ve seen enough dysfunction with Illini football over the years that I barely batted an eye when they fired their head coach only a week before the season opener. At a core level, Tim Beckman was a terrible football coach, awful in press conferences, disjointed with the media and, according to the evidence, abusive to his players. The question in my mind isn’t whether Tim Beckman should have been fired, as that was obvious to me after his first season in Champaign. Instead, the question is what the heck did Illinois Athletic Director Mike Thomas ever see in Beckman in the first place? If Beckman had an interview that was anything like his conversations with the media, what possessed Thomas to see anything in him? Let there be no doubt: this was a CYA firing by Mike Thomas, but the seat under his own “A” is going to be burning hot coal for awhile. To be fair, many of the non-revenue programs have seen quite a bit of success under Thomas, particularly volleyball, tennis, golf and baseball. However, football and men’s basketball are where power conference athletic directors are ultimately judged and Thomas has, at the very least, underachieved with both of them.

Here are my basic expectations for the Illinois football program: considering its location with access to the Chicago and St. Louis recruiting areas along with Big Ten membership, this team should at least be winning 6 to 8 games per year to consistently make it to bowl games while challenging for the weaker Big Ten West every 4 years or so when senior-laden teams cycle through. This shouldn’t be much to ask for. I’m not delusional in believing that Illinois should be having Ohio State-level success in football or becoming the dominant team in the Big Ten West. However, I also don’t buy some of the national narratives that Illinois football has to be inherently bad. Illinois is not like Indiana or Kansas where football will always be a placeholder until basketball season starts, so I’ll never accept the “Illinois is a basketball school” excuse for football ineptitude. (Besides, a top tier athletic department should have the ability to perform well in both football and basketball. See Ohio State, Michigan State and Wisconsin just in the Big Ten.) Instead, Illinois is simply a fairweather football school in the same manner as 90% of other college programs: they sell tickets when they win but fans won’t come out when they lose. The Illini football fan base is similar to the fan base of my Chicago White Sox – there are large numbers of us out there, yet we aren’t paying to watch a poor product like, say, Cubs fans have historically done. Illinois has made several terrible bad football decisions in the past, but there isn’t any structural reason why the school can’t have at least a competent football program. The immediate issue is that I don’t trust that Illinois will make a competent football decision until Mike Thomas is gone.

Of course, even with the turmoil surrounding Illinois football, I’m still pathological enough of a football fan to get excited for a Friday night game against Kent State. I’m fairly certain that my hopes and dreams for the Illini and Bears this year will be quickly crushed within the next 4 weeks, but until then, que sera, sera. Enjoy the games and holiday weekend!

(Image from News-Gazette)

(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)

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:

  1. More old people watch TV than young people*
  2. More women watch TV than men
  3. 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.

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

(Image from American Progress)