Sports costs and television

[ChicosBailBonds]

Since we discussed this many times last week as it relates to conference shuffling, etc, seemed a good timing that this article came out yesterday.  It does get to the heart of the matter that many sports fans don't understand.  They want it all, willing to pay for it, but the reality is that most people in this country aren't sports fans and aren't willing to pay for.  So the system that has been created is driven by huge sports fees for sports content that few want to watch but nearly all are forced to pay.

http://www.latimes.com/entertainment/envelope/cotown/la-fi-1202-ct-sports-cost-20121202,0,2955837.story

[Aughnanure]

Chicos, what are your thoughts/insight on this GTown blog post on the sports content bubble.

This Bubble Will Burst: How Greed Will Bring Down Modern Amateur Athletics
http://www.casualhoya.com/2012/11/27/3698576/big-east-tulane-east-carolina-big-ten-big-12-pac-10-acc-maryland-rutgers-ncaa-realignment

This won't end well.

Pardon us as we take a break from our regularly scheduled delusion to provide a brief dose of reality. The news of the past week has perturbed me. Not because I am a Georgetown fan, Big East fan, or college basketball fan, but because something smells rotten in the state of amateur athletics. All this talk of TV contracts, TV markets, and TV valuations in the latest round of conference realignment has made me feel all, well, bubbly.

Let's take a look at current trends in the TV market:

Sky Rocketing Valuations. The value of the ESPN family of networks was recently estimated at a mind-boggling $66 billion. To put that in perspective, three years ago an analyst pegged the value of the sports network at $23 billion. That is nearly a 3x jump in valuation in three years for a well-established company; we're not talking Facebook in 2007 here. Heck, ESPN was basically a throw-in when Disney purchased ABC-Cap Cities in 1996. The real value of that deal was perceived to be the ABC broadcast networks. Disney top brass reasoned that they could extract some extra value from ESPN by creating themed restaurants utilizing the brand, ahem, ESPN Zone. We all know how that worked out.

So what drove this massive increase in value you ask? Well, many things did, the most important of which is the very different way we now consume television content. In 1996, everyone gathered around the television on a set date and a set time to watch a specific show (and its accompanying commercials). If you missed the show, you had better hoped your VCR worked correctly or you would be forced to watch it on re-runs at a much later point. This was an age before DV-R and On-Demand; it was an age where broadcast television reigned supreme. It goes without saying that today things are very different. The only type of content that requires a person to tune-in at a specific point at a specific time on a specific device is live programming, which mostly consists of sports. Hence, sports content and the networks dedicated to the airing of sports content are seeing immense jumps in value. Values of infinity, and beyond.

Slowing Ad Market. Advertisements represent roughly 50% of revenues for cable networks. It is no secret that advertisers hate DVRs and have not figured out a way to effectively monetize On-Demand programming. Some also don't really get online video, yet. The only thing they know, and know well, is TV. To them, TV is the most effective method of reaching their target demographics. So logically, if advertisers love reaching people through linear TV, and sports is the only content that can predictably provide viewers watching live programming, then advertisements on televised sports content are the most effective way to reach viewers. And therefore, the TV ad market for sports content should be growing. Only, it's not. Recent reports from Disney and Time Warner have indicated that the sports ad market is actually slowing down. It could be because of the economy. It could be because there is an over-supply of sports content. It could be because advertisers are finally figuring out the Internet. Or it could be because advertisers are realizing they are overpaying for access to a blanket label called sports content.

Decreasing Customer Demand. The other 50% of revenues for cable networks come from subscriptions fees, which are the monthly charges content distributors pay the networks for the right to deliver their channels. This was the driving force behind the Maryland and Rutgers moves as the BigTen reasoned that if it was able to add new television markets, it would be able to make more money off of the BigTen Network. The BigTen Network is only included in the basic tier package if a member school is situated in that DMA. Hence, by adding Rutgers and Maryland, all people in the 1st and 8th largest DMAs will now receive the BigTen Network as part of their basic cable TV subscriptions and the distributors will have to pay the BigTen Network for every basic cable subscriber they have in those areas. Makes perfect sense, if everything were to stay the same forever. Again, it's not.

There is already a growing fear in the TV industry about cord-cutters, cord-shavers, and cord-nevers - people that no longer receive some or all content via the traditional coaxial cord/satellite and receiver setup. Forcing people to pay for more content that they do not necessarily want will only increase this trend. This is especially true if other conferences that have announced plans to launch dedicated cable networks follow a similar approach to the BigTen. What if the SEC adds Virginia Tech? Are all DC residents willing to pay an extra ~$5-6/month to Comcast for access to Tier 2 and Tier 3 BigTen and SEC games just because they live in the same geographic area that Maryland and Virginia Tech also situate? Am I willing to be forced to pay $60-72 a year for the privilege to watch Indiana and Minnesota or Tennessee and Mississippi State play football? This is on top of the annual increases Comcast already levies upon me. Non-sports watchers have already noticed that the ESPN Networks account for 20% of the wholesale subscription fees paid by distributors and then passed along to subscribers. Might this be the final straw for the current content distribution system?

New Competition. There used to be only ESPN. Now there is NBC Sports Network. There is CBS Sports Network. Turner Sports has entered the playing field by acquiring NCAA Tournament rights. And News Corp might launch a cable sports network. More competition, more bidders, even higher prices paid for content. But it also means there will be even more sports content on television, increasing the supply for advertisers. Increasing supply with decreasing demand ... recipe for disaster.

Technological Innovation. The above four trends assume that the traditional pay-TV system stays the same going forward. Prices increase and decrease, consumers come and go, competitors enter and exit, but the fundamental system of paying a monthly sum for access to a hundred TV channels, ten of which are probably watched, remains the same. It embraces a complete and utter disregard for what Google, Netflix, Microsoft, Amazon, Apple, Facebook, and many of today's other top innovators are currently doing with video content. Google has already launched a broadband service in Kansas City and has been slowly unveiling details about its TV initiative. It has already proven that it can host live content on YouTube for a mass audience and could be entering the wireless service market soon. Despite its recent struggles, Netflix still has more subscribers than any pay-TV distributor. And Xbox Live has quietly amassed a subscriber base equal to that of the top two pay-TV distributors combined.

The innovation is not only limited to outside players, traditional media companies are embracing and reacting to the changing environmental as well. HBO recently launched HBO GO as a standalone service in parts of Europe; it could very well do the same in the U.S. Cox Communications is offering an ultra-low priced package that excludes sports channels. Everyone knows that change is coming, yet sports content is following the same old broken model.

Money-Hungry and Short-Sighted Leaders. The people at the center of this circus are the highly-esteemed leaders of our educational academies and the directors charged with finding accord between academics and athletics. There is no shortage of impressive degrees following the surnames of these people yet they so rashly lose focus at the mere prospect of more money, like a child in front of candy. Promises of greener pastures and greater paydays by simply publicly saying one thing and privately doing the opposite. No concern for the long-term ramifications of their hasty decisions, rather an impetus to be seen as doing something rather than nothing in an enigmatic market. Two Maryland officials turned their backs on 60 years of traditional over the course of a weekend. Insert whatever cliché you want here about there being no free lunch on the one day it took to build Rome.
So let's sum this up. We have increasing valuations despite slowing ad revenue and decreasing customer demand. New competition is quickly entering despite the fact that technological innovation is primed to transform the industry. And people in positions of very high power are making rash decisions based on information derived from past trends and not future outlooks. Does this sound familiar to anyone?

What Happens After the Bubble Bursts?

Sports content will still be valuable. Sports content will still drive people to the television set at a specific date and time. And advertisers will still pay massive premiums to know they are reaching people. It's just that not all content related to sports will be as valuable as the hype it is getting today. And I think the losers in this not-too-distant future are the schools/teams/conferences that made drastic and short-sighted decisions with the expectation of a major payday just because what an outdated TV model has dictated in the past. The BigTen added two broke and historically bottom-feeder football programs because of where they were located. The Big East added two nationally (probably even regionally) irrelevant schools for access to different TV markets. It remains to be seen what the remaining conferences choose to do.

At the end of the day, the quality of a product is the only characteristic that will lead to consistent and stable sales. I am sure the inner-marketers in you will be sure to point out that there are three other P's in the marketing mix that I am neglecting. Promotion and placement will certainly bring attention, and price should be a factor, albeit it is not now, but the product itself is what will bring recurring consumers. And unfortunately for a lot of fans, the quality of the on-field content just got a lot worse.

I am sure Rutgers fans have visions of greatness as their team toes the line of scrimmage against Ohio State in the BigTen Championship game. Sorry, it's not going to happen. And I am sure Big East executives have dollars signs in their eyes as they envision the 2018 Big East Championship match between Southern Methodist University and Tulane in front of a sellout crowd at the World's Most Famous Arena. Not happening either. All that has happened is a complete and utter dilution of what makes college athletics great: competition.

My lowly suggestion is for each and every university President and Athletic Director to take a break from the madness and do some inner soul-searching. Find what put your athletic program on the map, whether it is football, basketball, field hockey, intense local rivalries, or whatever. Find it and preserve it, because becoming something you are not in order to chase money will only result in irrelevance. The pay-TV tide is ready to turn, and when it does, the programs/conferences that built castles on shells will be swept away.

I hope I am wrong, but this won't end well.

[Abode4life]

Looks like the WSJ also had an article on this.

http://professional.wsj.com/article/SB10001424127887324355904578157190021391794.html?mod=WSJ_hps_sections_business

Time Warner Cable CEO Lashes Out at Program Costs

By SHALINI RAMACHANDRAN

Time Warner Cable Inc. Chief Executive Glenn Britt issued a stern warning to entertainment companies Monday, saying he will take a "hard look" at each programming contract and drop television channels that "cost too much relative to the value of the service."

Speaking at an investor conference, Mr. Britt said TV channels that receive "hashmark ratings" are going to experience a "different kind of conversation" with Time Warner Cable "than we had with them five to six years ago."

Time Warner Cable, like several other pay-TV distributors, has been vocal about the rising fees that entertainment companies--especially those with valuable sports programming—are charging them to carry their channels.

Mr. Britt said that the increasing cost of giant TV packages is behind the softness in the video business that the cable industry as a whole has been grappling with.

"We've accumulated networks that hardly anybody watches," Mr. Britt said. "We can't keep carrying these giant packages...with services that don't carry their weight."

Mr. Britt also expressed frustration at programmers that think that full distribution across cable platforms is a "birthright." "This stuff is just starting to cost too much. If we want to keep this going we need to get the prices of packages lower," he said.

While he acknowledged the occurrence of cord-cutting--disconnecting a TV subscription in favor of cheaper online video options—Mr. Britt said the more threatening issue is that the prices of packages are increasing while the economy hasn't improved significantly enough. The economy is "still bouncing along the bottom," Mr. Britt said, though he added that he is seeing "a little bit" of new household formation.

Separately, Mr. Britt said he sees set top boxes going away as more consumers watch video through devices like smart TVs and tablets that communicate using Internet Protocol, a standard that is more flexible and easy to update than the clunky systems used by traditional set top boxes. "Over the next five to 10 years, you're going to see many fewer set tops out there," he said, because "the devices that people buy have all the same functionality as set tops," including technology to decode cable signals securely.

Cable operators have said that they want to move toward a fully IP-based delivery of video, which will open up valuable space on the cable pipe to be allocated for more high-definition channels, better cloud-based user guides and faster Internet speeds. With more capable devices, the need for set-tops "will diminish," Mr. Britt said.

[The Equalizer]

Since we discussed this many times last week as it relates to conference shuffling, etc, seemed a good timing that this article came out yesterday.  It does get to the heart of the matter that many sports fans don't understand.  They want it all, willing to pay for it, but the reality is that most people in this country aren't sports fans and aren't willing to pay for.  So the system that has been created is driven by huge sports fees for sports content that few want to watch but nearly all are forced to pay.

http://www.latimes.com/entertainment/envelope/cotown/la-fi-1202-ct-sports-cost-20121202,0,2955837.story

But to be fair, the cable operators aren't coming clean on this either.  They imply that the full cost of sports programming gets passed on to subscribers, forgetting to mention that they're able to sell more local cable ads on those channels (at higher cost),  possibly even generating a profit.  

The operators would rather pay for popular programming that they can sell against (like sports) as opposed to free programming that won't generate a dime in local cable ad sales (like Cspan).  If they can get subscribers to pay for it on the other end,  even better.  

And if they can convince the public that the sports teams deserve 100% of the blame for price increases--that's ideal.

[martyconlonontherun]

OT: but do we really need to post the whole article on MUScoop? Most of these sites are free or have a simple registration. Why not support the businesses giving free information instead of completely stealing it?

[ChicosBailBonds]

But to be fair, the cable operators aren't coming clean on this either.  They imply that the full cost of sports programming gets passed on to subscribers, forgetting to mention that they're able to sell more local cable ads on those channels (at higher cost),  possibly even generating a profit.  

The operators would rather pay for popular programming that they can sell against (like sports) as opposed to free programming that won't generate a dime in local cable ad sales (like Cspan).  If they can get subscribers to pay for it on the other end,  even better.  

And if they can convince the public that the sports teams deserve 100% of the blame for price increases--that's ideal.

True in some situations.  It depends if the contract allows for local ad insertions.  Some deals do, some do not.  The numbers aren't great, a typical deal like that allows usually 1 minute of ad sales time per 30 minutes, sometimes only a :30 ad spot.  You typical cable spot might sell for a couple thousand dollars, sometimes less.  Depends.

You are absolutely right that not 100% of the blame is a result of sports properties, but I can tell you they are the biggest driver by far. ESPN is over $5 a subscriber per month, a channel on a basic network might be $0.20.  The local regional sports networks...the Lakers new channel, about $4.00 (all public knowledge). 


One thing that the Big Ten and other sports networks are going to have to balance is how hard to push.  With so many consumers not interested in sports, do they make a play for a fee that is going to drive customers off these platforms entirely or into packages that have no sports content?  Or, do they go for a volume play where their rights fees are lower but can be spread across many subscribers, thus increasing their eyeballs.  Today, it's the latter but it is getting very close to the point where some distributors are simply saying no more.  Not going to pay it.  We are doing that with the Pac 12 network right now.  DISH is doing it with YES, Lakers, MSG, etc.  Charter and Comcast are starting to do it.  Interesting times ahead. 

[Canned Goods n Ammo]

There are some basic economic forces at play.

Sports, and watching sports aren't inelastic. Consumers will go pretty far to support their team, but at some point it can become cost prohibitive.

Chico's correctly notes that 100 hardcore fans paying $10/month is the same as 1000 regular viewers paying $1.

The hard part is calculating the loss of potential fans over time due to a loss of overall exposure by going with the higher priced model.

My mom likes football, but she isn't going to pay extra to get the NFL games. She's just not that dedicated or interested. You will have enough casual fans who don't subscribe, and eventually you might have an exposure problem... especially exposure to youths.