BUNDLE OF QUESTIONS
Sports has long been the essential ingredient in the cable-driven media model. But as more viewers cut the cord, what will happen to sports?
If your cable package were a sports team, it would invariably be described as "close-knit," all those individual channels bound and bundled together. Unlike most of commerce today—we purchase individual songs rather than entire albums; we customize everything from cars to phone cases to basketball shoes—cable comes to us as one robust, unbreakable whole. Don't have kids? Too bad, you're still paying monthly for Nickelodeon. You're a socialist? Sorry, you're buying a slate of financial news networks. You can't spell inextricable without c-a-b-l-e.
But even with the most harmonious team, bonds eventually unravel and connections erode. A growing number of subscribers are cutting the cord, replacing cable with broadband. Networks such as HBO and CBS are going straight to the consumer with content that can be streamed on mobile devices. As the president of Fox, Chase Carey, put it on a recent earnings call, the cable bundle is "fraying at the edge." The received wisdom: Inevitably a day will come—perhaps soon—when we will consume media √† la carte, picking and choosing and paying for only the programming we desire.
For years sports have been an essential ingredient in the cable-driven model, providing "appointment television," the rare fare that is all-but-DVR-proof. "The power of sports is the leading reason the bundle exists today and [why] the bundle is as big as it is," says Rich Greenfield, media and tech analyst at BTIG in New York City. "Sports support the whole business." At the same time bundling has been a boon to sports, increasing exposure on new tiers of channels and, more important, creating wealthy cable networks that have used those riches to pay record rights fees.
How will the new, unbundled model affect this synergy? Here's what the sports viewing landscape could look like in the future:
What happens to ESPN?
Today, cable viewers pay about four times as much for ESPN as for any other nonpremium channel, roughly $6 per month, thanks to the network's near monopoly position. With a few minor exceptions—the NHL, the Olympics, English Premier League—ESPN has a deal with every major sports league. Sports fans want this programming.
Just under 100 million cable homes get ESPN in their cable package; before selling a single commercial unit, the network earns around $7 billion annually in subscriber fees. Still, how many consumers would voluntarily pay for ESPN? In conjunction with a 2004 renegotiation, one cable carrier surveyed its consumers and found that one-third of them would drop their current carrier if it didn't offer ESPN. For sake of argument, let's assume that if subscribers could order channels piecemeal, two-thirds would choose not to pay for ESPN.
Calculating ESPN's subscription price in an unbundled scenario goes beyond simple math. Advertising rates are largely based on scale and potential reach, so while viewership might be constant, ESPN would lose ad revenue by reaching 67 million fewer homes. (On the other hand, ESPN has huge support among males ages 18 to 49—the most desirable demographic for advertisers—which might help keep its ad rates up.) Scalar Media Partners, a Manhattan consulting firm, estimates that the price would be $30 a month. "That's what ESPN would need to get back to the current positive cash flow that supports all the rights fees they're paying, and the dividends they pay to [parent companies] Disney and Hearst," says Frank Hawkins, a founding partner of Scalar. "And I think they could get it."
Who would pay $30 a month for ESPN? According to Nielsen research, the average household consistently watches only 17 of the 189 channels it receives. Consider how many of them you, the sports-minded consumer, would gladly give up to offset the ESPN fee increase, and $30 a month becomes much more palatable, no?
Who loses if channels are unbundled?
Regional sports networks (RSNs), for one, which charge between $2 and $3 a month. Ratings suggest that only a very small percentage of subscribers would pay that voluntarily. Take Denver, a market of 1.57 million cable households. During Rockies games, Root Sports Rocky Mountain draws 37,000 viewers. (This is lower than Yankees games, which average 221,000 on the YES Network, but higher than Astros games, which average 8,000 viewers, the lowest in MLB, on CNS Houston.)
Consider that the Rockies are Root Sports Rocky Mountain's big-ticket item, even if they draw only 2.3% of potential viewers during games; that there's very little other live programming to fill the thousands of hours when the Rockies are idle; and that, in an unbundled world, fans will have the option to start their subscriptions before the baseball season, then cancel them right after. Is such an enterprise viable? Do the back-of-the-envelope math, and the Denver RSN would have to charge more than $1,000 per subscriber annually to offset the drop in reach. "That whole business model is going to explode," says Tom Spock, another Scalar founding partner.
Likewise, it will be interesting to see how the unbundling of cable will affect college-conference networks—and, in turn, college sports. For instance, each eligible Big Ten school will reportedly make $30.9 million this year, thanks mostly to proceeds from the Big Ten Network, which is in 60 million households nationally. (That figure is projected to rise to $44.5 million in 2017--18.) Yet based on ratings, only a small fraction of cable subscribers would pay to order the network. If conference networks can no longer rely on bundling, they will struggle to replace that piece of the revenue pie, which will have a huge impact on athletic department budgets.
What about network television?
You could argue that the national networks have gotten a raw deal all these years. Even as media proliferated and fragmented, ABC, NBC, CBS and Fox still delivered the largest audiences on television. However, until fairly recently, when they started getting cash from cable companies for retransmission rights, they've had to rely solely on advertising because they cannot charge subscription fees.
In an age of unbundling, the business model of networks will be less disrupted than that of their cable counterparts; they're less dependent on cash for carriage, and they offer a wide variety of programming that appeals to a wide variety of viewers (i.e., they're likely to have more than a third of households choose to keep them). Plus, as CBS has already started doing, networks can recoup viewers (and revenue) by offering Over the Top (OTT) subscription video services, available on mobile devices and tablets.
As it stands, sports can be a loss leader for network television. Rights fees and production costs are high, but games enable networks to gain a mass audience that leads in to other shows (think of the Sunday NFL audience that sticks around for 60 Minutes) and a chance to integrate promotional opportunities (e.g., the promos for fall shows displayed between downs in football or pitches in baseball).
Why don't the leagues and other content holders emulate HBO Go and market directly to consumers?
Some media experts are predicting that the next round of sports television deals won't be with ESPN and networks but with Google or AppleTV or Netflix. Who even needs television and linear channels when content can stream? Already some leagues sell OTT content directly to the consumer. Why wouldn't the NBA, for instance, consider holding the rights to a few extra games and selling them for, say, $1.99 apiece, or offering an entire subscription-on-demand package directly to fans?
Others say, Not so fast. For one, given the premium that networks pay for live programming, it's unclear whether leagues would fare better financially under a content-streaming model: They would be selling only to their fans, and at higher prices. It's also much easier to develop the next generation of followers when your programming is available to everyone; that's one reason that the fan base of the NFL, which has mostly stayed on broadcast television, has continued to grow. Remember, too, that most leagues—including the all-powerful NFL—have signed television deals well into the next decade.
What else can networks do to squeeze value out of sports?
Especially if pricing becomes more competitive, networks will have more incentive than ever to experiment with features to augment the viewing experience. This could mean giving viewers an opportunity to pause the game and make a microbet. This could mean more fantasy league tie-ins during the broadcast. This could mean offering viewers access to advanced statistics during the broadcast. "Intelligent upsells and second-screen experiences and innovation with broadcasts are going to be crucial," says Scalar's Hawkins. "Will the average fan pay $1,000 for a baseball package? No. Will they pay a few hundred if they get live games and also this additional data and features? Maybe."
Where does net neutrality figure into this?
Glad you asked. It's not the sexiest topic, but resolving it might be the most important factor in the entire discussion. Greatly simplified: Net neutrality is the principle that no one should have better Internet access than anyone else. As President Obama has put it, "There should be no gatekeepers between you and your favorite online sites and services." This means, for instance, that established companies shouldn't be able to charge a premium for superior speed.
While this sounds fair and equitable, it can be problematic. If ISPs can't charge for upgraded service, they have little incentive to innovate and broaden bandwidth. Right now, bandwidth is sufficient to watch Netflix movies or our favorite shows on demand. But can millions of people simultaneously stream the same NFL game? If not—and if net neutrality prevents the improvement of Internet architecture—a discussion of mass streaming of mainstream sports may be a moot point.
Is there anything we know for sure?
Sports will be a major player. There was a time when it was chic to say that "the media drives sports"; that television rights fees and video game revenue and digital distribution propped up the entire sports industrial complex. Now it's fair to assert, as Greenfield does, that "sports drive media"; that this valuable live programming that attracts large audiences at exactly the same time is a critical player in the future. As Spock puts it, "How sports is distributed—and the technology we come up with to enhance and augment it—is going to lead the entire media industry."
Old saying: The history of the media industry is the history of the tension between content and distribution. Right now the tension is crackling.
Do the back-of-the-envelope math, and Denver's regional sports network would have to charge more than $1,000 per subscriber annually to offset the drop in reach. "That whole business model is going to explode," says one media analyst.
Channel Charting
The estimated amount cable providers pay top networks each month, per subscriber
$6.04 ESPN
$1.48 TNT
$1.37 3NET
$1.22 NFL NETWORK
$1.21 DISNEY CHANNEL
$.99 FOX NEWS
$.83 USA
$.74 ESPN2
$.72 TBS
$.68 FOX SPORTS 1
ILLUSTRATION
Illustration by Andrew DeGraff