It seems everyone is writing about the sports programming bubble, wondering whether it’s here and when it will burst. Just Google “sports TV bubble” and you’ll find this story from the New York Times in January, and these from FOX and ESPN in March. But it’s not just this year. Forbes warned of a sports TV bubble in late 2011 and followed up in early 2013 declaring that the bubble existed and was about to pop.
What is the sports TV bubble anyway? It’s the hyper-inflated prices sports networks, cable and satellite companies, and consumers pay to produce, show, and watch live sporting events. Live sports means no fast-forwarding through commercials on the DVR. Advertisers pump gobs of money into the system to place their products in front of an engaged 18- to-35-year-old male audience. Target consumers are valuable. They make sports programming valuable. Networks pay billions to broadcast sports to those consumers but everyone — not just sports fans — foot the bill.
How did we get here? I touched on these issues in this post in May, when Senator John McCain introduced a bill that would eliminate regulatory barriers to a la carte programming by cable and satellite companies:
Here’s the example Senator McCain used: Disney owns ABC, Disney Network and ESPN. If a cable or satellite operator wants to offer ESPN to its customers, it must purchase and pay for all Disney-related programming, and vice versa. The cable or satellite company then has no choice but to offer ESPN and Disney Network as a bundle, even if some customers only want ESPN and others only want Disney. McCain’s proposed legislation would change that.
ESPN charges cable and satellite companies $4.69 each month to carry the network. When some consumers want ESPN and others want Disney, the cable or satellite company has no choice but to pay the $4.69 for ESPN and whatever the carriage fee is for Disney, and pass those costs onto their customers. If a la carte programming takes hold, then cable and satellite companies will purchase ESPN only for those customers who want the World Wide Leader. That means less money to ESPN in the short term. And it may force ESPN to raise its industry-leading carriage fee even higher. That may cause additional consumers to fall away, based on cost. In other words, unbundled programming will test how elastic the demand is for ESPN and other sports networks.
Without a la carte programming, consumers who want any cable or satellite programming are forced to pay for channels they don’t want at ever increasing prices. Patrick Hruby summed it up well several weeks ago at Sports on Earth.
This is the heart of the Sports Cable Bubble: Tens of millions of pay television viewers spending what Thompson estimates is at least $100 a year on sports programming they have no intention of ever watching, pumping billions into games enjoyed by others, enriching networks, leagues, teams and athletes all the while.
Hruby went on to note that surveys attempting to quantify sports-watching consumers are all over the map:
The exact number of non-sports fans is difficult to peg: A recent Harris Interactive poll found that 43 percent of Americans won’t cancel cable and satellite television simply because of live sports, which also suggests that the majority of the country could be perfectly happy not paying for ESPN; industry analyst David Bank told Bloomberg Businessweek that 80 percent of basic-cable customers would decline to pay for sports if given a choice; Forbes writer Alan McGlade figures that no more than 10 million homes are regular ESPN viewers, about 10 percent of the total pay TV market.)
What does any of this have to do with the local TV deals for MLB teams?
Baseball is live sports programming, 162 games a season. Just like with national sports broadcasts, advertisers want to have their products in front of a baseball-watching audience who can’t skip through the commercials. Regional sports networks want that expected ad revenue, so they bid billions for the right to broadcast the local team’s games for a long, long time.
But ad revenue is only a part of the equation. Regional sports networks charge a carriage fee to cable and satellite companies, just like ESPN does. And while RSNs don’t often have non-sports programming to bundle with their sports offerings, they have the leverage of being the only game in town for fans who want to watch the local sports teams.
Or do they?
Comcast launched CSN Houston last year in a joint venture with the Astros and the NBA’s Rockets. The Astros own 45% of the new network and will receive $80 million per year for 20 years. But three of Houston’s cable and satellite companies have refused to pay the $3.40 carriage fees CSN Houston wants to charge per customer. That’s left 60% of the Houston area without access to Astros and Rockets games. In San Diego, 40% of cable and satellite customers don’t have access to Padres games because Time Warner Cable has refused to carry pay the carriage fee Fox Sports San Diego charges.
What’s going on?
Cable and satellite companies have stepped up their efforts to pin point exactly who is watching local sports on TV, when, and for how long, according to a report by The Wall Street Journal (subscriber only).
The data have given them a better sense for how often individual customers tune into home-team games, and for how long. They have created algorithms to gauge this level of “engagement,” and are now using the findings to make decisions about whether to add sports networks and pass on the fees to all subscribers.
According to the Journal, AT&T U-verse used this information in deciding not to offer CSN Houston.
The question now is whether RSNs will start gathering similar kinds of information in deciding how much to bid for teams’ broadcast rights. Hard to imagine they won’t, if they want to avoid finding themselves in the same situation as CSN Houston and Fox Sports San Diego.
This shifting landscape is likely to affect those teams with local TV rights deals expiring in the next few years. The Rockies’ contract with Root Sports expires after the 2014 season, the Phillies’ deal with CSN Philadelphia and the Diamondbacks’ deal with Fox Sports Arizona expire after the 2015 season, and the Reds’ deal with Fox Sports Ohio expires after the 2016 season.
Should the Phillies be worried? Perhaps. Sports Business Journal (subscriber only) reported last week that ratings for Phillies games on CSN Philadelphia through the first half of the season have dropped 36% from 2012. And while Philadelphia is the fourth-largest TV market in the country (after New York Los Angeles, and Chicago), the Phillies sit outside the Top 5 MLB teams in average TV ratings and average audience size. (Top 5 in ratings are the Tigers, Cardinals, Reds, Red Sox, and Pirates. Top 5 in audience size are the Yankees, Tigers, Red Sox, Mets, and Dodgers).
For now, it’s wait and see.
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In November, we published information on each MLB team’s local TV contract. Since then, several teams have negotiated new deals, so it seems like a good time to update that information. The information on the below chart was collected from publicly-available sources.
|Team||RSN||Avg. Annual Rights Fee||Equity Stake||Expiration Year|
|Arizona Diamonbacks||FS Arizona||$31 million||2015|
|Atlanta Braves||FS Sports South/Sports South||$20-$30 million||2031|
|Baltimore Orioles||MASN||$29 million||87%||N/A|
|Boston Red Sox||NESN||$60 million||80%||N/A|
|Chicago Cubs||CSN Chicago/WGN||$50 million (combined)||20% CSN Chicago||WGN: 2014/CSN: 2019|
|Chicago White Sox||CSN Chicago||$45.5 million||40%||N/A|
|Cincinnati Reds||FS Ohio||$30 million||2016|
|Cleveland Indians||FS Ohio||$40 million||2022|
|Colorado Rockies||Root Rocky Mountain||$20 million||2014|
|Detroit Tigers||FS Detroit||$40 million||2017|
|Houston Astros||CSN Houston||$80 million||45%||2032|
|Kansas City Royals||FS Kansas City||$20 million||2019|
|Los Angeles Angels||FS West||$150 million||25%||2032|
|Los Angeles Dodgers||SportsNet LA||$340 million||2038|
|Miami Marlins||FS Florida||$18 million||N/A|
|Milwaukee Brewers||FS Wisconsin||$20 million||2019|
|Minnesota Twins||FS North||$29 million||N/A|
|New York Mets||SNY||$65 million (inc. over time)||65%||2030|
|New York Yankees||YES||$90 million (inc. over time)||34%||2042|
|Oakland A’s||CSN California||$43-$48 million||2029 (opt-out after 2023)|
|Philadelphia Phillies||CSN Philadelphia||$35 million||2015|
|Pittsburgh Pirates||Root Pittsburgh||$18 million||2019|
|San Diego Padres||FS San Diego||$60 million||20%||2031|
|San Francisco Giants||CSN Bay Area||$30 million||35%||2032|
|Seattle Mariners||Root Northwest||$115 million||more than 50%||2030|
|St. Louis Cardinals||FS Midwest||$25-28 million||2019|
|Tampa Bay Rays||SunSports||$20 million||2016|
|Texas Rangers||FS Southwest||$150 million||10%||2034|
|Toronto Blue Jays||Rogers Sportsnet||$36 million||N/A|
|Washington Nationals||MASN||$29 million||13%||N/A|