At their core, media rights to sporting events, particularly marquee events, are about the economics of scarcity. The number of events which can be used by media companies to attract desired television audiences is scarce. Thus, those large media companies with significant resources and scale are able to offer more than smaller companies to secure those scarce rights. Content owners, those selling the rights to their events, reap the financial benefits of large-scale distribution of their product, provided the networks who purchased the right can secure broad carriage deals.
In that sense, for the better part of the last 50 years, networks held the power relative to media rights. Perhaps no network exploited this power better than News Corporation when it purchased the rights to NFL games in December 1993 for its FOX network despite its status as a fledgling, fourth-wheel broadcast network. Shortly thereafter, FOX began moving to more desirable VHF stations and soon established itself as an equal to legacy networks CBS, NBC, and ABC. But this was prior to a fully mature cable industry.
The value in controlling access to live sports rights, it seems, may no longer be the panacea it once was for networks. If anything, the enormous fees it paid to acquire those rights may weigh down a network’s ability to be distributed as it seeks to recoup those costs through subscriber fees. Comcast’s recent decision to dump the Big Ten Network from its non-Big Ten market systems illustrates how this power dynamic has shifted from networks to the distributors who deliver the networks to consumers through carriage agreements. Traditional, large multichannel video programming distributors (MVPDs) had long enjoyed monopoly power in a given market.
Now that monopoly advantage is being challenged by the growing cord-cutting trend and the rise of virtual MVPDs such as YouTube TV, which bought time as presenting sponsor of the 2017 World Series.As evidence of this transition, Shalini Ramachandran reported in last Friday’s Wall Street Journal that Charter lost 122,000 subscribers in the first quarter of 2018, triple the 40,000 analysts anticipated. Additionally, Apptopia reported last week that DirecTV Now, fuboTV and Hulu Live all recorded more than 160% increase in monthly active users (MAU) from March 2017 to March 2018. YouTubeTV was launched in April 2017 and was excluded from the report. While Playstation Vue remained flat, Sling TV lost 34% of its MAUs.
Collectively, the vMVPD customer base now exceeds more than 4.6 million users, representing one-third of the 13 million people who have cut the cord since 2010. Ramachandran reported a MoffettNathanson estimate pegging the number at nine million cord cutters since 2015. And more alternatives to the traditional cable bundle seem to appear monthly, all attempting to differentiate themselves in some fashion, such as the upstart AT&T Watch which is eschewing sports altogether in an attempt to capture a share of the market that does not wish to pay for sports.
Last September I wrote about cord-cutting in this space. I suggested at that time “The future of sports media consumption, and television consumption in general, certainly seems destined to be controlled from a consumer’s tablet or phone, rather than a set top box.” Comcast’s decision to pull the Big Ten Network from certain systems, as well as its decision to move the NFL Network to less widely-distributed tier, point to Comcast making business decisions to jettison high-priced sports networks in which it has no equity stake from its set top boxes. This decision can be viewed as an attempt to lower bundle prices, and prevent a flight of customers to the aforementioned vMVPDs.
Comcast is the second biggest player in the traditional MVPD space with more than 22 million customers. As a result, when Comcast makes a decision to pull the Big Ten Network or NFL Network from its systems, the market of Comcast competitors will likely do one of two things. The competition will decide either a) it can position itself as an alternative to Comcast and seek to increase market share through subscriber churn, or b) it can follow Comcast’s lead and drop those networks.
We all know the formula here: the more subscribers to a particular network, the more revenue to that network. The more revenue to a network such as the SEC Network, the Big Ten Network, the Pac-12 Network and the forthcoming ACC Network, the more revenue that is distributed to member institutions, who in turn spend it on coach and administrator salaries or facilities for athletes.
The decision by Comcast probably won’t impact BTN’s bottom line too much. Its partnership with FOX means it will likely navigate this in good shape as it is likely bundled with other FOX assets such as FS1 and FX. If the cord-cutting trends continue, though, it may force other MVPDs to follow suit, creating additional negative externalities beyond just lost TV revenue.
Consider Charter, which has a large presence in Florida, with so many transplanted and retired Big Ten fans who enjoy the ability to watch their alma mater even though Florida is clearly not in the Big Ten footprint. Should Charter follow Comcast’s lead, Floridians wanting the Big Ten Network might be forced to choose between learning a new system like Hulu Live, paying a separate fee for a subscription to BTN Plus, or going without programming they desire. That will be the reality for Comcast households in Florida.
Comcast says its decision to drop BTN came following a regular review of its channel lineups. So, is this an indication that the amount of alternative entertainment programming has increased to the point where traditional MVPDs are no longer willing to distribute content that is not watched? Anthony Crupi of AdAge wrote in December about a PWC report which speculated that sports media rights could soar to $23 billion in 2021, an increase of four percent per year.
Whether that growth remains attainable as consumers ditch the traditional cable bundle remains to be seen. No singular change will impact the industry too much, but if a few thousand households here and there switch from the cable bundle to alternative systems (or forego the cost altogether), the ramifications might be felt during the next wave of media rights renewals.
This begs the question of whether networks such as BTN would be better off lowering the amount it seeks per subscriber in order to remain on broad tiers and avoid having boosters of member institutions such as my parents lose the ability to watch desirable programming? Two weeks ago, the excellent Jon Wilner of the San Jose Mercury-News reported BTN receives, on average, 48 cents per sub per month, including both in-market and out-of-market subscribers. By comparison, the SEC Network commands 74 cents per sub while the Pac-12 Network limps in at 11 cents per sub.
Wilner followed with another piece a week later, suggesting he does not believe the Comcast decision will impact the Big Ten much, citing an industry source who thinks out-of-market subscribers who want BTN will find alternate means to get access to the content. In noting that the out-of-market subscriber paid between 5-10 cents per month for BTN, Wilner suggests a different concern beyond carriage. He opines, “If Big Ten content is losing value, wouldn’t the same hold for other conferences?”
If that 2021 figure is accurate, it may actually signal the long-rumored sports media rights bubble might finally burst. If it does, I’m reminded of a 2003 quote from Barry Frank, vice chairman of IMG Media which I have used in my classes, “They created it (the NFL Network) to have viable alternatives if everybody doesn’t pay what the NFL thinks they ought to.”
If conference- and league-owned networks such as the NFL Network, BTN and the Pac-12 Network exist for negotiating leverage for media rights, what happens when the MVPDs decide the carriage fees are too high? Leverage shifts from the network to the MVPD, unless the network is prepared to take distribution in-house and become both the content provider and the content distributor.
The Big Ten, through its BTN Plus app, seems uniquely positioned among the major conferences to heed Frank’s advice and shift content to more of their own platforms. The new ESPN+ app might eventually afford the SEC and the ACC similar leverage. The future of sports consumption could very easily be a series of apps on someone’s mobile device along with subscriptions to individual networks, rather than the cable bundle.
In my piece last September, I suggested “Historically, the value in this transaction, and thus the power, rested with the content producer, but that power may be shifting to the distributor.” If, I wrote, a television network cannot gain broad distribution, its long-term viability is threatened. Companies such as Comcast and AT&T which own both the content and the distribution are uniquely positioned to dictate what content they carry, and at what price.
Which brings us to the well-scrutinized proposed merger between AT&T (primarily a distribution company with DirecTV) and Time Warner (primarily a content company). The Department of Justice has challenged the merger on anti-competitive grounds and arguments in the case are currently being heard in U.S. District Court. On April 18, Time Warner CEO Jeff Bewkes was questioned directly about whether the proposed merger would provide increased leverage over rivals. Of course, Bewkes said it wouldn’t.
But it could, and here’s how.
A merged AT&T and Time Warner (the Justice Department will rule on this by June 12) would include the Turner family of networks – TBS, TNT, TruTV – which happen to broadcast the NCAA men’s basketball tournament. The merged company, understanding the economics of scarcity, could raise the subscriber fees it charges competing distributors such as Comcast or Dish Network to carry those networks. Comcast could easily say “no, thanks” to the proposed fee increase and drop the Turner stations and frame AT&T-Time Warner as the bad guy, attempting to extract more money from subscribers to watch March Madness. Alternatively, AT&T-Time Warner could, however unlikely it is, make Turner stations exclusive to DirecTV and force consumers interested in March Madness to switch carriers.
In fact, a central point made by DOJ attorney Craig Conrath during closing arguments on Monday was, as quoted in a Wall Street Journal article, “AT&T could use Time Warner’s Turner networks, like TNT and CNN, as leverage to force rival pay-TV providers to pay higher prices for the channels. Otherwise, those rivals would face the prospect of a Turner blackout and possible customer defections to AT&T’s DirecTV.” Clearly, this merger is about content distribution.
Bewkes testified that the merger was necessary to compete with internet giants such as Google and Facebook, the latter of which has stepped into the world of distribution this spring with its deal to exclusively stream a Wednesday afternoon MLB game of the week. Conceptualizing those companies as distributors provides conferences with additional distribution options, should, to paraphrase Barry Frank, the market not offer what the conference thinks its rights are worth.
While much of the conversation here has centered on the Power 5 conferences, a recent deal struck by the Ivy League reconsiders the thinking of OTT apps not as networks, but as distribution channels. The Ivy League’s 10-year deal with ESPN for carriage on ESPN+ app allows the nation’s most tradition-rich conference to immediately rub shoulders with the Power 5 by placing its in-house Ivy League digital network on ESPN’s system.
Similarly, as I explained in that September piece, conferences such as the Patriot League, the Mountain West, and the WCC have sold rights to Stadium, a joint venture between Silver Chalice and Sinclair Broadcasting, owner of 173 local over-the-air broadcast stations. As part of that agreement, certain digital OTA Sinclair stations broadcast Stadium content 24 hours per day, giving those conferences a nationwide presence. Sinclair is currently seeking regulatory approval to purchase Tribune broadcasting, which could expand that nationwide footprint.
Additionally, both Hulu and upstart fuboTV have turned to programmers for capital infusion. Hulu initially turned to big programmers such as Time Warner and Disney for capital, while fuboTV recently raised $75 million from a group which includes FOX. The increased convergence of programming and distribution is illustrative of the growing importance of distribution channels.
It would appear cord-cutting and subscriber churn are here to stay, creating a tenuous future for the legacy cable bundle. Conferences and universities would be wise to develop a plan for distribution of their content which is not predicated on past practice, but, rather, focuses on creative sources of distribution whether it is their own platform, or through partnerships with existing and emerging distribution channels. Sports fans and their desire to watch live sports is not going away. But the cable bundle might.
As more people use the Internet to stream video, the future battleground will involve Internet speeds and net neutrality, a topic about which I scratched the surface last December. That future is now present, as Comcast last week announced it will only increase Internet speeds for customers who also purchase the company’s cable bundle. The company which owns the distribution holds the power.