Bad Sports: ESPN Sues Verizon

No U.S. television network is more invested in, or has benefited more from the dynamics of the bundle than ESPN. The combination of must-have programming for a key segment of the pay-TV audience, and the must-carry leverage of its sister-broadcast network ABC, has given the Disney-owned sports network the power to command the highest per-subscriber carriage fees in the industry, ensure placement on basic tiers, and compel carriage of ancillary networks like ESPN Classics and ESPN Deportes.

espn_sportscenter_logoFor those pay-TV subscribers not in the ESPN demographic, however, that leverage has acted like a tax, imposing higher costs for networks and programming they don’t watch, yielding what amount to windfall rents for ESPN. Those windfall rents, in turn, have given ESPN the wherewithal to pay the skyrocketing rights fees for live sports. Thoseinflated rights fees, in turn, have become the primary economic engine of most professional and big-time amateur sports while acting as a formidable barrier to entry for would-be competitors to ESPN, yielding a virtuous cycle that reinforces ESPN’s dominant position within the pay-TV ecosystem.

Take away the windfall rents generated by the pay-TV bundle, however, and the wheels of that virtuous cycle could start to come off. That’s why it was no surprise that ESPN would be first out of the blocks with a breach-of-contract suit against Verizon over Verizon’s FiOS Custom TV plan that goes part way toward disassembling the traditional all-or-nothing bundle by offering subscribers a mix-and-match menu of smaller channel packages organized thematically.

Critically for ESPN, the plan relegates the network and its offshoots to a sports package, making its purchase optional for FiOS subscribers. According to ESPN, that violates the terms of its carriage deal with Verizon, which it says prohibits placing ESPN and ESPN 2 in a separate, add-on package.

Nor is it surprising that the two loudest objections to Verizon’s unbundling after ESPN are coming from Fox and NBC Universal, both of which have launched their own 24-hour sports networks in the past two years in an effort to compete with ESPN and both have used the same leverage points of retransmission consent for their broadcast channels and the bundling of their cable channels to gain carriage for the new networks. Both have also spent heavily on live-sports rights, premised on using the financial leverage of the pay-TV bundle to pay for them.

In contrast, CBS has not sought to position CBS Sports Network as a direct, 24-hour competitor to ESPN and has been more circumspect in pursuing expensive rights deals. No surprise then, that CBS announced on Monday — the same day ESPN filed its lawsuit against Verizon — that CBS Sports Network would join the FiOS Custom TV lineup.

Regardless of the merits of ESPN’s contractual claim against Verizon, unbundling threatens the basic premises of the sports broadcasting business model, more so than any other programming category. A la carte streaming to the existing fan base is unlikely to make up for the loss of windfall rents that would result the unraveling of the all-or-nothing bundle, at least in the near term.

ESPN knows that some renegotiation of the bundle is inevitable, of course, which is why it’s cooperating with efforts like Sling TV and has made some of its programming available over-the-top without authentication. You can’t control a conversation you’re not a part of.

What it can’t abide is renegotiation on someone else’s terms.