According to a report released this week by PriceWaterhouseCooper, the revenue earned from media rights by the North American sports industry will surpass the revenue earned at the gate by 2018, when they’ll reach $19.95 billion and $19.72 billion, respectively, fulfilling the old adage that the sports business is really the TV business.
Increasingly, the reverse is also true: The TV business is really the sports business.
More than a third of all TV advertising in the U.S. today goes to live sports, and that doesn’t include ESPN, which shows a mix of live sports and sports-related programming. Add in ESPN and the share of advertising going to sport programming would top 40 percent, Advancit Capital partner and former Fox Digital president Jonathan Miller estimated from the stage at the New York Media Festival earlier this month. At the same time, according to SNL Kagan, sports networks account for nearly 20 percent of the carriage fees paid by cable and satellite operators, and that doesn’t count the portion of the carriage and retransmission fees paid to broadcasters and general-interest cable networks that can be attributed to the sports programming they carry. According to an analysis last year by MoffettNathanson analyst Michael Nathanson, the aggregate of sports rights account for as much as 50 percent of the cost of the average cable bill.
The relationship between sports and TV industries, in other words, is a mutually reinforcing one: TV money is the sports industry’s largest source of revenue, while sports programming drives the bulk of the advertising and distribution revenue that powers the TV industry.
A better way to describe it, though, might be co-dependent, where the pathologies of one are enabled and reinforced by the pathologies of the other.
Although access to live sports helps keep a critical mass of people subscribing to pay-TV, the cost of sports programming is the biggest factor behind rising cable and satellite bills, which acts like a tax on non-sports fans who subscribe to cable and has become a major driver of cord-cutting and shaving. Cord-cutting, in turn, is starting to cut into the bottom line of sports networks that rely heavily on carriage fees. On Wednesday, ESPN announced the elimination of 4 percent of its workforce in response to lower subscriber fees — a trend ESPN’s parent Disney warned in its most recent earnings call could accelerate.
Another, and potentially more dangerous place their co-dependent pathologies are starting to show up, however, is in the court room. Last week, the NFL and its broadcast partners were hit with a proposed class action lawsuit led by a group of bars and restaurants charging them with conspiring to limit competition for NFL telecasts and to raise the price of DirecTV’s NFL Sunday Ticket package of out-of-market games.
The complaint, filed in U.S. district court in New York, brings to nearly a dozen the number of similar complaints filed against DirecTV and the NFL in various jurisdictions around the country over the past two years all alleging price-fixing for out-of-market games. All insist that access to out-of-market games, whether via streaming or premium pay-TV package, is artificially and unfairly limited by the league in order to protect its exclusive arrangement with DirecTV for NFL Sunday Ticket, which can cost anywhere from $250 year for an individual subscriber to $120,000 for a commercial establishment, and only offers games in an all-in bundle.
The New York case goes further than most, however, in explicitly naming the NFL’s other national broadcast partners, CBS, NBC, Fox and ESPN, as parties to the conspiracy.
The complaint leans heavily on the critical role that sports programming plays in the economics of the broadcasting business both to suggest a motive for the alleged conspiracy and to explain how it works:
The agreement has restricted the availability of live video presentations of regular season NFL games. The Teams have agreed not to avail themselves of cable, satellite, or Internet distribution channels individually. In the absence of an agreement, each team would have an incentive to distribute its games nationally in these channels. Given the relatively low cost of Internet streaming and satellite and cable television carriage, each team acting independently would offer their games at a competitive price to anybody in the country who wanted to watch that particular team.
Instead, however, the Teams have all forgone this option in favor of creating a more lucrative monopoly. The Teams have agreed to make an offering called “NFL Sunday Ticket” (“Sunday Ticket”) the only way to view games other than the limited selection of games broadcast through sponsored telecasts (or, as discussed below, the cable channels ESPN and NFL Network) in any given area. Sunday Ticket bundles all other games into one package, sold jointly by the NFL to DirecTV and then to consumers.
This scheme thus doubly overcharges Sunday Ticket purchasers. First, the total elimination of competition allows the NFL, its Teams, and DirecTV to charge supracompetitive monopoly prices, rather than the prices that would exist if the 32 teams were competing for interest and distribution in a free market. Second, Class members must pay for access to all 32 teams’ games, even if they are only interested in viewing one or two teams’ games.
In addition to allowing Defendants to charge supracompetitive prices for Sunday Ticket, this scheme protects the five networks that currently contract with the NFL to broadcast regular season NFL games…By limiting the availability of competing products, the agreements drive up the market share and value of the Network Defendants’ broadcasts. This allows the Network Defendants to increase advertising revenue and demand higher affiliation or retransmission consent fees from multichannel video programming distributors (“MVPDs”; i.e., cable and satellite providers), which in turn are passed on to Plaintiffs, Class members, and others who purchase MVPD packages.
Much of which is true, at least as a practical matter. Whether it’s also a violation of the Sherman Act as alleged, given all the exemptions Congress and the courts have carved out over the years for sports and sports broadcasts, is a question for the courts to sort out. But the scope of the complaint illustrates the dangers to the networks in their co-dependent relationship with the leagues. The ultimate purpose of the alleged conspiracy to limit out-of-market access, according to the plaintiffs, is to protect the networks’ lucrative monopoly on broadcast rights, and you can’t find the NFL teams guilty of colluding to fix the price of out-of-market games without also finding the networks guilty.
Nor is the NFL the only professional sports league facing court challenges to its television deals. Both Major League Baseball and the National Hockey League were named in a lawsuit last year charging them with illegally limiting out-of-market access to locally broadcast games. After the district court judge in the case rejected the leagues’ motions for dismissal and summary judgment the NHL settled, and now offers single-team packages of out-of-market games in addition to its full slate of games. MLB declined to settle and the case is currently scheduled to go to trial in January.
It’s no accident that these lawsuits are arising now, against a backdrop of increasing OTT streaming of both sports and non-sports programming. The same centrifugal forces that are pulling apart the pay-TV bundle are starting to tug at the sports bundle. Each, in fact, reinforces and amplifies the effect of those forces on the other. As the TV bundle frays, it puts margin pressure on the networks that have committed to paying hefty fees for exclusive sports rights, which threatens the leagues that relay on those networks for revenue. As legal and market pressures on the leagues to break up the sports bundle grow, they will inevitably put pressure on the networks that rely on exclusive sports programming for advertising and carriage fees.
I’m not sure the marriage can be saved.