As Viewers Move Away From Cable to Watch Live Sports, Watch the Dominoes Fall

As Viewers Move Away From Cable to Watch Live Sports, Watch the Dominoes Fall

By Sean Pendergast
Tuesday, April 26, 2016 at 6 a.m.

In team sports, to fans and spectators, ultimate victory is a simple concept. One winner takes home one trophy each season in each sport. Peyton Manning’s hoisting of the Lombardi Trophy, confetti raining down onto the Villanova basketball team after their title-winning buzzer beater — to fans, those are the images of success.

Behind the scenes, though, to the power brokers and franchise owners who move the chess pieces in our sports universe, true “victory” is far more inclusive. To them, success is measured in dollars, and while only one team can lift the trophy at the end of each season, for several years now, the money has piled up sky-high for every single team owner and major college president, regardless of how good or bad their teams have been.

A high-definition antenna…… is able to capture the over-the-air channels like CBS, NBC, ABC and FOX crystal clear, and thus fills in much of the remaining sports-viewing gap after cable is cut

Yes, big-time sports are a cash machine in which even the worst teams on the field are wildly profitable. According to Forbes, the Buffalo Bills are the least valuable team in the NFL. They’re worth $1.4 billion. The Milwaukee Bucks are the least valuable team in the NBA. They recently sold for nearly $600 million. Auburn and South Carolina combined to win three SEC football games last season. Their athletics departments combined to bring in $235 million in revenue last year.

You get the idea. Precious few are lifting trophies, but everyone is swimming in cash, and the fuel driving this money-printing engine is television rights contracts whose values have skyrocketed into the stratosphere. The 32 teams in the NFL split roughly $7 billion in television money each year before they even sell one ticket to a game. The NBA’s new media rights contract with ESPN and Turner starts next season. It’s a nine-year deal worth $24 billion. Major League Baseball, college football, the NCAA basketball tournaments, all of these are smoking-hot television properties.

Where is the TV money coming from? Largely from ESPN, which has its hand in carrying virtually every major sport, and whose astronomical per-subscriber fees that it charges to cable providers to carry its content — roughly four times those of its closest cable competitor — allow it to spend on sports broadcast rights like a drunken sailor. According to Clay Travis of Outkick The Coverage, ESPN spends around $6 billion per year on rights fees for professional and collegiate sports. FOX, NBCSN and a few other cable entities factor in, as do regular over-the-air entities like NBC and CBS, but it’s mostly ESPN’s money that’s fueling this boom.

Why is ESPN able to spend so voraciously on sports television content? Because cable and satellite providers pay ESPN a relative king’s ransom for the right to carry its network. For just the main ESPN channel (not including ESPN2, ESPNU and other ESPN properties), cable providers pay Disney (ESPN’s parent company) $6.61 per cable subscriber. With ESPN in around 93 million homes, that’s about $7 billion in revenue before ESPN even takes in one dollar of advertising. For some perspective, the next most expensive cable network behind ESPN is TNT at $1.65 per subscriber. When you consider that, according to a 2013 Needham & Company report, only 20 percent of cable subscribers would pay for ESPN if the cost were unbundled, that’s a lot of non-sports viewers indirectly paying sports leagues for their TV rights.

Ironically, though, the very thing that has driven the value of sports television rights through the roof could ultimately be the pin that pops this gluttonous bubble — the evolving television consumption habits of this generation of viewers, specifically the advent of the DVR and consumers’ choosing to sever ties with cable and satellite providers altogether. The former is what has spawned the golden goose, and the latter could kill it. I’ll explain.

With more and more cable subscribers using their DVR functionality to binge-watch shows and skip commercials, live programming that is considered “DVR-proof” has never been more valuable. Sports is the last bastion of content in this category and, therefore, the most sought after by advertisers. So it stands to reason that ESPN and every other sports outlet (but especially ESPN, because it can) would overpay for the rights to broadcast games, since it’s easily the category of programming in which viewers are most likely to sit through commercials. Advertisers love sports. This is how sports rights fees balloon.

However, if the “live,” DVR-proof aspect of sports on TV is the air inside the sports TV rights bubble, then the sword of Damocles hanging over the bubble is the very real trend of people eschewing cable altogether, or “cutting the cord,” as they say. Indeed, there are a growing number of people looking at their monthly cable bill of anywhere from $100 to $200 and realizing they rarely watch most of the channels. In fact, on average, cable subscribers watch only 17 of the nearly 200 channels they’re paying for.

Cable programming, with its bundled, “single price for hundreds of channels” approach, has always been accepted as a kind of weighted socialism in which we’re all paying various semisecretive amounts for channels that we rarely watch. We’ve never been allowed to really unbundle our cable bills and pay for what we actually use.

However, the television viewing landscape has changed dramatically in the past five years, with the rise of streaming, on-demand services like Hulu and Netflix, and streaming television packages like Sling TV, which carries more than 20 cable channels for about $20 per month, including ESPN. Cable subscribers, and specifically sports fans, can now leverage the power of the Internet to walk away from cable, stream their shows over the web and still get nearly everything they had watched as cable subscribers.

Houstonian Chris Brantner founded CutCableToday.com, a website that educates sports fans on how they can leave cable behind but still be able to consume all the big sporting events. “For the longest time, sports was the No. 1 thing holding people back from cutting the cord, because you need to see the action live as it occurs,” said Brantner. “But in the last year or so, a lot has changed for sports fans. It really started in January 2015 when Sling TV launched with the ESPN networks. Suddenly, cord cutters had access to all of ESPN’s programming live. That gets you Monday Night Football, NBA basketball [Sling also carries TNT], MLB on Monday, Wednesday and Sunday nights…the list goes on.”

A high-definition antenna, Brantner’s website will tell you, is able to capture the over-the-air channels like CBS, NBC, ABC and FOX crystal clear, and thus fills in much of the remaining sports-viewing gap after cable is cut. When it’s all said and done, depending on how many streaming services a cord cutter subscribes to, the typical monthly savings can be anywhere from $50 to $100, says Brantner. Also, the cord-cutting approach is flexible. “Cord cutting brings you freedom,” Brantner exclaimed. “Unlike cable, there are no contracts. You have the option to add and subtract services whenever you want.”

And while in the end consumers seemingly win, this is how the sports television rights fee bubble gets popped. For every cable subscriber who cuts the cord, that’s $6.61 in pure profit per month that leaves ESPN, not to mention smaller but significant amounts of revenue for other sports outlets such as the NFL Network ($1.31 per subscriber), FOX Sports 1 (99 cents), ESPN2 (83 cents) and NBC Sports Network (30 cents).

When it’s described that way, it sounds like only a few bucks here and there, but the fact is, the fiscal earth is shifting slowly under cable television, and the tremors are already being felt. In the past two years alone, ESPN has lost more than 7 million subscribers to cord cutting, which equates to more than half a billion dollars lost straight to ESPN’s bottom line. With the number of cable subscribers continuing to drop each year, this is a terrifying trend for ESPN and, in turn, a growing concern for sports owners and major universities.

The ripple effect of cord cutting on our sports landscape has the potential to be profound. In professional sports, player salaries are driven by revenue, and revenue is driven primarily by tickets and television rights fees. For years, the annual increase in all those numbers was a given. Everyone got rich — players, coaches, owners — and we wondered where the ceiling would be. The gradual implosion of cable television might be that ceiling, in which case, future work stoppages in professional sports will be almost a given. Hell, there were strikes and lockouts when salaries were increasing. If they stagnate or decrease, look out.

Also, the truth on valuations of professional sports franchises will most certainly be vetted over the next few years. Television has been the driving force that’s made every NFL team worth anywhere from $1.4 billion to $4 billion, with similar exponential gains in the NBA and MLB. Locally, the Texans ($2.5 billion) and the Rockets ($1.5 billion) are among the eight most valuable teams in their leagues. How much of that value is at risk, subject to the whims of millions of Americans who’d just as soon stream Netflix and Hulu than pay AT&T or Comcast?

In college sports, of the 20 richest athletics departments, 17 of them are in the SEC or the Big Ten, conferences that both have their own networks, backed by ESPN and FOX, respectively, that generate more than $30 million in annual revenue per school. These networks are subsidized by monthly per-subscriber fees (66 cents for the SEC, 39 cents for the Big Ten) that are way above the range they should be for such a small, regionally driven niche viewership. Cord cutting could decimate these revenue streams and severely affect collegiate athletics departments.

Perhaps the biggest albatross in sports television is the University of Texas’s Longhorn Network, another ESPN venture for which the Worldwide Leader overpaid to keep competitors out. Texas is cashing $15 million checks annually from ESPN for another 15 years for a network that has only 20 million subscribers and has lost $50 million so far, in part because, outside of football and men’s basketball, there’s no compelling content. (And honestly, is UT football even considered “compelling” right now?)

The rest of Texas’s Big XII cohorts would love to create a lucrative Big XII Network the same way the SEC and Big Ten did in their conferences. However, to do that, they would need to make Texas whole by folding the Longhorn Network, and there’s little chance ESPN (or any suitor) can guarantee that kind of money to the Big XII in this shrinking cable environment. So, in a weird way, cord cutters are actually contributing to the continued unrest in the Big XII. Aren’t college sports awesome?

To their credit, the cable networks are not merely standing pat and watching the earth move beneath them. Brantner says that they’ve taken steps to protect themselves.

“The sports networks are slowly coming on board because they realize there’s a shift occurring that they can’t stop,” claimed Brantner. “Even the ‘big, bad cable companies’ are creating their own skinny bundles that stream via the Internet to try and keep up with the new trends. There’s even rumor of ESPN offering a standalone over-the-top service.”

The leagues are taking measures as well, ensuring that broadcast rights contracts include streaming packages and plenty of Internet-related revenue, since the Internet appears to be where this is all going. The NFL, for the first time in its history, sold the exclusive broadcast rights to a regular-season game to Yahoo! last season, and just a few weeks ago, it sold non-exclusive streaming rights to ten Thursday night games to Twitter.

For decades now, sports owners and collegiate athletics directors have been undefeated in the game of profitability, but they now face an unwieldy foe — a wiser consumer driving a new business model into uncharted territory in sports’ most important revenue stream. Pretty scary stuff.

Listen to Sean Pendergast on SportsRadio 610 from 2 to 6 p.m. weekdays. Also follow him on Twitter at twitter.com/SeanCablinasian or email him at sean.pendergast@cbsradio.com.