How high can fees for sports rights go?
When the National Football League kicks off its regular season Thursday night at Green Bay’s storied Lambeau Field, fans will notice some new rules aimed at making the game less violent.
But player safety is not the sole motivation of NFL Commissioner Roger Goodell. He knows having the best players on the field will keep fans tuned in, which results in billions of dollars in payments from the television networks that carry NFL games.
The networks combined pay about $3.1 billion a year for the rights to the 16-game season, up 35% from their last deal. Although the NFL’s contracts with CBS, Fox, NBC and ESPN still have two years to run, the league would like to have new deals wrapped up by the end of this season, in February. The three broadcast networks could end up joining ESPN in paying 10-digit dollar figures per season in their next contracts.
“It’s not for the faint of heart,” said Fox Sports Chairman David Hill when asked about the next round of NFL negotiations.
Already, ESPN and the regional sports channels are the most expensive basic cable channels on the dial — often costing distributors such as DirecTV Inc. and Comcast Corp. three times more than what they pay for news or entertainment networks such as USA, TNT and Discovery. Distributors worry that continuing to pass along sports costs to their customers could drive more away.
“The American consumer is screwed big time,” said Rocco Commisso, chairman of Mediacom, a small cable operator with just over 1 million subscribers.
For decades, the rising cost of sports rights has been among the biggest sources of conflict between programmers and pay-TV services, which occasionally have dropped sports channels for short periods rather than pay rate increases.
The fees have gotten so big that even some of the NFL’s own are wondering if a reality check is in order.
“I think the NFL as a league should be very concerned about the costs of carrying their games getting almost obscene,” said Art Modell, the former owner of the Cleveland Browns and Baltimore Ravens who chaired the NFL’s television committee for three decades. The 86-year-old Modell worries that the NFL will face a backlash if it is seen as gouging the networks.
Asked how his thoughts would play in a meeting with today’s NFL owners, Modell cracked, “They’d run me out of the room.” The NFL declined requests to comment for this story.
Rights for sports have become so expensive, in part, because ratings for just about everything else on TV have diminished, as the proliferation of network channels has meant that each program attracts smaller and smaller audiences. Sporting events draw big numbers, particularly NFL games, each of which drew an average of 18 million viewers last season. Advertisers pay a premium to reach those viewers — mostly men ages 18 to 34.
“At a time when the media landscape is fragmenting and people are scattered up and down the dial, major events are the one thing that can aggregate those audiences,” said David M. Carter, a professor of sports business at USC’s Marshall School of Business.
Sports has even proved resilient to technological advances roiling the rest of the TV industry. With more than one-third of American households equipped with digital video recorders, viewers are not watching nearly as much live television or commercials. But they are still tuning in to the big games.
“It’s DVR-proof, it delivers consistently high ratings and it provides value to advertisers,” said ESPN Executive Vice President John Wildhack, explaining why he doesn’t see the cost of sports programming coming down any time soon. “The value of sports — to both advertisers and distributors — will continue to be very high.”
To ensure that, all of the major leagues — the NFL, Major League Baseball, the National Basketball Assn. and the National Hockey League — have launched their own networks. The channels serve two purposes: They bring in new revenue streams and serve as stalking horses to make sure the NBCs and ESPNs of the world pay up.
Now colleges are getting into the act. In May, the Pac-12 Conference, which includes USC and UCLA, created a new network that ESPN and Fox Sports are paying $3 billion to carry for more than 12 years. Last month, the University of Texas created a channel in partnership with ESPN.
Some distributors, nervous about subscribers cutting the cord to their pay-TV service, are tired of being squeezed by both the sports leagues and networks and taking flak from consumers when they pass on those costs.
“In this last quarter our industry has probably lost about a half-million subscribers,” said Derek Chang, an executive vice president at DirecTV. “What do you attribute that to? Most people are attributing it to the affordability of the product.”
Mediacom’s Commisso took the unusual step of asking government to do more to combat rising programming costs.
“Sports are the worst culprit,” Commisso said in an interview. “Why should my mother be forced to pay for the YES Network?” Commisso asked, referring to the cable channel owned by the New York Yankees. “Why is this the only industry not affected by the recession?”
Chang and Commisso advocate putting some sports networks on a separate tier so that not all consumers have to foot the bill.
“It is valuable programming, but it is only valuable to a subset,” said Chang, who warned that the leagues and networks are “taking us down a dangerous path.”
Programmers will fight hard against a so-called a la carte offering because without wide distribution, they can’t charge advertisers as much and, they argue, would have to raise their fees even more to make up for the lost households. Industry analysts think despite the tough talk, programmers have distributors over a barrel.
“The problem is cable operators don’t have a great deal of leverage,” said Marc Ganis, president of consulting firm SportsCorp. ESPN and other sports channels have highly desired content and a vocal constituency. Cable operators, Ganis added, “complain about increased rights fees, but often they are complaining to justify their fees and make a larger profit.”
One distributor — Time Warner Cable — decided if you can’t beat them, join them.
Once one of the most vocal critics of rising sports costs, the cable company made headlines earlier this year when it snagged the local TV rights to the Los Angeles Lakers in a 20-year deal estimated to be worth $3 billion. It announced plans to start its own regional sports network to compete with Fox Sports’ two cable channels, Prime Ticket and Fox Sports West. Time Warner Cable Executive Vice President Melinda Witmer said at the time that the company made the move to “control our economic destiny.”
Not every distributor has the resources of Time Warner Cable to start their own sports network, and even if they did, that would hardly be good news for consumers. The theory that more competition leads to lower prices has not been the case in cable television. Sports channels bid aggressively against one another for product and then pass the buck.
“Ultimately, this all gets passed along to the consumer,” said Scott Rosner, a professor of sports business at the Wharton School of the University of Pennsylvania. “Is there a threshold of what the consumer is willing to pay? We’ve seen it now, in the throes of the recession and the aftermath, which has shown people will cut the cord, will turn off cable.”
