ESPN and the Business of Sports

Sports is a fascinating business to me. It is truly amazing how quickly sports have grown into billion dollar franchises with top end players making up to $30 million a year. Baffling. On top of it, the numbers for broadcasting rights keep climbing right along with them and frankly seem to be entering into nosebleed territory. Even the vaunted ESPN is feeling the effects of the bidding wars and rising content prices.

In the last 24 months, ESPN has agreed to huge rights deals with a bunch of leagues and events. Some of the highlights:

$15.2 billion over 10 years for Monday Night football (73% higher annually than the previous deal).

$7.3 billion over 12 years for the new college football playoff (480% higher annually than what it was previously paying for BCS bowls).

$5.6 billion over 8 years for MLB (100% higher annually than the previous deal).

$825 million over 11 years US Open tennis (400% higher annually than the previous deal).

That doesn't include smaller deals with specific college sports conferences, golf tournaments, and NASCAR.

Ones they lost include the Olympics for $4.4 billion and Premier league Soccer for $250 million over three years. Now I don't necessarily agree with the article in that this is a deathly sign of things to come for ESPN but I do think that at some point the scales will have to tip against it because NBC, FOX etc are shelling out big dollars to become players into the future.

The numbers back that up. In the DVR/Internet Era, live sports are a reminder of the way the TV business used to work. Sports are the only thing you really need to watch live, and one of the last remaining arguments for why you need to subscribe to cable.

ESPN now charges cable companies $5 a month per subscriber, and ratings aren't cratering for sports the way they are for other types of programming. The NBA set record regular season ratings last year, and the NFL has accounted for 55% of all shows that were watched by more than 20 million people from September 2010 to January 2013, according to the AP.

Sports haven't gotten dramatically more popular in the last few years, but everything else on TV has gotten less popular — lending new value to the consistent and predictable audience that watches live sports.

What do you guys think regarding sports rights and the ever increasing pricing structure? Do you think the fragmentation of the sports broadcasting market will, if it even happens, will drive up prices through the nosebleed section?

 

I don't think they'll be driven through 'nosebleed section', because I don't think that section exists. The companies who pay for sports content are in fine shape because the advertising dollars follow. Like you mentioned sporting events are about one of the last things you watch live. If you watch it live = no skipping through advertisements. Whereas dvr/internet download = no ads/skip through ads. Companies know this and charge increasing premiums for advertising slots during sporting events because they know it's one of the last mediums to get your product/message across on tv.

 

ESPN costs your typical cable company $5.50 or so per month to carry (this is newer deals, the $5 must be an average that includes older contracts). Given the percentage of revenues programming costs represents, that means ESPN costs you about $12-$15 a month. So if for example, you could drop ESPN similar to how you don't have to have HBO, your cable bill would be $12 to $15 lower.

Dish Network has one doozy of a retransmissions fee battle coming up (September 30 I believe is the deadline) and Dish/ABC hate each other. Dish could very well be the first provider to stop carrying ESPN. There's definitely a market for such an offering. Lots of women couldn't give two shits about ESPN (I know my sister would drop it if it meant $15 more a month in her pocket).

 
alexpasch:
Lots of women couldn't give two shits about ESPN (I know my sister would drop it if it meant $15 more a month in her pocket).

Interesting analysis. The other side of this coin is that, at a time when people are increasingly opting to cut the cable cord altogether and get all their video contents from Netflix/Amazon/Hulu, live sports are the only thing that make sure that a sizable portion of the population, especially men, keep their cable subscriptions for the time being. In this sense ESPN is basically saving the cable companies from bleeding even more customers.

I wonder what is keeping your sister and others like her from cutting the cords and using only Netflix since they have no interests in ESPN. By doing so she can save a lot more than $15 bucks a month.

Too late for second-guessing Too late to go back to sleep.
 
brandon st randy:
alexpasch:

Lots of women couldn't give two shits about ESPN (I know my sister would drop it if it meant $15 more a month in her pocket).

Interesting analysis. The other side of this coin is that, at a time when people are increasingly opting to cut the cable cord altogether and get all their video contents from Netflix/Amazon/Hulu, live sports are the only thing that make sure that a sizable portion of the population, especially men, keep their cable subscriptions for the time being. In this sense ESPN is basically saving the cable companies from bleeding even more customers.

I wonder what is keeping your sister and others like her from cutting the cords and using only Netflix since they have no interests in ESPN. By doing so she can save a lot more than $15 bucks a month.

Netflix has improved, but availability still isn't that broad. I think people are overstating the extent to which you could "easily" get rid of most channels. Even people that don't really watch tv (e.g. me) often have just one random thing that they find tolerable while eating dinner on a couch, and it happens to be on a channel which they otherwise have no interest in. This is especially true of people (e.g. the women you mentioned) whose core viewing interest isn't sports.

I think we are also exaggerating cost savings from a la carte pricing. Most of these channels cost essentially nothing, since they are free-riding on the cable infrastructure. Its kind of like a mandatory insurance scheme (e.g. Obamacare) which brings down costs for all:

Right now cable costs $60 for hundreds of channels. If we didn't have cable, ESPN would lose a significant chunk of subscribers (25 - 40%) and prices would increase at least that much. The same would be true of any of the other 10 channels you might choose to watch. Take ESPN, add in the cost of a (non-cable) distribution medium, a few cable news channels, comedy central, and your 2-3 other favorites and it'd be pretty easy to be back at $50 even for a light viewer like myself, while missing out on the random little gems you'd occasionally stumble across on those "not it" channels.

 

ESPN also signed the ACC up for something like $300 million per year.

These contracts are no-brainers for ESPN. Live sports seem to be the last profitable bastion of cable TV as people will buy cable just to see their sports teams play.

 

I disagree that these contracts are no-brainers, or at least some of them. Sure, most college sports, NFL, etc. are huge money makers, but ESPN isn't going to stop there. ESPN just laid off a pretty good percentage of employees, mainly due to the fact that their margins suck since they're gobbling up the TV rights for every "sport" out there. (Yes, ACC football is just a "sport"). ESPN is going to have to learn that they can't get the rights to every sporting event (or at least use better judgment when trying to shell out money for every event that could possibly be on TV) because, let's face it, the Blind Women's World Series of Poker is just not that fun to watch.

 

are you crazy? let's see you try to ante your way to a hellen keller award...

westsidewolf1989:

I disagree that these contracts are no-brainers, or at least some of them. Sure, most college sports, NFL, etc. are huge money makers, but ESPN isn't going to stop there. ESPN just laid off a pretty good percentage of employees, mainly due to the fact that their margins suck since they're gobbling up the TV rights for every "sport" out there. (Yes, ACC football is just a "sport"). ESPN is going to have to learn that they can't get the rights to every sporting event (or at least use better judgment when trying to shell out money for every event that could possibly be on TV) because, let's face it, the Blind Women's World Series of Poker is just not that fun to watch.

If the glove don't fit, you must acquit!
 
westsidewolf1989:

I disagree that these contracts are no-brainers, or at least some of them. Sure, most college sports, NFL, etc. are huge money makers, but ESPN isn't going to stop there. ESPN just laid off a pretty good percentage of employees, mainly due to the fact that their margins suck since they're gobbling up the TV rights for every "sport" out there. (Yes, ACC football is just a "sport"). ESPN is going to have to learn that they can't get the rights to every sporting event (or at least use better judgment when trying to shell out money for every event that could possibly be on TV) because, let's face it, the Blind Women's World Series of Poker is just not that fun to watch.

ESPN is monopolizing sports for decades to come. These are definitely no-brainer contracts for them. It forces cable companies to pay them the largest sums by far per channel because live sports are the last remaining reason anyone obtains a cable subscription. With their SEC and ACC sports contracts, ESPN effectively rules college athletics--it has as much influence as the NCAA. With their Monday Night Football contract, they own some of the highest rated programs in America each year. ESPN is monopolizing major sports for DECADES. If they have to lay off some people today then so be it.

 
westsidewolf1989:

I disagree that these contracts are no-brainers, or at least some of them. Sure, most college sports, NFL, etc. are huge money makers, but ESPN isn't going to stop there. ESPN just laid off a pretty good percentage of employees, mainly due to the fact that their margins suck since they're gobbling up the TV rights for every "sport" out there. (Yes, ACC football is just a "sport"). ESPN is going to have to learn that they can't get the rights to every sporting event (or at least use better judgment when trying to shell out money for every event that could possibly be on TV) because, let's face it, the Blind Women's World Series of Poker is just not that fun to watch.

Yes, because the Blind Women's World Series of Poker is just raking it in with the programming fees they are getting from ESPN, lol. ESPN is cornering the sports market. It's a well known fact that people that watch lots of sports tend to watch a great variety of sports, not just a single sport. ESPN knows this and are making themselves a "must-have" channel. The risk they run is certain providers switching to an ESPN a-la-carte model. For example, lots of single women right now are paying $12-$15 a month for ESPN when they don't want to.

Sooner or later, content a-la-carte will be the norm. There's too much demand for that from the general population. That's big trouble for all the cable and content companies and they're fighting every step of the way (hence why Apple can't get it's damn TV to market). People are paying way more for video than they would if they switched to an a-la-carte model. If typical person could buy the 10-30 channels they actually watch (or worse still, only the shows they watch); then revenue dries up quickly (and you won't be able to charge ridiculous prices for content because the consumer behavior changes dramatically). Most people don't realize how much they are paying for certain channels. I would buy maybe 10 or 20 channels and my cable bill would be half of what it is now.

The aforementioned is analogous to what happened with music. Before, people had to buy the entire CD even if they only wanted one song. Now with iTunes; you pay a fraction and only get the songs you want. What happened? Revenues for the music industry plummeted. It really had very little to do with piracy (piracy forced the change in content delivery; but the real impact was that when the method of content delivery changed, people's budgets for music drastically declined). Cable companies know this and are rightfully unwilling to let Apple do the same thing to them.

 
alexpasch:
westsidewolf1989:

I disagree that these contracts are no-brainers, or at least some of them. Sure, most college sports, NFL, etc. are huge money makers, but ESPN isn't going to stop there. ESPN just laid off a pretty good percentage of employees, mainly due to the fact that their margins suck since they're gobbling up the TV rights for every "sport" out there. (Yes, ACC football is just a "sport"). ESPN is going to have to learn that they can't get the rights to every sporting event (or at least use better judgment when trying to shell out money for every event that could possibly be on TV) because, let's face it, the Blind Women's World Series of Poker is just not that fun to watch.

Yes, because the Blind Women's World Series of Poker is just raking it in with the programming fees they are getting from ESPN, lol. ESPN is cornering the sports market. It's a well known fact that people that watch lots of sports tend to watch a great variety of sports, not just a single sport. ESPN knows this and are making themselves a "must-have" channel. The risk they run is certain providers switching to an ESPN a-la-carte model. For example, lots of single women right now are paying $12-$15 a month for ESPN when they don't want to.

Sooner or later, content a-la-carte will be the norm. There's too much demand for that from the general population. That's big trouble for all the cable and content companies and they're fighting every step of the way (hence why Apple can't get it's damn TV to market). People are paying way more for video than they would if they switched to an a-la-carte model. If typical person could buy the 10-30 channels they actually watch (or worse still, only the shows they watch); then revenue dries up quickly (and you won't be able to charge ridiculous prices for content because the consumer behavior changes dramatically). Most people don't realize how much they are paying for certain channels. I would buy maybe 10 or 20 channels and my cable bill would be half of what it is now.

The aforementioned is analogous to what happened with music. Before, people had to buy the entire CD even if they only wanted one song. Now with iTunes; you pay a fraction and only get the songs you want. What happened? Revenues for the music industry plummeted. It really had very little to do with piracy (piracy forced the change in content delivery; but the real impact was that when the method of content delivery changed, people's budgets for music drastically declined). Cable companies know this and are rightfully unwilling to let Apple do the same thing to them.

I agree that a la carte is going to threaten the cable model in the next decade. However, ESPN is, by far, the best positioned to weather the storm since, as you've pointed out, they are cornering the sports market. When people buy channels a la carte they will end up paying more per channel, but they may end up saving money overall because they won't be paying for unwanted content. For example, perhaps Fox News now is costing the consumer 90 cents per month on his total bill undisclosed to him. If it goes to a la carte that may cost $2.00. If that happens, ESPN may be able to demand $25-30 for its sports package since it is cornering the market. As a college football and basketball fan as well as an NFL and MLB fan I'd have no choice but to grudgingly pay for ESPN.

 
Best Response

Who's REALLY going to get fucked is DirecTV with NFL Sunday Ticket. They're going to lose exclusivity for it because the NFL wants too much money for the exclusivity. Then, they'll still have to pay above market prices to get access to it (without exclusivity) because if they're the sole provider that doesn't have it, they are going to lose way too many subscribers to cable (since they got a lot of these subscribers via being the only provider with Sunday Ticket). Lose-lose situation for DirecTV. The NFL will do this because it knows it can make more money by offering Sunday Ticket to more providers rather than doing an exclusive to DirecTV (lots of people would like Sunday Ticket but they don't want to switch to DirecTV for whatever reason - for example I would get DirecTV but it's not an option in my building). Cable companies will be fine paying for it because they'll pass through the cost to consumers via having Sunday Ticket be an additional option. Everybody wins but DirecTV.

 

This is basically a multi-tiered calcutta auction for sport broadcast rights. ESPN just keeps upping the price and then their previous deals look good. REally no different than buying shares of a stock in chunks as it's rising.

This is really interesting to me because I'm really trying to cancel cable, but I'm not willing to lose ESPN. I have a way of watching almost everything else I'd want to see. I'd gladly pay $25 to get the ESPN networks streamed to my Apple TV.

btw - I agree that Direct TV is really screwed. I know a lot of people who have Direct TV basically because of the NFL Ticket. I can't imagine what they're going to have to pay if they want to try and retain exclusivity.

twitter: @CorpFin_Guy
 

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