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Three Reasons Why Dismissing Talk Of Sports Cable Bubble Is A Mistake

Image courtesy of Sports On Earth

A few weeks ago, Patrick Hruby of Sports On Earth served up this article on the Sports Cable Bubble. He described it as “a value balloon that keeps going up, up, up, launched and inflated by America’s collective cable and satellite bill, a perfectly legal shell game built on high-stakes deal-making, entrenched corporate interests and overlapping near-monopolies.” (He was also kind enough to feature this site in his article.)

Not long after that, John Ourand of the Sports Business Journal, who’s been covering the sports media game for a while now, offered this counterpoint, which dismisses the notion that this bubble is on the verge of popping.

These executives believe the sports media industry is no closer to a bursting bubble than it was in 1993, when talk of a sports rights bubble first emerged. That was when Fox Sports outbid CBS by more than $100 million per year for the rights to the NFL’s NFC package. At the time, industry insiders thought the price was so outlandish that there was no way Fox would make money off that deal. Of course, the deal worked for Fox, and rights fees have risen ever since.

For as long as I’ve covered the media business, people have been sounding an alarm about a sports rights bubble. Every five years or so, it gets louder. I don’t get the sense that there’s any more validity to it today than there was 20 years ago.

This is exactly the sort of thinking you would expect from the leaders of an industry currently raking in billions. It’s also incredibly short-sighted, and it ignores a number of realities in the media landscape today that didn’t exist in 1993. The biggest reality might be this:

1.) The amount of growth in the pay TV industry is zero.

Pretty much everyone who wants cable at this stage has it already, as this Leichtman Research Group data reveals. The number of people who had some sort of pay TV service declined over the 12-month period from April 2012 to March 2013 — the first time this has ever happened in the history of the industry.

Yes, the net loss was small (roughly 80,000), and cable alternatives like DirecTV, Dish Network, AT&T U-Verse and Verizon FiOS all posted gains, suggesting that most homes merely ditched cable for more customer-friendly competition. Still, where are the new customers? Where are the people who want pay TV that haven’t had it before? As this report suggests, the biggest problem this industry faces isn’t cord cutters…

The real challenge to the pay TV business model are behaviorally-driven cord-nevers. These are tomorrow’s householders that are in their teens (and younger) today. They are growing up in an Internet-based video culture, in which the mantra of “why pay for TV?“ and “pay TV is a rip-off,” develop.

Why are so many kids deciding it’s not worth getting pay TV in the first place? The answer lies in the second reality:

2.) The number of viewing options for non-sports fans has risen dramatically, and they’re cheaper.

Netflix, Hulu Plus, YouTube, Amazon Prime, Crackle, UStream, Redbox, Blip.TV — none of these existed in 1993. As broadband has increased, Internet video services have exploded, and they’re no longer locked into personal computers. Netflix has more customers than HBO, and its streaming service is a staple on every set-top box on the market.

More importantly, the online options are much less expensive than cable. In its most recent quarterly earnings report, Time Warner Cable revealed it earned $2.6 billion in video revenue from 12.1 million customers. That would suggest each customer paid about $71.62 per month on the average, which is generally consistent with the current monthly pay TV bill.

Compare that to the monthly prices of Netflix streaming ($7.99), Hulu Plus ($7.99), Amazon Prime ($6.59), and YouTube ($0.00). That’s only $22.57, and the number of viewing options is expanding.

What’s more, Netflix and Amazon are both starting to develop original programming. Variety might scoff at those who call Netflix the new HBO now, but in terms of original programming, Netflix is gaining ground (and Emmy nominations) rapidly. A few more winners like House of Cards and Orange is the New Black, and big name talent will flock to Netflix in a hurry.

Of course, not all the TV shows on these services have the latest episodes, but even purchasing the newest season of a particular show from iTunes or Amazon would cost only $40-45 a year, or less than $4 a month. You could subscribe to all three services and buy three seasons of new shows per year and still pay less than half what the average cable bill costs. More importantly, you’re paying for the shows you want to watch, not the ones you don’t.

That last point underlines the third reality of the current market, which is largely an economic one.

3.) Endless growth is unsustainable.

Remember how bullish everyone was on the economy during the last decade? Remember how the market corrected itself? At some point, the same thing will happen to the pay TV market — especially in a struggling economy where cost-cutting measures are growing more common. Cable TV tends to be one of the first things to go when the bills get too high. With so many new options for watching TV now, cable customers who leave might find no reason to come back.

The current belief, though, is that sports fans will always come back, because all the biggest pro and college sports are on cable. At the moment, that’s true. If people who don’t watch sports, however, decide cable isn’t worth the money anymore, where will the sports networks get the income they need to pay off those massive rights contracts?

Ourand suggests that the amount of competition in the market will keep the sports rights fees market from crashing.

The sharp increases may moderate, but it only takes two companies to make a market. With ESPN, Fox, NBC, CBS, Turner and others vying for live sports rights, the market for sports rights will remain vibrant for a long time.

This belief ignores the fact that any drop in pay TV subscriptions will impact all of those networks negatively. So if everyone has less money to work with, where will that leave the most popular sports leagues in the long run?

Ourand’s point that this bubble won’t pop “for another 10 years, at least” might very well be true. It all depends on how quickly people decide to cancel their pay TV services in the next decade. If cord-cutting continues to grow more popular, though, sports networks might find themselves facing some very tough decisions very soon. Talk of a Sports Cable Bubble isn’t going away any time soon, and those big executives dismissing that talk now might end up looking mighty foolish before too long.

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One Response to Three Reasons Why Dismissing Talk Of Sports Cable Bubble Is A Mistake

  1. We cancelled Comcast cable after suscribing for decades. Too much sports coupled with ever increasing fees made us buy an over the air digital tv antenna. It’s been a month now and we rarely miss it. They reception on the free antenna is superior to cable and we just watch the news, sports on the weekend and PBS. The fact we’re saving $86 a month is a bonus. The last straw was when Comcast started charging for each DTA. They forced fed us these wall-warts, told us they were free…then a couple years later they raised rates. No more my friends…I got a laugh when i read Comcast will begin charging a “Broadact TV fee.” Oh, for the the right to watch the channels I now get free and in pure HD. Ha! Thanks for laugh, Comcast.


     

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