For months, Fox Sports 1 promised it would launch today in 90 million homes, and it appears to have done so. What it did to keep that promise, however, will likely cost Fox hundreds of millions of dollars.
As John Ourand of Sports Business Daily reported on Thursday, Fox was forced to back off its asking price of $0.80/month for its new sports channel after multiple carriers refused to pay. Cablevision, Cox, DirecTV, Dish Network, and Time Warner Cable — that’s just over 53 million homes total, if you’re counting at home — all had contracts in place for Speed Network, the channel Fox Sports 1 replaced, which called for a $0.23/month subscriber fee. Those carriers demanded that price for Fox Sports 1 until those Speed contracts expired, and in order to hit its 90 million-home target, Fox conceded.
The end result for Fox doesn’t stop at those 53 million homes, though. According to Ourand:
A major distributor not involved with the deadline pressure was Comcast, which signed a deal with Fox earlier this year that included FS1, but it is believed to contain “most favored nation” provisions that guarantee the distributor pays the lowest rate available.
That’s another 21.8 million homes that won’t have to pay the subscriber fee Fox was seeking. All told, roughly 75 million homes will pay only $0.23/month for Fox Sports 1.
So how much will Fox Sports 1 actually get in subscriber fees?
Let’s presume that the other carriers were willing to pay Fox’s asking price. That’s 15 million homes paying $0.80/month and 75 million homes paying $0.23/month. Here’s what FS1 will receive in subscriber fees:
$0.80 * 12 * 15 million = $144 million
$0.23 * 12 * 75 million = $207 million
TOTAL: $351 million
That’s $513 million less than what FS1 was projected to get in subscriber fee revenue in its first year, had Fox gotten its 80-cent asking price. Starting next season, Fox will pay Major League Baseball $500 million a year for broadcast rights. Fox will have to eat that contract for a year or two until it can renegotiate deals with carriers as those Speed contracts expire.
So why did Fox concede? The answer is right there in its own press release:
Ford Motor Company, GEICO, and Yum! Brands, three of the country’s leading marketers, are among the many that have taken ground-floor positions with FOX Sports 1 and are the network’s leading brands in the automotive, insurance and quick service restaurants categories. Samsung Mobile leads the electronics category, while several movie companies have also made significant investments in FOX Sports 1 and other FOX Sports outlets.
Simply put, Fox promised 90 million eyeballs to some very rich advertisers, and it had no choice but to deliver — even if it meant conceding more than half a billion in subscriber fees in its first year. Consider that ESPN could make as much as $3.5 billion in TV ad revenue in 2013. If Fox is able to bring in even one-third of that, that’s more than $1.16 billion, and that’s a bigger pot to risk than $864 million. Thus, it behooved Fox to establish the channel and make it as attractive as possible to advertisers first and foremost, even if it meant losing out on subscriber fees in the short term.
Make no mistake, though — Fox will come back for those subscriber fees soon enough. It might even escalate into a full-blown carrier dispute that makes that CBS-Time Warner Cable spat look small. For now, though, the carriers have won the day, and so have pay TV subscribers, who won’t have to pay extra for a shiny new competitor to ESPN. If the Fox Sports 1 proves popular enough, though, that niche-channel subscriber fee won’t stick around for long.