Will Sports Programming Costs Lead to Collapse of Video Business?
(SPORTS TECHNOLOGY)
The U.S. sports programming business has economics much like healthcare, which, depending on your point of view, means either great trouble or a great "moat" around the business for content owners, programming networks and video distributors.
Either way, sports network costs, which are passed along to video consumers, seem to be on a path that leads to ever-higher prices, until there is an absolute collapse, which necessarily would be triggered by some massive defection of consumers unwilling to pay the ever-higher prices.
"Basic economics don't work in the media business,” says Craig Moffett, Sanford Bernstein SVP. “The only analogy is the health care system, where there is no clear signal between consumers and providers about pricing.”
You might use the analogy of a long, slowly-building “financial bubble” as well, where prices keep rising strongly, right up to the point where the bubble bursts. "We're waiting for the straw that will break the camel's back," says Craig Moffett, Sanford Bernstein SVP.
Both programmers and video distributors will lose when the burst happens, as the market will radically reshape itself, necessarily in ways that have sports enthusiasts spending money one way, while most people and households spend money other ways.
A shift to on-demand, over the top consumption is the way we usually think about the change. The other simultaneous change would be an end of the current way of packaging channels and genres so there is “something for everyone.” As costs rise to the point where value simply does not keep with costs, consumers will abandon video services in larger numbers.
Then, faced with smaller audiences, networks will be unable to make as much money as they now do, and prices will drop throughout most of the sports programming ecosystem. At the same time, rights owners might well find that the only way they can keep customer segments is by increasing reliance on direct sales to subscribers, as ad revenue will plummet when consumers start deserting in large numbers.
In other words, there will be more on-demand delivery to more-targeted audiences who value the programming enough to pay the going rates. Almost by definition, a sports enthusiast, or a news enthusiast, or a movie enthusiast who pays only for the right to watch channels and programs in those specific genres should rationally expect to pay less than if paying for all the other channels and genres of little to no interest. So a collapse of the sports programming business could lead to a collapse of the current packaging model as well.
That ultimately means big financial trouble for sports leagues, sports programmers and video distributors.
In part, ever-increasing sports programming costs are one reason the equity valuations of cable companies have contracted, for example. “Cable companies used to trade at 10 time multiples. Now, they're at five times," says David Bank, managing director, Globe Media and Internet Research. No End In Sight To Escalating Sports Rights
Like any other bubble, asset owners are largely to blame, in this case the owners of sports properties. ESPN's (News - Alert) new contract is more than 70 percent higher than its current level, for example. From 2014 through 2021, ESPN will spend much more on NFL programming alone.
ESPN has signed an eight-year, $15.2 billion rights renewal with the National Football League. At $15.2 billion, the deal is the largest in U.S. sports-media history and its average price of $1.9 billion represents a 73 percent increase from its $1.1 billion annual outlay under its current eight-year pact that expires with the 2013 season.
Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.
Edited by Rich Steeves
