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How Rising Sports Fees Imperil TV’s Business Model 12/09/2012 7:00 PM Eastern

There’s one baseball record that’s likely to be broken in the coming weeks, when no games are to be played.

News Corp.’s Fox Sports Net appears set to hit a new high mark for sports programming rights, paying an estimated $6 billion to $7 billion to air Los Angeles Dodgers Major League Baseball games on its L.A.- area regional sports networks for the next 25 years.

That deal, expected to be announced before year-end, could have even broader implications than just being the most money ever paid for a single sports team’s TV rights. To some, it could be the final straw that forces a fundamental change in TV distributors’ overall programming-cost structure.

The Dodger deal isn’t the only reason the industry’s eyes are focused on Los Angeles. In the past year, two other major long-term rights deals — for the National Basketball Association’s Los Angeles Lakers and baseball’s Los Angeles Angels of Anaheim — were struck, totalling another estimated $6 billion.

HOLLYWOOD SPOTLIGHT

“A lot of attention is being focused on Los Angeles as the poster child for how this [system] is all broken,” American Cable Association president Matt Polka, whose group represents smaller, independent MSOs, said in an interview last week.

Cox Communications senior vice president of content acquisition Bob Wilson wasn’t convinced that the Dodger deal will be the breaking point for distributors, but he said escalating sports costs are a growing concern.

“Obviously, there is this license fee feeding frenzy going on right now and the view is that the marketplace is still sorting itself out in terms of the value of this content,” Wilson said. “The marketplace is trying to find out where the bottom is.”

Rising sports costs have been a complaint of distributors for more than a decade. But in recent weeks, the hue and cry for some kind of reform has been louder than ever.

Last month Liberty Media chairman John Malone — a champion of hands-off government — suggested that federal regulatory intervention might be one way the problem of programming costs gets solved. Executives at both satellite and telco TV companies, who’ve typically been more than willing to pay top dollar to get content in the past, have recently complained of out-of-control programming costs.

And last week, Time Warner Cable chairman and CEO Glenn Britt, speaking at the UBS Global Media and Communications conference in New York, argued that rising costs may force distributors to drop networks that have low ratings.

“We’re going to take a hard look at each service and those services that cost too much relative to the viewership, we’re going to drop them,” Britt said at UBS. Some distributors are already starting to push back.

Dish Network has refused to carry regional sports programmers in some big markets — for example, all three of the New York City market’s RSNs: MSG, YES Network and SportsNet New York.

At DirecTV, executive vice president of programming and chief content officer Dan York said the satellite giant is taking a long hard look at sports costs.

“We would love to make all of these channels available to our customers, but the sports programmers are making it impossible with their unreasonable, unsustainable prices,” York said.

At the UBS conference, Britt said Time Warner Cable’s overall programming costs have risen 30% since 2008, while its rates have increased just 15% in that span.

Programming costs may be on the rise across the board, but sports and retransmission consent account for the biggest portion of the gains. Wilson estimated that in large markets like Los Angeles — where Cox has about 250,000 customers — more than 50% of the MSO’s total programming costs are sportsrelated.

RAPID RAMP-UP

Sports costs also have accelerated at a faster rate.

According to SNL Kagan data, rates for the Fox College Sports networks have more than doubled since 2008, while NFL Network has increased by 114.3% and Versus (now NBC Sports Network) has increased 100%. While ESPN still remains the priciest network — at $4.76 per subscriber per month, it is 13 times more costly that Fox College Sports at 36 cents — its increases have been a more modest 46% over the same five years.

In contrast, during the same period rates for general entertainment and news channels have been downright anemic, with only Fox News Channel (which had historically low rates during its initial launch) rising 121.2% in the past five years. Other networks, like TNT (29.3%), USA Network (25%) and Nickelodeon (18.6%), have had more temperate increases.

L.A. is the current focus because of a flurry of sports deals in the past year. Fox Sports kicked off the latest feeding frenzy last year with an estimated $2.5 billion, 17-year deal for rights to baseball’s Angels, followed by Time Warner Cable’s estimated $3.6 billion agreement in February for rights to Los Angeles Lakers games for the next 20 years. If the Dodgers deal goes through as expected, pay TV bills for the 5.6 million video households in the Los Angeles DMA could rise by more than $10 per month for sports costs alone.

MSOs have been able to pass through higher programming rates to customers, Wilson said, but there will come a point when it becomes too much to bear.

PRESSURE POINT

“You have to expect that the price of the multichannel video product will get to the point where more people can’t afford it,” Wilson said. “Whether it will be one seismic earthquake of change or whether it will be just small change over time … who knows what form that will take?”

And those are just for regional sports networks. Cable and satellite video service providers have complained for years about the high price of national sports networks. In 2003, Cox Communications CEO James Robbins led a battle against ESPN’s annual 20% rate increases that created a new template for distribution of the entertainment and sports giant.

But almost 10 years later, ESPN is still the most expensive network on cable. The only difference today is that there are a lot more sports networks to join them.

MLB Network was the latest national sports channel to enter the picture in 2009, joining NFL Network (launched in 2003) and NBA TV (launched in 1999). Since 2007, Fox Sports has increased its RSN presence from 15 networks to 21; and three college RSNs have come on board — two conference-based channels, Big Ten Network and Pac-12 Network (consisting of a national network and six RSNs), as well as the Longhorn Network, geared toward the University of Texas.

Cable operators also have jumped on the bandwagon. NBCUniversal’s NBC Sports Group has about a dozen RSNs and launched its latest, Comcast SportsNet Houston, this year.

There is no doubt that sports programming is valuable. Sports content is consistently at the top of the ratings, attracts a young, loyal demographic and is virtually DVR-proof.

Just last week, the National Football League said that its games topped the ratings in local markets across the country a record 92% this season, up from 88% at the same time last season.

Wilson said sports channels obviously have strong ratings and a loyal viewership, both valuable traits to a cable system. But the perceived value and the actual value of the channel is what appears to be out of whack.

According to SNL Kagan, sports channels have far and away the highest cost per viewer — affiliate revenue divided by total viewership. In a recent report, Kagan estimated that of the top 20 channels in terms of cost per viewer, 13 were sports networks. And at the top of that list, ESPN — at $7,368 — outpaced No. 20 Style Network, at $1,420, by nearly 6 times.

So, what can a distributor do? According to some members of the distribution community, outside of allowing cable, satellite and telco video service providers uniformly deciding not to carry pricey networks, not much.

COMPETITION FACTOR

“It’s a competitive enough market where that is going to be hard to do,” Pivotal Research Group principal and media and communications analyst Jeff Wlodarczak said. “There is always going to be somebody who says, ‘I’ll pay it.’ And if somebody pays it, it forces everybody else to.”

Polka said the continuing dialogue — and the fact that larger distributors are beginning to enter the conversation — could mean that some relief is on the way.

Concerns over rising programming costs could spur Congress to continue to hold hearings on the issue in 2013 and beyond, Polka noted, adding that both the House and the Senate have held several hearings this year on the need to reform current rules and regulations, including retransmission consent.

Consumers can also play a role, he added.

“Congress will respond in times of crisis,” Polka said. “If consumers complain more to their congressmen and senators about the rising costs of programming, then you’ll definitely see more action.

“As I look over the next couple of years, I do think that Congress is going to engage. They are going to be involved, starting with hearings and looking at other legislation that’s already been offered, and we’re going to see more discussion on video issues, costs of programming and choices for consumers.”

Whether programming costs ease up on the accelerator or continue their stratospheric rise is largely up to the players involved. And perhaps distributors could take a lesson from the late Cox CEO Robbins, who, after reaching a nine-year deal with ESPN in February 2004, said there was still work to be done.

“We who are in the food chain have let it get out of hand,” Robbins said of sports costs in an interview with Multichannel News after he completed his ESPN deal in 2004. “So now we have to do our part to get it back in the box.”

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