special report
6 Obiter Dicta
Sports, Business, and the Cable Bundle Bubble
Will the current sports economic system come crashing down
on its own weight?
T
michael silver › contributor
here is no denying that sports
is big business. The NBA just
signed a new television deal for
24 billion dollars over nine years.
The NHL Canadian television deal was
for 5.2 billion dollars, and is now suggested to have been less than the rights
were actually worth. The television rights
deals seem to be continuously increasing
in value. However, this system may be
unsustainable.
Gone is the era of sports as a small family business,
or a hobby for millionaires and billionaires. Run sensibly, sports franchises can bring in gigantic revenues, largely based on income from television. The
Los Angeles Clippers, following the Donald Sterling
scandal, were recently sold for over 2 billion dollars.
Other franchises may sell for even greater amounts.
One would be hard-pressed to find sympathy for
the players who routinely earn multimillion dollar
contracts for playing a game at a high level. However,
the current collective bargaining agreements in
many sports are structured to give players only a limited percentage of the league revenues. These collective bargaining agreements were premised on the
fact that the owners required a large portion of total
league income in order to avoid losing money. This
understanding failed to account for the massively
growing revenues. If all that the owners required was
a share of revenue capable of covering team expenses,
as they suggested was the case, the owners would
require a much smaller percentage of total league
revenues. The players are well aware of the changing
league finances, and will fight in the next set of collective bargaining agreements for a much larger share
of league profits.
Simply put, the current system cannot last forever.
The ballooning revenues are based on television networks craving live programing. They believe that in
an era of PVRs and streaming services the only way
to ensure viewership is to offer live programing that
people will not be willing to watch later. The networks
h ave
e nte re d
into an arms
race, seeking to
outbid each other
for precious live
programming.
Many of the important bidders in these processes
are American cable networks. They seek live programming in order to increase viewership, and maximize
advertising dollars, but also in order to increase their
number of subscribers. The model is that as a cable
network increases their offering of live programming,
they are able to attract more and more subscribers.
However, the majority of cable network subscribers
will have the network available to them as a part of a
subscription package.
Subscription packages are the norm in television.
Consumers are not able to select the specific channels
that they want to receive, but have to select a package.
Generally the package will include many channels
that the consumer has no real interest in receiving.
Each channel receives a share of the total fees paid for
the total package. This share is bargained for between
the cable providers and the cable networks. Because
consumers demand the live sports that a channel like
ESPN can offer, ESPN is able to bargain for extremely
high rates, and knows that cable networks, and consumers will be willing to pay.
This increases revenues at networks like ESPN (FOX
sports 1, NBC sports network, TSN, and Sportsnet),
and allows the networks to continuously increase
their bids on live sports content, furthering the cycle.
However, from a consumer perspective the bundle
system is undesirable and unfair. Consumers are willing to pay for the content that they actually want, but
do not want to subsidize networks that they have no
intention of ever viewing, as they are forced to in the
bundle system.
There is a growing push to allow
à la carte cable
subscriptions, in
which viewers are
able to decide which channels they want, and only pay
for those.
This system would reduce revenues for the cable
networks. This is because under the current system,
almost all packages include the main sports networks.
If people who have no interest in sports were given
the choice, they would drop this portion of the subscription, and would stop subsidizing the interests of
sports fans. The networks might respond by increasing subscription fees to those who were willing to pay
for sports, yet this increase would likely result in a
further decrease in subscriptions. Either sports networks would predominately cater to the elite, or they
would experience significant decreases in revenue.
The decreased revenue to the sports networks
would result in them being forced to reduce their bids
on live sporting events. The leagues would experience
a corresponding decrease in revenue.
The shift in cable bundles is likely to happen after
the next round of negotiations on collective bargaining. Thus, the percentage of league revenues going to
owners should be lessened, as should the total value
of league revenues. Combined, these factors might
finally result in many owners being unable to cover
the operating expenses of their teams, just as they
have been claiming until recently.
The change in the finances of sports that would
follow from allowing à la carte cable subscriptions
would be monumental. Franchises would be sold for
significantly less than the value at which they were
purchased and teams would relocate, amongst other
consequences. Potentially, leagues might even be
forced to decrease their number of teams to compensate for the lost revenues.
Sports faces many challenges, including issues
of concussions, and illegal behavior of players and
owners. However, in the near future, the largest challenge looming for professional sports leagues may be
the unsustainable business model that they have constructed around cable television fees.
Leagues may pay lip service to alternative revenue
streams such as international markets or the internet, but these alternatives cannot possibly compensate for the inevitable burst of the television revenue
bubble. u
“Subscription packages are the
norm in television.”
ê Will current sports networks be able to survive the shift to à la carte cable subscriptions?