Published on May 25, 2013,

The ESPN Tax

¬†Fans Pay for Sports They Don’t Want¬†

 

By Blair Kerkoff

The Kansas City Star

Ryan Bennett of Kansas City records a few programs and doesn’t demand much from his television entertainment.

But he wants his sports … when he wants his sports.

Chiefs on Sundays, plus the Royals and Missouri football and basketball when his schedule allows.

“I don’t really watch anything live, except sports,” Bennett said.

Consumers like Bennett, a 27-year-old product manager, are critical in the ever-more-expensive world of professional and college sports, where the costs of running pro teams and conference rights fees paid by networks escalate.

Bennett’s cable provider makes deals to carry ESPN and other networks that feature sports programming. ESPN and other channels bid in the billions of dollars for the rights to broadcast professional and college sports. The sports entities can demand a king’s ransom for their product, knowing it is in great demand.

The cable company pays it, and the cost gets passed to the consumer — whether he or she knows it or not and whether they like sports or not.

“Until I saw something about it recently, I had no idea how much,” Bennett said.

Confidentiality agreements prevent TV providers from releasing an exact breakdown, unlike the upfront fees known for such premium channels as HBO or Showtime.

But according to the media research and analysts firm SNL Kagan, basic cable customers paid an average of $5.06 a month for ESPN in 2012, making ESPN, which has nearly 100 million subscribers, by far the most expensive product on basic cable. Other companies are looking to cash in as well — Fox recently announced it’s launching a national sports channel to rival ESPN.

In the grand scheme of things, the deal seems reasonable to sports fans. For about the price of a large Frappuccino at Starbucks, you get a month’s worth of America’s best live sports lineup.

The rub is, non-sports watchers or those who don’t want some sports channels also are paying and have no choice in the matter.

“There’s little objectivity out of ESPN and for them to get more than $1 out of a cable bill is racketeering,” said cable subscriber Jim Bredemeier of Wichita.

“There’s little objectivity out of ESPN and for them to get more than $1 out of a cable bill is racketeering,” said cable subscriber Jim Bredemeier of Wichita.

Some have called it a sports tax on their cable bill, and Sen. John McCain has introduced legislation that would allow consumers to pay only for the programs they want to watch: a la carte pricing.

The idea would be to pick channels from a menu. TNT received $1.21 per subscriber last year, and viewers not only were shown NBA playoff and NCAA men’s basketball tournament games but full seasons of police dramas such as “Southland” and “Rizzoli & Isles.” CNN received 57 cents and the Cartoon Network 20 cents, although industry analysts believe subscriber costs would rise per channel in an a al carte system.

And sports channels likely would jump to an even greater percentage of the average monthly basic cable bill, which was, without a phone or Internet package, about $90 in 2012.

“I believe the whole sports model is broken,” DirecTV CEO Mike White told Wall Street analysts in a conference call following the company’s release of the 2012 fourth quarter report.

Subscription gold

ESPN was beamed into 98.9 million households in 2012, ranking near the top of the most-widely distributed cable networks. Which means before ESPN and its family of channels sold an advertisement, it had banked more than $6 billion in yearly subscriber fees. Ads are worth another $1.9 billion annually, according to industry analysts.

That was last year. SNL Kagan estimates in 2013 that ESPN is charging $5.54 a month per subscriber, and that amount is expected to top $7 by 2017, according to MediaPost, an online resource for advertising media.

Subscribers are the lifeblood of television.

“I always reminded my guys that the cable customer pays for just about everything in the industry,” said John Denison, founder and principal partner of Niles Media Group and a founder of Metro Sports. “The documentary that follows lions in Africa, cable subscriptions paid for that production.”

And plenty more, especially in sports.

Next week, the Southeastern and Big 12 conferences are expected to announce revenue distributions to their members, likely record amounts in the $20 million to $25 million range per school that are largely a result of TV deals with ESPN and other networks. Conference revenue distributions are among the top three sources of athletic department revenue at major universities, including Kansas, Kansas State and Missouri. In 2011-12, K-State’s athletic budget was $50 million, Mizzou’s was $66 million and KU’s was $78 million.

As live sports programming has become more expensive for networks to acquire, multimillion-dollar salaries for professional athletes and college coaches have increased as well. And some of the costs have trickled down to individual subscribers — sports fans or not.

Last September, DirecTV added a $3 monthly fee to the bills of new customers in about 20 percent of the U.S. markets, where there is more than one regional sports channel, like Los Angeles, Chicago and Denver. That fee was continued earlier this year.

Time Warner subscribers in Southern California likely will see their bills increase because of the cable company’s impending $7 billion deal for rights to broadcast Los Angeles Dodgers games. The Dodgers had an opening-day payroll of $216 million, the second-highest in baseball.

ESPN, which has contracts to televise games in the NFL, Major League Baseball, NASCAR, NBA, Wimbledon, major golf tournaments and in every major college sports conference, is paying $15.2 billion over eight years to air “Monday Night Football.”

Analysts cited skyrocketing rights fees as a factor in ESPN laying off some 300 to 400 employees, which was announced this week.

Power of live sports

So why is sports on TV so valuable?

The nine highest-rated single telecasts of 2012 involved live sporting events. And while skipping commercials is easy on a recorded program, sports is real reality TV that’s coveted by advertisers.

But A.J. Maestas, president of Navigate Research, said it all goes back to your cable bill.

“The DVR thing is powerful, and you are more likely to watch commercials, but that’s not why all of this happening,” Maestas said. “Sports, as much as anything, is must-see TV to the point where people will switch their cable carrier if they don’t have what they want.”

Cable distributors will have a choice to make when the SEC Network launches in 2014. Either add the channel — and its subscriber fees — to their basic cable lineup, or risk being alienated by hardcore sports fans.

The new channel will be produced by ESPN and air 450 live games a year in all sports, including Missouri football and basketball games. SEC Network officials expect the channel to be distributed on basic cable in the conference’s 11-state footprint, which includes the Kansas City market.

“I think they’ll be very successful in getting distribution,” said Maestas, who added he believes SEC schools will average $16.8 million in annual payouts from the network with income building over the life of the 20-year contract.

Cable companies say they fight to keep costs down. Companies such as Time Warner, Comcast, SureWest, AT&T U-verse, DirecTV and Dish Network, which serve the Kansas City area, make deals to carry cable networks, but they’re not part of the negotiations between sports channels and pro teams and college conferences. But the cable providers can decide what channels to carry.

All channels want wide distribution, “but we have to step in and act in the best interest of our customers,” said Mike Pedelty, a spokesman for Time Warner Cable Inc. “If all programmers started asking for $1 or $2, it may not seem like a lot of money, but it adds up quickly. That’s why we have to look at the big picture and make some tough decisions that aren’t always popular.”

All channels want wide distribution, “but we have to step in and act in the best interest of our customers,” said Mike Pedelty, a spokesman for Time Warner Cable Inc. “If all programmers started asking for $1 or $2, it may not seem like a lot of money, but it adds up quickly. That’s why we have to look at the big picture and make some tough decisions that aren’t always popular.”

One of those seemingly small increases is on the way. In sports, of course.

Rupert Murdoch’s News Corp. announced in March that it was launching Fox Sports 1, a national sports network to challenge ESPN. Fox Sports 2 is in the works.

The networks will take over the Speed and Fuel channels, which combine to cost subscribers about 40 cents per month. According to SNL Kagan, Fox Sports 1 will charge between 75 cents and $1 per subscriber.

Other big media corporations have gotten into the cable sports game. Comcast operates the NBC Sports Network, formerly called Versus, and is currently televising the NHL’s Stanley Cup playoffs. CBS Sports Network has deals to broadcast college football and basketball, lacrosse, tennis, golf and arena football.

All are angling for cable dollars, whether you want sports channels or not.

McCain, an Arizona Republican, wants to change that, by giving cable television consumers the ability to pay as they go.

Want an entire lineup of nature channels and no sports, or soccer channels and no politics? McCain’s bill introduced earlier this month, the Television Consumer Freedom Act of 2013, would offer that ability.

Cable companies are opposed to this because they’re able to bundle popular channels like ESPN with less desirable ones, and the National Cable & Telecommunications Association fired back with a statement.

“As countless studies have demonstrated, subscription bundles offer a wider array or viewing options, increased programming diversity and better value than per channel options,” the statement said.

A growing trend — cord-cutting — could give the consumer the final word.

According to a report by the Toronto-based Convergence Consulting Group, an estimated 4.7 million American households that previously paid for TV will have cut the cable cord by the end of the year. They get their entertainment streamed from the Internet to their computer, smartphones and tablets using services such as Netflix, iTunes and Hulu. That’s up from about 3.74 million in 2012.

Maestas tried cutting the cord himself last fall, but it didn’t last. “I had to have my Washington Huskies,” he said.

Some industry analysts are skeptical, suggesting cord-cutters are being lured back by traditional promotions such as discounted premium channels.

Bennett has thought about cutting the cord and has friends who have. Sports keeps him plugged in. And if a la carte becomes a reality, he’ll sign up for channels that show his teams, even if that means paying more.

“I’m a big fan of the free-market system, and if people are willing to pay let the market dictate what the price will be,” Bennett said.

What’s the breaking point for a sports channel? How much would be too much per month for a sports channel on cable — $10, $20?

What’s the breaking point for a sports channel? How much would be too much per month for a sports channel on cable — $10, $20?

“For now, Joe American, even with all of the technology that exists, still wants premier sports content,” Maestas said. “There’s stuff he has to have. And the reason it’s so well watched is because it’s the best content.”

Every cable subscriber buys it, whether they want it or not.

The cost of sports on TV

In 2012, more than half of the 31 most-expensive cable networks by affiliate fees were either all-sports networks or featured sports programming.

Network Households reached Fee persubscriber

ESPN/ESPN HD* 98,903,000 $5.06

ESPN3D* n/a $2.71

TNT* 98,921,000 $1.21

Disney Channel 98,666,000 $0.97

NFL Network* 59,499,000 $0.84

Fox News Channel 97,981,000 $0.82

ESPN2* 98,806,000 $0.67

USA Network* 99,301,000 $0.62

TBS* 100,205,000 $0.59

MGMHD n/a $0.58

CNNen Espanol n/a $0.58

CNN 99,156,000 $0.57

Nickelodeon 99,664,000 $0.52

HDNet n/a $0.47

FX 98,052,000 $0.46

Fox College Sports* n/a $0.39

MTV 98,591,000 $0.39

HDNet Movies n/a $0.38

Big Ten Network* n/a $0.37

Discovery Channel 99,604,000 $0.37

CNBC 97,497,000 $0.32

Sony Movie Network n/a $0.32

Antena 3 (Spain) n/a $0.31

Lifetime 98,904,000 $0.31

NBC Sports Network* 78,063,000 $0.31

Turner Classic Movies n/a $0.29

A&E 99,012,000 $0.28

Golf Channel* 84,436,000 $0.28

NHL Network* n/a $0.28

TyC Sports (Argentina)* n/a $0.27

MLB Network* 69,861,000 $0.26

* All-sports networks or channels that feature sports programming

Source: SNL Kagan

Live sports rights fees paid by cable networks

Event Contract Network

NFL’s “Monday Night Football” $15.2 billion over eight years ESPN

NCAA men’s basketball tournament $10.6 billion over 14 years Turner Sports, CBS

Major League Baseball $5.6 billion over eight years ESPN

Major League Baseball $2.4 billion over eight years Turner Sports

NBA $5.6 billion over six years ESPN/ABC, TNT

College Football Playoff $5.6 billion over 12 years* ESPN

Southeastern Conference $4.7 billion over 20 years** ESPN

Big 12 Conference $2.6 billion over 13 years Fox, ESPN/ABC

NHL $2 billion over 10 years NBC, NBC Sports Network

* starts in 2014; ** estimated

Source: Media reports

Networks with the most subscribers

Of the 31 most-widely distributed cable networks in 2012, only five were either all-sports channels or feature sports programming. Among this group, only the Disney Channel and Fox News Channel charged as much as the lowest-priced sports channel.

Network Households reached Fee per subscriber

The Weather Channel 100,205,000 $0.13

TBS* 100,025,000 $0.59

Nickelodeon 99,664,000 $0.52

Discovery Channel 99,604,000 $0.37

Food Network 99,601,000 $0.16

USA Network* 99,301,000 $0.62

Cartoon Network 99,159,000 $0.20

CNN 99,156,000 $0.57

A&E 99,012,000 $0.28

HGTV 98,947,000 $0.16

TNT* 98,921,000 $1.21

Lifetime 98,904,000 $0.31

ESPN* 98,903,000 $5.06

TLC 98,871,000 $0.19

ESPN2* 98,806,000 $0.67

History Channel 98,708,000 $0.25

Disney Channel 98,666,000 $0.97

Spike TV 98,623,000 $0.24

Comedy Central 98,607,000 $0.16

MTV 98,591,000 $0.39

FX 98,052,000 $0.46

SyFy 98,006,000 $0.24

Fox News Channel 97,981,000 $0.82

VH1 97,944,000 $0.18

CNBC 97,497,000 $0.32

ABC Family 97,451,000 $0.23

E! 97,414,000 $0.23

AMC 96,700,000 $0.26

Animal Planet 96,625,000 $0.10

TV Land 96,573,000 $0.13

MSNBC 95,526,000 $0.18

Source: SNL Kagan

What sports networks charge

Among all-sports channels or networks that featured sports programming in 2012, ESPN led the way with a $5.06 subscriber fee.

Network Households reached Fee per subscriber

ESPN/ESPN HD 98,903,000 5.06

ESPN 3D n/a 2.71

TNT 98,921,000 1.21

NFL Network 59,499,000 0.84

ESPN2 98,806,000 0.67

USA Network 99,301,000 0.62

TBS 100,205,000 0.59

Fox College Sports n/a 0.39

Big Ten Network n/a 0.37

NBC Sports Network 78,063,000 0.31

Golf Channel 84,436,000 0.28

NHL Network n/a 0.28

TyC Sports (Argentina) n/a 0.27

MLB Network 69,861,000 0.26

CBS College Sports n/a 0.23

The Mtn. (Mountain West Conference) n/a 0.23

Fox Sports en Espanol n/a 0.22

SPEED (will become Fox Sports 1) 81,449,000 0.22

ESPN Classic 31,969,000 0.19

ESPNews 74,680,000 0.19

ESPNU 73,234,000 0.19

ESPN Deportes n/a 0.18

NBA TV 59,833,000 0.18

Fox Soccer Channel 41,442,000 0.17

Tennis Channel n/a 0.16

FUEL (will become Fox Sports 2) 37,029,000 0.15

GolTV n/a 0.13

TruTV 92,315,000 0.12

Outdoor Channel 37,801,000 0.04

Source: SNL Kagan

~r~

 
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