How Local Sports Could Change All of Television

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March 13 2014 11:46 AM

How Local Sports Could Change All of Television

Sports franchises have driven the entire cable business model. That’s about to change.

L.A. Dodgers spring training
The future of television could depend on them.

Photo by Christian Petersen/Getty Images

Whether or not you care passionately about baseball, you should care about the Los Angeles Dodgers. The future of television may depend on them, and on teams like them. Cable companies are betting that local sports will justify big price increases—and they may have overreached. Wars over the rights to local sports broadcasting are breaking out across the country, and their outcomes may bring the cable business model to its knees.

Over the past 30 years, sports have driven the entire cable business model, and local sports have played a disproportionately big role. Landmark battles over the broadcasting rights to the Dodgers and other franchises—the Houston Astros and Rockets, the New York Knicks, and more—have created turmoil and increased service costs in the cable distribution model. Now cable providers are passing those costs onto you, the subscriber, whether you’re a sports fan or not.

Before we get to the Dodgers, let’s state the obvious: Cable television is expensive, and getting more expensive every year. The average monthly cable bill in the U.S. climbed from $40 in 2001 to $86 in 2012. Market research firm NPD Group says it could go as high as $123 by next year, and north of $200 by 2020. Such a dramatic rise could place cable outside the reach of many U.S. households and force others to seek price-competitive alternatives. Cord-cutting, a trend already underway at a small scale, could go mainstream. In order to maintain their subscriber bases, cable providers will need to keep their costs under control.

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ESPN, the king of sports networks, has a lot to do with those costs. It charges Time Warner, Comcast, AT&T, and other providers 20 times the licensing fee that most other cable networks do. As columnist Ravi Dev points out in Medium:

The History Channel costs roughly 22 cents per month [per subscriber]. ESPN, you might be wondering? That comes out to $5.13 per month. … The ESPN subscriber fee is more than CNN, MTV, FX, TBS, CNBC, AMC, Nickelodeon, Comedy Central, the Food Network, and the Discovery Channel … combined.

ESPN is so pricey in part because it pays tens of billions of dollars to college and professional sports leagues for broadcasting rights. It recoups that investment by licensing to cable providers at a significant premium over the rates of most other networks. This model has proven extremely profitable for Disney, ESPN’s parent company. Cable providers have taken notice, searching for ways to create their own mini-ESPNs in the form of regional sports networks, which would create demand for their services in competitive territories.

Local sports have served that purpose. Regional cable providers—offshoots of the big nationals—have been paying billions for the exclusive broadcasting rights to local teams. It’s a strategic calculation: ESPN won’t buy the rights because local investments aren’t scalable for its national business model. But local teams are still must-see TV, or so the thinking goes. They’ll drive demand for the regional providers who carry them.

Which brings us to the Dodgers. Recently, Time Warner signed a deal with the team valued at over $7 billion. The partnership resulted in the creation of SportsNet LA, a channel jointly owned by Time Warner Cable and the Dodgers, which launched in late February. At the time of this writing, SportsNet LA is the only means by which viewers in Los Angeles, Hawaii, the Las Vegas Valley, and the Coachella Valley will be able to watch the team on TV. That’s because local cable providers such as Cox, Charter, AT&T U-Verse, and DirecTV refuse to pay Time Warner a licensing fee rumored to be $4 to $5, and possibly as high as $8 over time. (Remember that the fee for ESPN, a national network, is in the $5 range.) Time Warner, which won’t comment publicly on its licensing fee, but claims the number is less than $5, is holding out in the hopes that its competitors will come to the bargaining table. It won’t offer the Dodgers as a tiered or à la carte option for nonsubscribers because it wouldn’t be able to recoup its costs that way. So it’s locked in a stalemate with its peers.