Best Sports Programming Headed to Broadcast Television

Best Sports Programming Headed to Broadcast Television

Sports media coverage of the recent Walt Disney Company-Charter negotiation largely focused on ESPN and the increased carriage fee it was able to command. Already the most expensive channel on cable television, the Worldwide Leader will now cost Charter subscribers ~$11 (up from ~$9). The balance of the ESPN suite will be another ~$2.

But contrary to popular opinion, it is the retransmission fees distributors charge to carry the broadcast networks placing the most pressure on the Pay TV bundle. The five channels (think: ABC, NBC, CBS, FOX, and CW) can collectively cost as much as $30. Charter subscribers will pay ~$23 for the over-the-air stations (up from ~$19).

And the increase Disney got for the ESPN family of networks didn’t come without sacrifice.

“Disney let Spectrum get rid of many of its segmented entertainment channels from the Pay TV bundle and Spectrum got the right to offer Disney’s streaming products, where most of the Disney entertainment content now lives,” media consultant Patrick Crakes said. “So, Spectrum can reintegrate that content back into their reimagined bundle with broadband, and they’re paying a lot less for it.”

The Pay TV distributor was willing to pay more for the broadcast networks, while at the same time seeking to taper or eliminate growth for the cable channels, because that is where it sees the most value moving forward. Even in a declining bundle, the broadcast networks remain the most watched channels on television.

Most favored nation clauses will ensure the terms of this widely covered negotiation spread across the industry in the years ahead.

As they do, expect rights holders to increasingly move “a lot of the biggest and best sports programming to broadcast,” Crakes said. “For example, in the expanded CFP, look for the championship game to be on an over the air station; not ESPN.”

At least not exclusively.

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Almost every major sports media company’s content acquisition strategy already involves levering cable and broadcast distribution together, and in some cases streaming as well. Disney recently announced it will simulcast nearly every Monday Night Football game for the remainder of this season on ABC.

However, the Charter-Disney negotiation reflects the business’ new reality; one that will drive rights owners to increasingly reallocate content to the distribution path delivering the most value.

"The new Pay TV paradigm increases the value of the channels and content with high general market appeal, and that means sports and broadcast TV [will be] the clear pillars of the reimaged video bundle," Crakes said.

To understand current market dynamics, one must understand how the media industry reached this point. As the Pay TV bundle grew rapidly in the late ‘90s and early ‘00s, broadcasters began segmenting content and berthing new cable channels in pursuit of carriage fees.

The result was a large number of highly segmented, high profitable Pay TV channels.

"Fox Sports, for example, had several highly segmented sports channels that featured lower viewing,” Crakes said. “Despite the low viewing, they still made $30 to $90 million a year in operating profit because they tagged along with the other higher value general market FOX entertainment and news channels in negotiations with Pay TV distributors.”

In fact, the economics of Pay TV became so powerful, strategic content that had traditionally been the lynchpin of broadcast TV started moving there (think: MNF on ESPN).

The problem was by adding an increasing number of highly segmented Pay TV channels, the bundle began to be sliced too thin. There were too many stations with little to no viewing, that subscribers did not see value in, and it led to cord cutting by the mid 2010s.

To correct the over segmentation problem FOX ended up rebranding and collapsing several of its channels and turned them into FS1, FS2 and FXX.

When the reverse segmentation process was complete, these new broader market channels “were worth more [than the collective of highly segmented cable networks], and distributors were able to sell consumers on higher value channels,” Crakes said.

But as households began exiting the bundle, the growth in Pay TV channels began to slow and stall out. Now it's in accelerating secular decline having lost approximately 25M subscribers over the last decade.

That isn’t the case with the broadcast networks though.

“The Cable Television Consumer Protection and Competition Act of 1992 says that broadcast affiliates get an opportunity to negotiate with [the local] Pay TV distributor if the Pay TV distributor wants to carry its signal,” Crakes said.

Affiliates can force carriage, but that doesn’t come with compensation.

It was simple negotiation throughout the peak bundle era.

The broadcast TV business was healthy (think: Seinfeld, X-Files, Friends) and the networks were willing to give up their signal for free. All they sought in return was the opportunity to launch new cable channels.

Distributors agreed to the terms because it helped them to grow the broader Pay TV business.

But as the business model began to show cracks, those same networks and station owners altered their tune.

“Instead of launching these channels, they began asking distributors to start paying them a fee for the broadcast affiliates,” Crakes said.

In essence, the networks turned their broadcast feeds into Pay TV channels.

Distributors had no choice but to go along with it. The broadcast channels were –and still are– the highest rated stations inside the Pay TV bundle (which is why there is still room for growth there). Remember, these are general market channels with a lot of high-quality programming (think: network primetime, local news, syndication, and sports).

Retransmission fee growth has been aggressive over the last decade plus. As noted, the broadcast networks are now among the most expensive channels on television.

“Then [networks] invented reverse retransmission to take some of what the non-O&O stations [command] in their negotiations with Pay TV distributors to pay for network strategic investments in increasing expensive programming, particularly sports such as the NFL,” Crakes said.

With the broadcast business still having some room for lift, it only makes sense for rights owners to continue moving the best content from cable there.

Look for tier one leagues to start appearing on weekdays in broadcast primetime (and not just because of the writer’s strike). Saturdays and Sundays are just too crowded to get air time.

Rights owners will not be upset about more games going to broadcast. They understand the reach problem that exists inside of the declining Pay TV bundle.

And neither will the distributors.

“At least then, it will be one negotiation over a smaller number of important channels,” Crakes said.

Of course, consumers could in theory get these broadcast networks for free with an over-the-air antenna.

But almost no one does. Or at least they haven’t until this point. ~90% of broadcast viewing comes from inside of the Pay TV bundle.

The Phoenix Suns are trying to change that. The team recently announced it would be offering fans a free antenna in the hopes of accelerating the adoption process.

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