Troubles Plaguing Cable TV are Coming for Broadcast Next

Troubles Plaguing Cable TV are Coming for Broadcast Next

With the Los Angeles Dodgers sprinting to a 3-0 lead in the World Series much of the street and the sports business media focused on how a sweep would impact Fox’s economics. The broadcast network reportedly stood to miss out on as much as $150mm in ‘potential’ advertising revenue if the New York Yankees could not extend the series.

However, many of those individuals appear to have overlooked the fact that ~70% of gross broadcast television revenues now come from retransmission fees–and as such, Fox’s World Series rights were largely paid for before a single spot had been sold.  

“Advertising is a kicker against your budget number. It can either overperform or underperform that figure,” former Fox Sports executive and current media consultant Patrick Crakes said. “But when it comes to major sports’ broadcast partners, all of them, largely succeed or fail based upon the value of multi-year contractual retrans fees; and the MLB post post-season, including the World Series, is no exception.”

So, Fox’s ‘dream’ matchup was never going to turn into a ‘nightmare’ as some pundits predicted. At least, not this year.

In a worst-case scenario, it simply would have been less profitable than Fox budgeted for (although the high number of “if necessary” games in the earlier rounds likely saw all of baseball’s network partners do well vs. their respective advertising budgets). The Dodgers ended up winning the series in five games–as the network had planned. 

Nevertheless, retransmission fees are collected, like pay TV network fees, based on the number of subscribers inside the bundle. If that universe continues shrinking, the broadcast networks will eventually find themselves in a similar circumstance to their cable counterparts.

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Crupi gets it and was simply looking to contextualize what so many others were discussing. But a disconnect does exist amongst many other media observers.

How can one tell?

“Everybody talks about ESPN and their challenges, nobody talks about those same headwinds in the context of the broadcast networks; despite all the sports content moving there,” Crakes said.

That is because most people hear broadcast and associate it with free or over-the-air. 

“It is the reason why the station groups were able to get away with saying teams moving from regional sports networks to local broadcast affiliates would be able to reach everybody in the market,” Crakes said.

But the reality is that most broadcast television viewing comes from inside the pay TV bundle (think: 80% or more), even with retransmission fees now pushing $30/mo. and consumers able to get the channels for free with an antenna, and broadcast and cable television channels make money in similar ways. The headwinds impacting the pay TV channel economics will eventually influence OTA stations in the same way–unless the broadcast networks can find a way to keep retransmission fee prices rising.

Rights holders are increasingly moving live sports programming from cable channels to broadcast to try and do just that (see: MNF). By concentrating valuable content on OTA stations, they have been able to mitigate declines to date.

But the belief is that is only a temporary solution.

“Not today, but at some point, thanks to the secular decline of Pay TV, the model’s retransmission fee returns begins to taper off,” Crakes said.

And that’s almost certainly going to be the case, even if sports fans never adopt bunny-ears (or digital antennas) en masse.

“Distributors are eventually going to say, ‘I can't give you any more increases’,” Crakes said. They “worry that doing so will further drive Pay TV’s decline. It’s a price elasticity problem.”

That doesn’t mean broadcast network revenues will immediately go to zero. The OTA channels are going to be the last on linear TV to fall. And the timeline for each will be different.

However, as contractual content costs continue to rise, they will increasingly eat into broadcast network profits. That reality, combined with the continued shrinking of the pay TV universe, is likely to accelerate the ongoing wave of reverse segmentation or consolidation/restructuring amongst broadcasters (think: shuttering of NBC Sports Network). 

“NBCUniversal is still doing its tri-cast strategy across USA, broadcast, and Peacock. It’s just collapsing more channels and changing the content mix on them,” Crakes said. “You’re going to see that happen more and more.”

Where rights owners land once the fallout is complete remains to be seen. It’s realistic to believe there could be as many as 15 fewer ‘well-known’ linear channels come 2030, and there’s not nearly enough shelf space on the four broadcast channels for all the live rights that currently air on pay TV.

Amazon, Alphabet, and Apple are logical destinations to suggest. The three streamers have all been actively experimenting with sports, and in the former’s case, aggressively.

But unless incremental bidders who are willing to overvalue live rights relative to pay TV connected networks emerge, it’s not clear that will be enough for top properties to double rights fees again in their next negotiation cycle. And the concern becomes exacerbated if one of those new entrants decides it’s out on sports.

“The NBA’s recently signed deal could end up being an inflection point,” Crakes said. “As the revenue compressing realties of pay TV’s decline continue to progress over the next several years driving potentially large mergers and acquisitions within media distribution, the result could be less competitors bidding for less content at an elite level moving forward. That’s how you right size the system’s cost increases from the buyer perspective.”

If there are fewer broadcasters bidding on live rights and those remaining are investing their resources there, one can surmise there will be less money to be spent on ancillary sports programming in the years ahead. That could become problematic for at least some content creation companies.

Remember, many sports production houses/arms were formed at a time when folks assumed there would be infinite shelf space for docs and long-form content on streaming services and those companies were still willing to pay cable TV rates (or more) for exclusivity.

That’s no longer the case. There’s more high-quality programming available for distribution today than dollars or channels for it. For every one project greenlit, many others are rejected. 

“The fallout from having profitable distribution outlets thanks to the pay TV bundles, and non-live programming not being really picked up by the streamers, who themselves are starting dial back content creation, is another big unspoken thing impacting the industry,” Crakes said.

It just doesn’t influence sports property economics in the same way shrinking cable and retransmission fees do. It’s more about the loss of valuable storytelling and the opportunities to develop or engage new fans.

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