Here Comes Fox Sports 1, Part 4 of 5: Are Sports Propping Up the TV Ecosystem?

Television AdvertisingThis Saturday, August 17, 2013, Fox Sports 1 will launch and become the newest entrant in the sports network business. In the five days leading up to Fox Sports 1’s launch, Uzo will take a daily look at the sports network business, its players, the landscape and what this all means for the future of television, the media and the economy as a whole. The series is dubbed, “Here Comes Fox Sports 1.” In Part 3, Uzo talked about the failures of CBS and NBC. Today, Uzo explains how cable sports is holding up all of television.

I used to work with a  woman that refused to order our lunch online. Despite the inventions of GrubHub, CampusFood and Seamless, she had no interest in turning her custom made salad order over to a computer. She wanted to do things the old-fashioned way: pick up a phone and talk to the company that was going to make her food. For whatever reason, putting her food requests on the internet was scary, involved a learning process and was against every inertia-liking bone in her body.

Some people think that’s how most suckers–I mean subscribers–are with cable today. In a world filed with YouTube, Hulu, Netflix, Xbox One and SmartTVs, why would anyone pay an egregious amount of money ($91 on average) for a pay-TV service that’s full of channels you don’t watch?

Well, the answer is that some people actually aren’t willing to do that. Over the last 8 quarters, the major cable companies, in aggregate, have lost subscribers every quarter. And in the most recent 3 quarters, the losses have been 3% on average.

So despite what a lot of cable companies are telling you, cord-cutting is real!

And it makes sense that it is. I can use Tivo, Apple TV, Roku and Chromecast to watch many of the things I get on cable in an a la carte fashion–which means I don’t have to pay for the crap I don’t want.

Of course, with all these devices, DVRs, and declining subscriber numbers, live television viewing is down. And while that means the consumer can now watch what he wants to watch when she wants to watch it, it also means that the best advertising mechanism known to man, network television commercials, is finding it hard to find a live audience.

Except when they turn to sports!

Despite the declines in overall traditional television viewership, and especially traditional viewership among Generation’s Y and Z, who watch about 20 fewer hours of TV than baby boomers, sports keeps people coming back to the old fashioned way of watching (and paying for) television.

While you can get your fix of the latest reality show on Hulu, or binge-view the crap out of the latest cable drama to capture our imaginations via Netflix, you not only need to pay some entity to watch the BCS Championship game on ESPN this January, but in all likelihood, you are going to watch it live.

Advertisers adorn ESPN and other sports networks and broadcasters, because they can still bring in 12-20 million viewers easily. To put it in perspective, the best show on television right now, Breaking Bad, had a record 5.9 million viewers for the season premier of its final season. On the contrary, Fox Sports got over 9 million viewers for its broadcast of the MLB All-Star Game, and ESPN gets anywhere from 5 to 10 million viewers for non-finals rounds of NBA playoff basketball games.

As the last bastion of live TV viewing audiences is primarily available through sports, you can imagine that the ESPNs of the world are doing everything they can to keep as many people subscribing to cable (and subsequently their channels) as possible so that they can keep the the pay-TV ecosystem going. So how do they do it?

Basically, they pay billions of dollars to keep sporting events on cable so that men and families have to pay cable and satellite operators. That’s why ESPN recently shelled out $15.2 billion to the NFL. That’s also why Time Warner Cable paid $8.5 billion to the Dodgers to start their own channel.

Subsequently, the money cable and satellite operators collect from subscribers goes towards paying the bills for those sports programming rights. And those bills are getting bigger and bigger. ESPN already demands $5.71 (according to SNL Kagan) for ESPN and ESPN2. Time Warner is expected to charge Los Angeles area subscribers around $4 to watch the Dodgers. And Fox Sports 1 is expected to get $0.80 per subscriber, up from the $0.30 it was getting as the “Speed” channel.

But hey, you have to have your sports, right?

Well, maybe you don’t. After all, if people are cutting the cord at an aggregate rate (inclusive of cable, telecom and satellite) of approximately 0.3%, then that means some people are finding a way of life that doesn’t include sports!

I know. I know. That’s blasphemy!

But it’s also the truth. In fact, only 71% of Americans consider themselves sports fans. That means, with the cost of sports channels driving up the costs of our cable bills, there’s a good chance that the cord-cutting we are seeing is going to go on for a while. And that cord-cutting may speed up as new and better technologies are unveiled. If we ever see pay-TV usage rates drop anywhere close to 71% of homes, you can assure yourselves that the margins for cable operators will disappear, and thus, so will the industry.

And as we stand now, people are already fighting to end the system of bundling ESPN and other national and regional sports networks into basic cable packages. Senator John McCain wants Congress to move forward on legislation that would force cablers to offer ESPN, and all basic cable channels, a la carte.

But is that really the answer? Do we really want a la carte television? It sounds nice, but the truth of the matter is that sports programming only makes up 20% of the programming costs that cable operators are paying. And if we make it so that the channels are sold separately, ESPN won’t charge $5.71, it will charge $25 per subscriber, and other channels will have to have similar increases as a result of supply and demand. Thus, instead of getting all of the channels for $91, you may only get 10 or 15 channels for that price. Whatever the actual economics of the prices will be, they certainly won’t be at the value we are getting now.

More importantly, destroying pay-TV as we know it, from a bundling service to an a la carte one, will not last long in a digital world. Apple and Google will be all over that model as they already are with their online media stores, and they will probably crush the likes of old-stodgy cable companies.

If pay-TV goes away, that could effectively spell the end of the greatest advertising mechanism known to man. If we don’t have scores of people watching live television anymore, how does Madison Avenue reach millions of consumers in just 30 seconds? I love the internet, and it has proven a great tool for increasing advertising ROI, but reach on the internet has its problems. Even in online video advertising, it’s hard, if not impossible, for an advertiser to reach 10 million like-minded people at one time. I don’t see any rate cards for YouTube that go for the $3 million per 30 seconds that a Super Bowl commercial goes for…and I probably never will.

And say what you will about today’s generation of Mad Men, but we need television advertising. Believe it or not, it works. People buy stuff when they see it in commercials, integrated into popular shows or endorsed by celebrities doing big-money TV spots. Advertisers sell a lot of goods through commercials by launching new products, promoting sales and discounts, and branding tried and true staples. To put it simply, commercials produce money for big companies, and that means jobs for you and me. Without an efficient means of advertising, the economy will suffer. Will we replace television advertising, if necessary? Probably. But will it for sure be as effective as TV commercials? Who knows? And that’s the risk of a future without live television.

But as we sit here today, television, and its commercials, aren’t going anywhere. Cable sports is keeping the whole thing together. Over 97% of sports are watched live, and ESPN, Fox Sports, the YES Channel, and others like them, keep many men and their families on the pay-TV teat. And because of our fascination for the NFL, NBA and UFC, we will be on that teat for a long time…just like my former co-worker who has probably been on hold for a long time waiting to give “Just Salad” her lunch order.

This was Part 4 in MediaMan’s 5-part series “Here Come’s Fox Sports 1.” Keep coming back to MediaMan everyday this week for a new installment. In Part 5 of the series, Uzo gives his prediction on the future of Fox Sports 1 and all things cable sports.

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