Here Comes Fox Sports 1, Part 5 of 5: Does Fox Sports 1 Mean the End of an Era?

Fox Sports 1

Fox Sports 1 will bring the heat to the cable sports business.

This 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 4, Uzo talked about how cable sports is holding the television ecosystem together. In his concluding post, Uzo weights Fox’s strategy and gives his prediction on what becomes of Fox Sports 1, cable sports and television as a whole. 

Not to toot my own horn, but we have covered a lot this week. We looked at the history, present and future of ESPN. We asked (and hopefully answered) why Fox is entering the sports space now and how it changes the cable sports landscape. We looked at NBC’s and CBS’s cable sports networks and analyzed their strategies. And then we explored how cable sports as a whole is affecting the pay-TV paradigm.

Now, I’m here to tell you, in the most self-righteous way possible, that the entrance of Fox Sports 1 into this arena means the end of an era. But I’ll get into that later.  Let’s first recap everything we have covered this week.

We know that ESPN has turned broadcasting sports into a gold mine. They are printing money for Disney and they have shown little signs of slowing down. But where greedy industry titans see profits, they see opportunity. So the likes of CBS, NBC, and long before them, FSN, CSN, and RSNs all came to the trough, looking for sports dough. RSNs have had unmitigated success; for example, FSN (Fox’s regional sports channels) and the YES channel (also partially owned by Fox) have made billions of dollars.

But ESPN has been the king, which is why CBS and NBC set up national sports channels that could rival them. Only their channels don’t. Mainly because they have not invested enough to do so. Why haven’t they? Maybe they don’t have the money. Maybe ESPN’s makeshift moat around their business isn’t so makeshift. Or maybe those two networks are just being real “scary-like” right now.

However, Fox, and historically, Rupert Murdoch, ain’t never scared. He came to this country looking to set up a fourth broadcasting network when people said it couldn’t be done and he did it. Now Fox is investing the dollars to to buy rights to premiere sporting events, and as more rights come up for renewal, you can bet they will be at the bargaining table with ESPN and the sports rights providers both networks seek. And by entering the cable sports network game with distribution (90 million homes), some talent (the current Fox Sports crew), and existing content ($9 billion invested in rights over the past 2/3 years), Fox Sports 1 is going to be a force to be reckoned with at said bargaining table.

But Fox Sports 1 isn’t just betting that they can compete with ESPN, they are betting on the ecosystem. They are betting on the fact that as their entrance, and the entrance of many other networks and RSNs, means that the real price of pay-TV will go up for the average consumer, people will not stop paying for it. That argument would seem to defy supply and demand, but history has proven that as the real price of cable has gone up, and as we have suffered through troubling economic times, people historically have kept paying for television.

That, however, appears to be changing.

Technology has been nothing but a thorn in the side of the media industry’s back. Radio hurt newspapers. TV killed the radio star. The internet finished off the newspapers once more–and then did it to music, too. And now the internet, perhaps just for the fun of it, is going for television. The invention of DVR, Apple TV, Roku, Chromecast, Netflix and Xbox One means that people can watch what they want to watch, when they want to watch it, and consumers can possibly do so without paying for cable. As a result of these new options, the number of subscribers paying for television has gone done for 3 straight years.

Still, if you want to watch sports, you need cable. The NBA Playoffs, NHL Playoffs, MLB Playoffs, Olympics, World Cup, BCS Championship, NCAA Tourney and Monday Night Football are all on cable. So if you want to watch those things, you have to ante up, you’re going to watch it live, and the cable companies, cable networks and advertisers are going to laugh all the way to the bank. And call me crazy, but people are not going to give up all those sports…not yet anyway.

Prediction
This is funny, because in sports coverage, I have grown to loathe the pre-game prediction. Sports TV personalities make all kinds of ludicrous pre-game predictions that are mired in nothing factual but the direction of the Twitter winds at the moment a prediction is being made. And as I make fun of the dopey sports game prediction, I am about to make one of my own.

Fox Sports 1 will succeed, but in doing so, it will fail. Allow me to explain.

First, I truly believe that there is very little in the way of competitive advantages in media. There are definitely some. You can have a government-regulated advantage, superior knowledge, a cost advantage or maybe you have set up a system that is so intricate that the consumer just cannot possibly live without your media product or brand. However, in the case of being a sports network, none of those advantages exist in perpetuity. The best thing ESPN has going for it is that people have learned over the past 30 years to turn to ESPN for their sports coverage. It might take Fox Sports 1 a very long time, but if they are around for long enough, they too will get that learned behavior. Hey, if CDs and MP3 players can ween you off the radio, Fox Sports 1 can get you to click over a couple of channels.

Others may point to ESPN’s 30-years of experience. That’s nice, but all of their experience lies within their talent, not technology. They don’t have any ability that cannot be bought by Fox. And the long-term contracts people love to bring up are cute, but the problem is that the contracts are long-term, not permanent term. When those contracts end, Fox has just as much right to TV rights and talent as ESPN does, and if Fox bats .500, or even .300, Fox will have worthwhile sports rights locked up–for a while.

So I truly believe Fox Sports will be a worthwhile competitor. And they are no CBS or NBC, who both failed to get distribution or pay for sports rights. On the contrary, Fox has put its money where its mouth is, and in this business, if you are smart and know what you are doing (i.e., FOX, Fox News, FX, BSkyB, etc.) that is really all it takes. Well, that and a little bit of luck.

But that luck thing is actually pretty important. Remember those no-name devices I brought up. You know–AppleTV, Chromecast, Netflix? Well, those people have money too. And they want the content that will get people on their devices. So they are buying up and executing licensing deals with studios and creators to make people leave the cable system. And it’s a question of when, not if, enough people go the way of cutting the cord, will ESPN and Fox Sports 1 be able to survive?

My answer to that question is no–at least not as we know them today. Sure, I don’t see why there won’t always be an ESPN, and if Fox Sports 1 doesn’t make me look stupid, they too will always be around. But they won’t be getting $6 per subscriber from cable companies forever. When enough people cut their cords, some real decisions are going to be made. I know the Fox Sports COO said “a la carte” is a fantasy–that is until it’s possibly regulated into existence. Then what? And if services and products like Netflix and Xbox One become good enough at getting original content, there will be no need to pay a cable subscriber so much money for sports alone. Thus, the cable sports networks of the world will have to join the rest of entertainment on the cloud; either delivering subscription services like Netflix, or distributing their content through things like Roku and AppleTV–possibly a la carte.

But in doing so, that will bring the number of people subscribing to these properties way down. Instead of 100 million subscribers, ESPN would probably be around 70 million, maybe 50 million. Sure, they will charge more dollars per subscriber, but how much can they really raise the price? People are much more price sensitive when services are unbundled. In the end, sports networks will see their profits drop, as a result of both fewer subscribers and a more competitive landscape.

That said, the live audiences that sports networks draw will still be of utmost importance. In a world where people move towards watching things on demand, sports (no matter their profit levels) demand live audiences that advertisers love. And as the greatest advertising mechanism known to man, live TV commercials will probably be more valuable than they ever were in a world of on-demand viewing. And it’s my belief that they will be valuable enough to make sure that ESPN and Fox Sports 1 are still around long after I’m dead.

In Conclusion
Fox Sports 1 is a good thing. It means we get more sports and more quality programing on TV. Yes, it will come at a cost, but that cost will bring good. Eventually, the rising price of pay-TV will spell the end of this era of pay-TV–as we know it. Cable companies may still exist 20 years from now, as they can certainly move to an a la carte or over-the-top option. However, in doing so, cable companies will lose the biggest advantage they have in media; local, government-regulated, monopolization, which will lead to more competition and lower prices for consumers.

That means that cable operators will have to fill their coffers in other ways. Ultimately, they will get richer off charging subscribers up the arse for internet access. But as it relates to sports, it also means that you could see cable operators continuing to stay in the habit of buying the television rights to sports  to make sure you still need them to watch your favorite teams.

As for ESPN specifically, they will likely remain #1. They have too much of a head start on Fox Sports 1 (especially digitally) to be knocked off their perch any time in the near future. But margins for the Worldwide Leader will go down over the next decade. The NBA will be open for negotiations in the next couple of years, and even if ESPN manages to win the rights, you can be assured that Fox Sports 1 will push ESPN to their budgetary limits.

Which is why in 20 years, I think the only difference between ESPN and Fox Sports 1 will be the same difference we see between ABC and CBS today. CBS is more profitable with more viewers, but in the minds of most consumers, those two titans of broadcast are just two of the higher quality brands in television with no channel having any significantly perceived content-quality lead over the other.

As of late, ESPN has been arguing that they are going to be able to defend their prowess and that they want and desire competition. If they are good business people, and I know that they are, the last thing ESPN wants is competition. But now that they have it, much like the athletes they (and now Fox Sports 1) cover, ESPN is going to have to put its money where its mouth is.

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