Weekly Update

NFL breaks up the pay-TV huddle

The National Football League may just have cut the cord.

The league’s new broadcast rights deals with CBS, NBC and Fox, along with ESPN, shatter all records for TV sports rights — or any other TV rights, for that matter — raising fees by 60 percent over the expiring deal between the networks and the league. The three broadcast networks will each pay the league an average of $1 billion per year through 2022, a total of $3 billion per year to the league, compared with $1.9 billion under the expiring deal. ESPN will pay $1.9 billion a year for rights to “Monday Night Football” through 2021, an increase of 73 percent over its previous deal.

The richness of the deal reflects the reality of the TV business these days. With audiences increasingly fragmented, NFL games remain among the few types of programs that can reliably aggregate an audience of tens of millions of viewers, including the elusive young male audience highly sought by advertisers. NFL games are also typically watched live, rather than being time shifted, which reduces commercial skipping and further increases the networks’ leverage with advertisers.

Equally critical, having the NFL rights boosts the networks’ leverage with cable and satellite operators, who are increasingly dependent on access to live sports to hold on to paying subscribers in the face of over-the-top competition. The 10-year term of the new deal will give the networks the flexibility to negotiate lucrative retransmission deals with pay-TV operators as their current carriage deals come up for renewal over the next decade.

Yet the steep price of the deal is also likely to put pressure on rapidly growing fault lines within the pay-TV industry that could, ironically, accelerate the breakup of the broad bundle of channels at the core of the current business model — something competition from over-the-top video providers has thus far been unable to achieve.

At the UBS Global Media and Communication conference earlier this month, the impact of ever-higher sports-rights fees on the pay-TV ecosystem was a topic of frequent, often pointed, discussion. The grumbling was coming not from cable and satellite operators, as might have been expected, however, but from other network owners. They were concerned that ever-higher sports rights fees were turning the pay-TV bundle into a zero-sum game among programmers.

Coming before the latest NFL deal was signed, much of the networks’ ire at the UBS conference was directed at ESPN, which has built its brand on live sports and whose estimated $4.69 per subscriber carriage fees are by far the highest of any cable or broadcast network. With the NFL networks now set to turn their attention to their own retransmission deals, however, the tensions will only increase.

Liberty Media CEO Greg Maffei questioned, “What happens to the bundle of cable if you keep pushing [the price] higher and higher?” And Viacom CEO Philippe Dauman pointedly noted that ESPN’s $4.69 per sub haul is more than twice what Viacom gets for all of its cable networks combined, which include MTV, VH1, Nickelodeon and Comedy Central, among others.

The ultimate source of the problem, of course, is that video subscriber counts for cable operators are no longer growing and may actually be shrinking, due to growing competition from OTT video, the impact of the recession on disposable incomes and some measure of cord cutting or cord avoiding on the margins.

That has made it harder, if not impossible, for operators to pass along increased program costs to their remaining subscribers. As a result, every dime per subscriber increase for CBS, Fox or ESPN will force operators to try to squeeze other networks where the operators’ leverage is greater. Smaller networks could find themselves squeezed off cable platforms altogether, forcing them to seek other, probably over-the-top distribution channels.

That would be the beginning of the Great Unbundling, but it probably wouldn’t stop there.

The cable TV bundle worked as long as the overall pie was growing. But not everyone can get a bigger piece of a shrinking pie. At some point, the current bundle itself may simply become unsustainable, done in not by disruptive competition from Netflix, Apple or Google but by the number of fingers trying to pull out their slice.

In the meantime, though, the jockeying for advantage is likely to be fierce.

Question of the week

If the cable TV bundle falls apart, which companies are best positioned to pick up the programming pieces?