Weekly Update

Sports report: Conflict ahead

HBO and CBS made a splash last week with their back-to-back announcements that they will offer their content on a standalone subscription basis on the web, setting off a torrent of commentary and speculation about the end of pay-TV as we know it. Yet as I discussed in my previous post on the moves, I suspect the announcements are as much tactical maneuvers aimed at gaining leverage over current and potential distributors as they were genuine strategic shifts by the networks — essentially an opening gambit in what is likely to be a protracted renegotiation between the networks and pay-TV distributors over the terms of what is still a mutually beneficial (if not always warm) relationship.

There were new data points this week, however, that do point to the potential for serious disruption because they involve the main stitching holding together the current pay-TV bundle: live sports.

In today’s time-shifted, on-demand, C-7 world, live sports has emerged as the single most valuable category of programming because it is still overwhelming watched in real time. That keeps people paying for cable or satellite, and advertisers will pay a premium to reach an audience that can’t skip through the ads. According to SNL Kagan, in the average pay-TV market sports channels like ESPN and regional sports networks account for almost 20 percent of the carriage fees paid by cable and satellite operators. And that doesn’t count the cost of the huge rights fees paid by the Big 4 broadcast networks that gets baked into retransmission fees. According to MoffettNathanson analyst Michael Nathanson, the aggregate cost of sports rights accounts for as much as 50 percent of the cost of the average cable bill.

Yet, like all other categories of TV programming, consumer viewing habits for sports are changing, rapidly. According to Adobe’s latest Video Benchmark Report, released this week, online video consumption grew 388 percent year-over-year in 2014 compared to 2013, a spike driven in large part by online viewing of the 2014 FIFA World Cup, which set streaming records. While online movie viewing surpassed sports for the first time this year, online sports consumption grew by just over 30 percent, to an average of 4.2 sporting events per month.

Although online viewing remains highly fragmented across platforms, mobile devices and platforms collectively represent the single biggest sector. According to Adobe, iOS devices accounted for 51 percent of all online viewing, while Android devices accounted for 20 percent, surpassing browsers at 19 percent.

While mobile devices, with their small screens, were once thought to be ill-suited to live sports, consumers increasingly don’t agree. According to a report issued this week by Yahoo’s Flurry analytics unit, time spent in sports apps grew a whopping 210 percent YoY in 2014, more than three times faster than for all other types of apps. Time spent in football apps (college and NFL) grew an astonishing 250 percent YoY. Clearly, the big-screen TV is no longer keeping live sports firmly anchored to traditional TV platforms.

The catch is: the broadcasters that pony up those huge sports-rights fees don’t always get streaming rights in the bargain. CBS’ standalone OTT service, for instance, notably does not include the NFL games the network broadcasts under its deal with the league. Of all that time spent in football apps, none of it is spent in the CBS Sports app or on CBS.com. Instead, NFL streaming rights are held largely by DirecTV as part of its exclusive NFL Sunday Ticket package of out-of-market games. Verizon has streaming rights for in-market games under a separate deal.

Likewise, the regional sports networks that broadcast most Major League Baseball, NBA and NHL games, and that help cement the pay-TV bundle, typically are not able to stream the games they broadcast, either in-market or out, because the teams themselves typically don’t control those rights. Instead, streaming rights are controlled by the leagues, which either offer them directly to consumers, as with NHL Game Center, or in partnership with a national broadcaster, as under the NBA’s recent deal with ESPN.

As sports viewing increasingly goes over-the-top and mobile, taking the traditional broadcast audience with it, those big-ticket, broadcast-only rights deals are going to grow increasingly problematic for the broadcasters. Not only do they stand to lose audience, they stand to lose leverage with distributors in negotiating carriage and retransmission fees, which may be one reason CBS is moving now to try to pressure distributors, while it still has the juice to do it.

It also represents a potential competitive threat, to both broadcasters and traditional pay-TV distributors. The NFL Sunday Ticket package was a major factor in AT&T’s $48 billion bid to acquire the satcaster, to the point where the offer was made contingent on DirecTV being able to renew its deal with the NFL. Likewise, Verizon clearly intends to use its own NFL streaming rights as part of the foundation for an OTT subscription service it is planning for its mobile and broadband platforms.

If over-the-top and mobile service providers do not need CBS, NBC, ABC, Fox or regional sports networks to offer their subscribers access to live sports those networks will be in a much weaker position with potential OTT distributors than they enjoy now, to say nothing of advertisers.

Given the centrality of sports to the economics of the current TV business, any disruption of that value chain will set off far-reaching ripples.