Sports, Business, and the Cable Bundle Bubble

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Are sports leagues going to continue the current pattern of ever-increasing revenues, or will the current sports economic system come crashing down under its own weight?

There is no denying that sports is big business. The NBA just signed a new television deal for 24 billion dollars over nine years. The NHL Canadian television deal was for 5.2 billion dollars, and is now suggested to have been less than the rights were actually worth. The television rights deals seem to be continuously increasing in value.   However, this system may be unsustainable.

Gone is the era of sports as a small family business, or a hobby for millionaires and billionaires. Run sensibly, sports franchises can bring in gigantic revenues, largely based on income from television. The Los Angeles Clippers, following the Donald Sterling scandal, were recently sold for over 2 billion dollars. Other franchises may sell for even greater amounts.

One would be hard-pressed to find sympathy for the players who routinely earn multimillion dollar contracts for playing a game at a high level. However, the current collective bargaining agreements in many sports are structured to give players only a limited percentage of the league revenues. These collective bargaining agreements were premised on the fact that the owners required a large portion of total league income in order to avoid losing money. This understanding failed to account for the massively growing revenues. If all that the owners required was a share of revenue capable of covering team expenses, as they suggested was the case, the owners would require a much smaller percentage of total league revenues. The players are well aware of the changing league finances, and will fight in the next set of collective bargaining agreements for a much larger share of league profits.

Simply put, the current system cannot last forever. The ballooning revenues are based on television networks craving live programing. They believe that in an era of PVRs and streaming services the only way to ensure viewership is to offer live programing that people will not be willing to watch later. The networks have entered into an arms race, seeking to outbid each other for precious live programming.

“Subscription packages are the norm in television.”

Many of the important bidders in these processes are American cable networks. They seek live programming in order to increase viewership, and maximize advertising dollars, but also in order to increase their number of subscribers. The model is that as a cable network increases their offering of live programming, they are able to attract more and more subscribers. However, the majority of cable network subscribers will have the network available to them as a part of a subscription package.

Subscription packages are the norm in television. Consumers are not able to select the specific channels that they want to receive, but have to select a package. Generally the package will include many channels that the consumer has no real interest in receiving. Each channel receives a share of the total fees paid for the total package. This share is bargained for between the cable providers and the cable networks. Because consumers demand the live sports that a channel like ESPN can offer, ESPN is able to bargain for extremely high rates, and knows that cable networks, and consumers will be willing to pay.

This increases revenues at networks like ESPN (FOX sports 1, NBC sports network, TSN, and Sportsnet), and allows the networks to continuously increase their bids on live sports content, furthering the cycle.

However, from a consumer perspective the bundle system is undesirable and unfair. Consumers are willing to pay for the content that they actually want, but do not want to subsidize networks that they have no intention of ever viewing, as they are forced to in the bundle system. There is a growing push to allow à la carte cable subscriptions, in which viewers are able to decide which channels they want, and only pay for those.

This system would reduce revenues for the cable networks. This is because under the current system, almost all packages include the main sports networks. If people who have no interest in sports were given the choice, they would drop this portion of the subscription, and would stop subsidizing the interests of sports fans. The networks might respond by increasing subscription fees to those who were willing to pay for sports, yet this increase would likely result in a further decrease in subscriptions. Either sports networks would predominately cater to the elite, or they would experience significant decreases in revenue.

The decreased revenue to the sports networks would result in them being forced to reduce their bids on live sporting events. The leagues would experience a corresponding decrease in revenue.

The shift in cable bundles is likely to happen after the next round of negotiations on collective bargaining. Thus, the percentage of league revenues going to owners should be lessened, as should the total value of league revenues. Combined, these factors might finally result in many owners being unable to cover the operating expenses of their teams, just as they have been claiming until recently.

The change in the finances of sports that would follow from allowing à la carte cable subscriptions would be monumental. Franchises would be sold for significantly less than the value at which they were purchased and teams would relocate, amongst other consequences. Potentially, leagues might even be forced to decrease their number of teams to compensate for the lost revenues.

Sports faces many challenges, including issues of concussions, and illegal behavior of players and owners. However, in the near future, the largest challenge looming for professional sports leagues may be the unsustainable business model that they have constructed around cable television fees.

Leagues may pay lip service to alternative revenue streams such as international markets or the internet, but these alternatives cannot possibly compensate for the inevitable burst of the television revenue bubble.

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Michael Silver

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By Michael Silver

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