(Updates in 5th paragraph with TV ratings for yesterday’s World Cup match.)
July 2 (Bloomberg) -- More Americans have watched the U.S. soccer team in this World Cup than ever before. The two biggest announced acquisitions in the world this year are for U.S. pay- TV operators. Yes, there is a connection.
AT&T Inc.’s bid for DirecTV, and Comcast Corp.’s merger with Time Warner Cable Inc., totaling a combined $134 billion, are tied together by a thread that today is driving many of the decisions in the world of pay-TV: Sports.
AT&T will buy DirecTV only if the satellite-TV provider renews its exclusive Sunday night package of football games. Time Warner Cable is selling because it’s losing customers rebelling against high cable bills -- caused in part by the soaring cost of obtaining sports rights. The two deals are prime examples of how sports programming’s immense popularity has become both the cause of, and solution to, pay-TV’s slowdown. The result: More media consolidation is on the way.
“Sports are seemingly everywhere now,” said Leo Hindery, the former CEO of TCI Communications Inc., then the largest U.S. cable operator, and co-founder of the YES Network, which broadcasts New York Yankees baseball games. “In the 100-channel world today, when very expensive sports programming is showing up all over the dial, the cost is much less manageable, both for the system operators and of course for consumers.”
Last week’s World Cup draw between the U.S. and Portugal was watched by more Americans -- about 25 million -- than any other soccer game in history, according to Nielsen Co. Yesterday’s audience for the 2-1 loss against Belgium had the highest overnight rating ever for an ESPN-televised World Cup game, according to Nielsen, showcasing another benefit when it comes to sports: it happens in real time, unlike most other content now.
Yet sports programming comes at a price. Last year marked the first year in which fewer U.S. households paid for TV than the previous year, dropping by about 250,000, according to research firm SNL Kagan.
Higher monthly bills are the main reason for the cancellations, as regional and national sports networks, like ESPN, which broadcasts the World Cup, are extracting ever-larger payments from such pay-TV operators as DirecTV, Time Warner Cable and Comcast. They in turn pass on the cost to customers, who are increasingly resorting to less expensive Internet programming.
In 1995, these operators paid about $1.17 per month to programmers for cable network sports content, according to SNL Kagan. In 2016, they’ll pay $18.32, about 41 percent of their total cost for content on all channels. That has helped push up the average monthly TV bill 25 percent to $85 a month over the last 5 years, according to data compiled by Bloomberg Industries -- more than double the rate of inflation over the same time period.
In Los Angeles, a battle now playing out between programmers and operators illustrates how sports has become both boon and bane for media companies.
In 2012 Frank McCourt sold the Dodgers baseball team for about $2 billion to a group including former Lakers star Magic Johnson, ex-basketball and baseball executive Stan Kasten and Guggenheim Partners.
It was a record high price -- no professional sports team had ever been sold for more than $1.1 billion before -- yet the new owners understood they would cover the cost by negotiating a healthy new TV-rights deal for Dodgers games.
Time Warner Cable entered the bidding for the games and won, agreeing last year to pay about $8 billion over 25 years for the right to run the Dodgers network.
While Time Warner Cable is a cable operator with 1.5 million customers in the L.A. region, it decided it needed to become a sports programmer as well if it wanted to control costs.
In its memory was a highly publicized spat in 2012 when it dropped a New York Knicks basketball network because of a fee increase. After seven weeks and many customer complaints, Time Warner Cable accepted a price hike and restored Madison Square Garden Co.’s MSG Network.
“We prefer not to be in this business and if we had been charged more reasonable rates we probably wouldn’t be in this position,” said Irene Esteves in 2012 when she was Time Warner Cable’s chief financial officer.
Now, in Los Angeles, the tables have turned and Time Warner Cable has been accused of demanding excessive fees from operators. It is seeking between $4 and $5 per month per subscriber from all the pay-TV companies in the L.A. area, including DirecTV, the region’s second-largest operator, Verizon FiOS, AT&T U-verse and Dish Network Corp., according to a person familiar with the matter. That would make the Dodgers network the most expensive regional sports network in the entire country.
In unprecedented solidarity, DirecTV, FiOS, U-verse and Dish have all said no to Time Warner Cable’s Dodgers asking price.
“Either the distributors start to stand together, like most of us have been doing in Los Angeles, or cord cutting explodes, because people just can’t afford it,” said DirecTV Chief Executive Officer Mike White, who favors a system that doesn’t require all subscribers to pay for every sports network.
The operators are paying a price in customer defections to Time Warner Cable as it’s the only provider showing the Dodgers games. DirecTV, with 1.2 million L.A. customers, added just 12,000 customers in the first quarter, after gaining 93,000 in the fourth quarter. The company’s second-quarter results, announced in early August, will further clarify the extent of customer transfers as the baseball season progresses.
Spokesmen for AT&T, DirecTV, Comcast and Time Warner Cable declined to comment.
Much of the value of sports programming for pay-TV operators stems from its immediacy. Unlike shows that can be watched later on Netflix, sports are typically watched in real time. This is great for advertisers, because commercials aren’t as frequently skipped, and it’s great for the pay-TV systems, because online options can’t offer a comparable substitute.
“Nobody watches the Super Bowl on Monday,” said David Levy, president of Time Warner Inc.’s Turner Sports.
It’s perhaps no surprise that the two main protagonists in the Los Angeles battle -- Time Warner Cable and DirecTV -- are now close to being acquired.
By pursuing Time Warner Cable, Comcast is showing that the value of sports programming trumps the fact that the cable operator nationally is losing customers to high bills.
Comcast is motivated by the quality of Time Warner Cable’s subscribers -- particularly in New York City, Los Angeles, Dallas and Chicago -- and that’s because they’re football markets, according to Hindery.
Comcast CEO Brian Roberts, for one, “knows that some degree of cord cutting will continue,” Hindery said, referring to cable cancellations. “Against this backdrop, the more profitable and thus more valuable cable systems are those in the so-called NFL markets where household income and education levels and overall system size generate the highest returns on investment. For cable operators, it now matters greatly where their future high-volume broadband customers reside.”
AT&T’s reason for acquiring DirecTV is even starker. It hinges on DirecTV renewing its NFL Sunday Ticket contract, which allows its customers to watch NFL out-of-market Sunday games. AT&T can cancel its $66 billion acquisition for the satellite-TV provider if it can’t get a new deal by the start of the 2015 season.
DirecTV will probably pay about $1.5 billion per year for Sunday Ticket if it renews, according to Amy Yong, an analyst at Macquarie Group Ltd. in New York.
The losers in any coming consolidation will be small pay-TV operators and owners of non-premium, non-sports networks, according to Matthew Polka, the president of the American Cable Association, which represents more than 850 small and medium- sized independent operators throughout the U.S. In the long run, he said, the entire pay-TV world could perish if prices get so high that no one will pay them.
“The content companies are going to implode because of their own greed to continue to demand payment for the bundle at ever-escalating prices when consumers want less of it,” Polka said.
There’s no sign that view is gaining traction. Even U.S. soccer rights are starting to fetch huge dollars. Fox paid $425 million for the 2018 and 2022 World Cup rights, more than quadrupling the $100 million ESPN paid for the 2010 and this year’s Cup, according to the Associated Press.
ESPN charges operators nearly $6 a month for its network, by far the most expensive national channel, and no cable operator has dared drop it. Two new direct national competitors -- Fox Sports 1 and NBC Sports Network -- will be actively bidding up the price of sports in years to come.
Both AT&T and Comcast have said that their deals will help slow the increase of cable bills by giving them more scale, and thus more leverage over all programmers -- sports and non-sports -- in the future.
As pay-TV providers get larger, that also means more people will be relying on them to deliver the television they want. And guess what? You’ll pay for it.
“The price escalation for sports is unrestrained,” said Craig Moffett, co-founder of MoffettNathanson LLC, who has long followed the pay-TV industry. “It’s fair to say the operators are now acutely aware of the unsustainability of the current price trajectory of the industry. At the same time, the programmers are reveling in the current pricing trajectory of the industry. Something has to give.”
--With assistance from Scott Soshnick in New York.