ESPN is the self proclaimed “World Wide Leader in Sports”. It has the most channels, highest subscriber fee for a cable network, high ratings, and it generates more revenues than any other cable network. Goldman Sachs estimated that ESPN accounts for 45 percent of all of their parent company’s (Disney) operating income. The Walt Disney stock (NYSE: DIS) was downgraded from a conviction buy to neutral, by Goldman Sachs in June for two reasons. The first issue cited was new competition from Fox Sports 1, and the second was slower operating income growth, due to cost increases from new national sports rightsdeals starting in 2014 (MLB, NFL Monday Night Football, and the new BCS Championship). The increase in sports rights are expected to hamper the profit margin of cable networks, and has created the sports rights bubble that people fear will follow that of the housing bubble and tech bubble before it.
Unfortunately for ESPN, the increase in rights costs and competition is not their only concerns. Over the last 12 months, ratings are down on both ESPN and ESPN2. ESPN generates their best primetime ratings during Q3 and Q4 because of their football programming (NFL and NCAA). In the second half of last year, ESPN was flat with their primetime audience, while ESPN2 fell more than 10%. Both ESPN channels were down a few percentage points in the total-day audience compared to 2011. Fox Sports 1 will launch in Q3 of 2013, ESPN’s most recent numbers had them down 32% from last year, which shows the negative trend for ESPN continues. With 6 underwhelming quarters in a row, ESPN continues to generate large profits because their content (live sports) is looked at as DVR-proof. ESPN has three major cable networks with high distribution: ESPNU, ESPN2, and ESPN. ESPN and ESPN2 have a distribution of 98.5 million, while ESPNU is in just over 74 million homes. ESPN commands the highest sub fee of ANY cable networks at $5.06; ESPN2 and ESPNU get 67 and 16 cents per subscriber respectively. Combining their subscriber revenues, these three networks will earn nearly $7 billion dollars in subscribers’ fees alone this year.
Each network has their own strategy, and NBC Sports Network (NBCSN) has decided to reach for low priced rights of growing sports to try and build up their viewership. NBCSN has deals in place with the Barclays Premier League, National Hockey League, and Major League Soccer. NBCSN also airs marquee annual events such as the Tour De France and Olympics, which help their distribution numbers. NBC Sports made large gains in Q2, because of the favorable Stanley Cup Finals matchup (Chicago vs. Boston). NBCSN was up 17% in Q2 from a year ago in primetime, and experienced its most-viewed non-Olympic quarter ever. NBC Sports Group announced their coverage for the Barclays Premier League this year, and in the first three weeks alone, over 14 matches will be offered on the NBCSN with high profile teams such as Arsenal, Manchester City, Manchester United, and Chelsea. This will help provide higher quality live programming, as well as content for studio shows in the short-term. Long-term, this investment in the BPL will help to grow the popularity of the sport domestically and may help increase MLS ratings as a result. The subscriber fee for NBCSN is 31 cents per, and they are distributed into 78 million homes. This year, before factoring in advertising revenues, NBCSN will generate nearly $290million in revenues from their subscriber fees, half that of ESPN2 and less than 5% of the total that ESPN will bring in.
Fox Sports 1 recently settled on honoring the carriage deals for SPEED with DirecTV, Dish, and Time Warner Cable. These networks had deals in place to carry SPEED and refused to renegotiate with Fox for a higher subscriber fee. SPEED cost 23 cents per subscriber, while Fox had been asking for 80 cents per, almost four times as much as SPEED. Fox Sports 1 is expected to have the best launch in cable history, because of the anticipation and advertising that have gone in to promoting the new channel, along with the unparalleled 90 million homes at launch. Fox Sports 2 will also take the place of Fuel TV, although it will serve as an overflow channel and will not require a renegotiation of a rights fee. Fox Sports 2 will launch in approximately 37 million homes. The decision to launch a cable network for Fox will not reap huge profits immediately, but is part of a long-term strategy as they continues to secure more rights and raise subscriber fees. Fox originally was offering an 80 cent fee in the first year, with a 7.2% raise each year, which would have net Fox over 12 billion dollars during the course of a 10-year deal. Fox will still be able to profit off of the advertising on Fox Sports 1, and with the large distribution that the channel will have, will still be generating almost $250 million from their subscriber revenues in their first year. Fox plans on airing MLB, NASCAR, UFC, FIFA, and all the college rights they have on Fox Sports 1.
CBS Sports Network remains on sports tiers, and continues to air Arena Football, Professional Bull Riding, and Major League Lacrosse. CBS rebranded their cable network to CBS Sports Network from CBS College Sports in 2011 and according to CBS Sports President David Berson, execs are “very pleased” with the progress from CBSSN. Berson had the following to say in an interview with Ken Fang of AwfulAnnouncing.com
“We’re going to continue to look and find properties that make sense for us, but again, we’re not going to spend foolishly. We want it to make smart business sense for our company and we picked our spots to date and we feel good about it and we’ll continue to be smart and strategic and selective in wherever we invest.”
CBS Sports is distributed in 46 million homes, and charges only 19 cents per subscriber. Their strategy is notably different than that of ESPN, Fox, and NBC. When asked what CBS’ reaction was to Fox, Berson had the following to say:
They’re coming quite aggressively now and they have a nice portfolio of rights. It’s not so easy going from random events to 24/7 and they’re in the throes of that right now, piecing it together and good luck to them.
A different strategy does not necessarily mean that they are unsuccessful. CBS acknowledges the difference in strategy, an important step for a network that is in an expensive industry with a lot of question marks.
The health of the cable sports networks lay in jeopardy as the sports rights bubble continues to loom over the industry. With less cable subscribers each quarter because of cable alternatives becoming readily available and higher sub fees for sports cable networks, the sports rights bubble looks like it may be the largest revenue generator that may eventually lead to the industries downfall. Industry experts such as John Ourand of Sports Business Journal believe that the bubble will not burst for at least another 10 years. The long-term carriage deals between networks and distributors, as well as long-term rights deals between network and leagues/conferences should keep the sports rights bubble safe until 2020, when a number of the rights are up for negotiation.