Matt HealeyWednesday,4 September 2013

The Snap:

I watch a lot of sports. Actually, that is not really true. I watch a lot of football. My team is the New York Giants, and I do really like the fantasy football league that I am in. I had hoped that I could get a Snap Download league going, but could not get enough players. As such, I do watch a lot of ESPN and so it bothers me that they are one of the most powerful forces supporting the bundling of TV channels.

The Download:

I have written before on my dislike of the bundled TV channels and my desire to go to an a la carte system. Why do I have to pay for channels I will never watch so that I can get SportsCenter? Disney requires cable companies to carry all of the Disney offerings if they want ESPN. So, I am assuming based on The New York Times’ article that I have to pay for all ABC networks, A&E networks (which includes, Bio, A&E, Crime and Investigation, History, H2, Spanish language History, Lifetime, LMN, Lifetime Real Women, and Military History), and The Disney Networks (which include Disney Network, Disney Television Animation, Disney Junior, Disney XD, and Disney Cinemagic) to get ESPN. But not just ESPN — I also have to pay for ESPN2, ESPN3, ESPNU, ESPN Films, ESPN News, ESPN Classic, Spanish Language ESPN, ESPN Plus (a regional college network), The Longhorn Network (Network devoted to University of Texas sports) and the SEC Network. Granted, I like sports, but there are only 2 of those networks that I ever want to watch — ESPN and ESPN2. I want ESPN2 because Fantasy Football Now is on that network.

Up until now Disney has been able to keep this system in place, largely because sports fans are a highly-targeted demographic. But I suspect that this is coming to an end. According to The New York Times, almost 900,000 people cut the cable cord last year. This represented almost twice as many as the previous year. The reason? Increasing cable TV bills and the availability of alternatives like Netflix, Hulu, and YouTube. Since ESPN is the most expensive network for cable companies to carry — they charge $5.54 per subscriber — they are ripe for attack. Combine this with the number of people who watch ESPN. Last year approximately 100 million people paid over $66 per year to get ESPN yet only 1.36 million watched during prime time. Granted, viewership rose during Monday Night Football. In 2012, the highest rated game was Chicago-Dallas, which drew 16.6 million viewers. The average was 12.83 million, which was down 3% from 2011. So using some bad simplifying assumptions, approximately 84 million people pay the $66 per year and get nothing. If the ratings numbers continue in their current direction, then in 2013 even more people will pay $66 for nothing. The last time I can remember a company forcing people to pay for something regardless of whether they wanted the product was Microsoft requiring everyone who bought a PC to pay for Windows even if they didn’t want that OS. The U.S. Department of Justice eventually stopped that practice.

The ESPN counterargument is that going to an a la carte system for channels will increase the prices for everyone. The rational is that by requiring everyone to pay, the costs to produce content is spread out and thus kept low. If you eliminate the bundling, then the cost to produce programming that appeals to a smaller segment will go up. That is true, and the prices for all networks will likely increase. But this argument is intrinsically flawed. First, the 84 million people who have no interest in sports will immediately save $66 per year. That savings may be reduced because some of their favorite channels will likely increase in price. The same goes for sports fans. The price for Monday Night Football through ESPN will likely go up, but the price for the overall package will likely go down. Since I will never watch the SEC network, the Longhorn network, Spanish Language ESPN, ESPN Plus, ESPN Films, ESPN Classic, or ESPN3, then I will not have to contribute to the fees being paid to SEC schools, UT, MLS (I am assuming that Spanish Language ESPN covers soccer), etc. Further, the cost of purchasing the rights to all sporting events will decrease. I say this because right now the NFL, MLB, NBA, NHL, etc. all can charge extraordinary amounts of money because ESPN and the other networks can afford it. The reason they can is the 84 million people who pay $66 per year for nothing. If you take that revenue away, then the cost of the content will decline. Granted, it will take a while as the contracts are long term deals, but it will decline. It has to decline because the business model is only sustainable if the cable companies can continue to force people to pay for things they don’t want.

Given the rising alternatives, and the shrinking ratings for sports programing, I suspect this system will collapse within the next 3-5 years. Congress has tried to pass legislation requiring a la carte and has failed. I suspect they will continue to fail. The free market, however, will not fail and as new competitors emerge, the chokehold that companies like Disney have will be loosened. It will be accelerated if Google can get the DirecTV Sunday Ticket.

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Hat Tips:

The New York Times, Media Life Magazine, EngadgetImage Credit: Flickr

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