Kagan analyst Adam Gajo has completed The 2019 Sports Report, a comprehensive review of professional sports and the broadcast and cable television networks that air both play-by-play programming and studio shows focused on sports of all kinds.
Gajo’s findings shed light on “the highly valuable commodity of live sports content in the television industry.”
Joined by John Fletcher, Scott Robson and Brian Bacon, Gajo finds that live sports content, to little surprise, is a highly valuable commodity in the television industry.
“Fans will pay for video packages and add-ons to ensure they never miss a minute of their favorite team in action, and the major media conglomerates know it. TV networks shell out big bucks to the pro leagues for the rights to broadcast games,” they write.
“Networks pass the cost of right on to multichannel operators through license fees and retransmission, then to the consumer in the form of higher bundle prices and surcharges. The current media landscape is challenging both operators and networks to maintain margins while traditional pay tv subscribers decline and programming expenses increase.
“The DVR-proof nature of televised sports incentivizes national sports networks like ESPN to pay leagues such as the NBA and NFL an exorbitant amount of money to broadcast games and prevent them from turning to competitors like FOX Sports 1. Arguably, the most valuable content on TV is produced by the NFL: The Super Bowl is the most watched telecast in the country year after year and Sunday Night Football attracts large audiences in prime time.”
A variety of national broadcast and cable networks have deals in place with the NFL. The NFL’s deals with FOX, CBS and NBC expire in 2022, and the ESPN deal ends in 2021. There are early discussions around breaking up the AFC and NFC packages for the next round of negotiations, with digital service providers increasingly expressing interest in bidding on streaming rights.
AT&T Inc.’s DIRECTV has a contract with the NFL to broadcast every game to NFL Sunday Ticket package subscribers. The satellite operator has exclusive rights to the package until the end of the 2022 NFL season. DIRECTV offers a handful of subscription services to customers that follow out-of-market teams.
Further, Kagan notes, sports is the main genre experimenting with high-resolution broadcasts in the U.S., with operators such as DIRECTV offering a steady stream of events throughout the year in 4K and HDR to subscribers.
Sports rights add up to ballooning programming expenses for the networks.
ESPN pays the NFL an average of $1.9 billion a year and the NBA an average of $1.4 billion.
Cable networks tied into expensive long-term contracts for sports rights have been trimming costs in other places, with ESPN shedding staff to compensate for a contracting multichannel subscriber base.
Kagan’s analysts took a deep dive into the subject to look at a number of issues, including how many channels multichannel subs are getting, the cost per channel by genre and how retrans factors in.
Analysis of programming costs per subscriber highlights the premium price networks are paying for sports content. In 2018, the average cost per subscriber for sports networks was $13.30, while the weighted average for all networks was just $5.83.
“While $13.30 per subscriber for sports networks stands out in the realm of TV network prices, it does not seem as onerous when compared to the cost of attending games in person,” Kagan notes. “While the cost to access live sporting events as part of channel lineups has increased over the years — and fees within the pay TV industry are head and shoulders above the nonsports channels — the cost to attend games in person is even more eye-popping. From a sports fan’s perspective, there is value in paying industry-leading sports programming fees, compared to following a team in person or being disconnected from tuning in.”
For nonsports fans, however, the continued growth of sports programming costs in pay TV bills has fueled the transition to digital platforms, where there is more customization, and prices better reflect a customer’s interests.
The average number of channels each consumer receives grew from about 27 in 1995 to 103 in 2018. This is a weighted average that includes basic, HD, premium and regional sports networks. It excludes broadcast networks, pay-per-view and some a la carte channels. Most consumers get well over 100 channels in their multichannel packages, and about 17 of those networks are sports-related networks.
Former skinny bundles are no longer that slim, with DIRECTV Now, Sony Corp.’s PlayStation Vue and fuboTV Inc. offering over 100 networks. Interestingly enough, although FuboTV was initially marketed as a sports-centric service, the virtual multichannel provider does not offer ESPN.
The average cost per channel has grown at a CAGR of 4.0% from 28 cents per sub in 2004 to 49 cents in 2018. Of the 103 channels covered in our survey, there were 17 dedicated to sports, with arts/education and general/variety right behind with about 15 each.
In 2018, sports channels were the most expensive at an average of $1.11 per sub per month. However, that figure ranges widely within the genre, Kagan finds, from those like Outside Television, Outdoor Channel and Sportsman Channel at 5 cents to 7 cents per sub per month to ESPN at $7.46 per sub per month.
The NFL Network was the only other national sports network that charged over $1 per sub per month in 2018. The NFL Network has the rights to the regular season “Thursday Night Football” games. However, the majority of those games are also broadcast on FOX.
Rising costs are affecting the operator’s bottom line. Sports programming costs as a percentage of cable average revenue per user was an estimated 22.1% in 2018, up from 14.1% in 2009. The average sports programming cost per subscriber grew to $18.55 in 2018 from just $9.09 in 2009, a CAGR of 8.2%.
The average cash flow margin at cable networks has grown from less than 30% in 1996 to more than 40% in 2018. However, margins on video for cable operators have declined precipitously during the same period.
Multichannel operators have been charging video subscribers additional monthly fees for sports programming to deal with declining video margins. These charges have been increasing since inception and have multiplied to include a variety of opportunities for operators to pass the program expenses onto the customer.
