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Cable Wars: The Empire Strikes Out
With the National Football League playoffs now in full swing, it is an opportune time to examine some issues going on in the cable and satellite TV arena. Specifically, how professional sports franchises/leagues play a large role in what customers can and cannot view with regard to different channels.
A quick synopsis of the cable TV landscape will help lay the groundwork for the issue. The average digital subscriber shells out about $75 a month for services, but when additional channels and services like DVR and pay-per-view are tacked on, many bills are well over $100 a month. Price hikes are anticipated to be in the range of 5% on an annual basis for each of the next several years, meaning that, very soon, the average household’s bill will exceed $100 a month. The inflation comes from the fact that networks are raising their broadcast carriage fees and cable providers have minimal options to thwart these growing costs. So in the end, as is often the case, these fees land at the feet of the loyal customer.
Time Warner Cable (TWC), Comcast (CMCSA), Cablevision Systems (CVC), and DirecTV (DTV) are the main players in this field, with Verizon’s (VZ) FIOS package gaining steam as its availability spreads out to more markets. As more and more contracts expire, networks are looking for larger payouts from these companies in order to show their content. One recent example was Fox Network, which is owned by News Corp. (NWS). Demand that it get $1 per subscriber for its broadcast network. Time Warner scoffed at the notion because it never had to pay such a stipend in the past. However, Fox has a wide array of offerings, especially sports channels, so an unhappy marriage here needed to be avoided. Exact figures were not released, but industry reports claim a settlement of more than $0.50 a subscriber was reached. On that note, TWC, in turn, raised rates by 5% -7% for 2010. In fact, it is widely believed it raised fees even higher than were necessary at this time, because it is preparing for further charges when other broadcast deals run out.
Many believe “a la carte” packages would be the best way to eliminate all these headaches, but the cable companies’ opposition to this is understandable. People would likely pick a small number of channels for a dramatically lower fee, and the money lost would be a real problem for these concerns, which are just coming out of a period in which tremendous capital outlays were made to advance to the High Definition (HD) standard. With this foundation laid, it is time to discuss the average sports fan.
Living in the New York Metropolitan area can be costly in all aspects of life, and utility bills are no exception. So, when Verizon and Time Warner started offering triple plays with cable, phone, and Internet services bundled together, demand for such packages was high. The Verizon FIOS offering is particularly hot, but the advertising fails to point out that the Madison Square Garden (MSG) Network, which broadcasts all games by the area’s New York Knicks (NBA) and New York Rangers (NHL) is not available in HD. It must be possible to call up and pay an extra fee to get such a service, right? No. It turns out that those two franchises are owned by Cablevision Systems. Therefore, in a desperate attempt to thwart a customer exodus to FIOS, Cablevision allows them to carry the channel but the HD version is not permitted to be shown on the FIOS network. The move is understandable from a business standpoint, but that is the farthest thing from anyone’s mind when they are shopping for an HD-ready TV, which would be rendered meaningless when watching MSG Network.
But the woes of the New Yorker appear downright petty when looking at the national sports landscape. In several markets, Jacksonville and Detroit are prime examples, if the local NFL game is not a sellout, what’s known as a “blackout” takes effect. The game is simply not televised in that market, which some loyal fans of the local team consider a slap in the face. The purpose of a “blackout” is, theoretically, to spark ticket sales and/or force that area’s fans to watch another game and, thus, spike that game’s ratings, which are then used to set next year’s fees for the commercials seen during the breaks in action. More eyes on one particular game can cause advertising rates to escalate dramatically. Such is the case with ESPN’s flagship program, Monday Night Football (the lone-game commercial rate setup is taken to the next level for the NFL’s end of the season crown jewel, the Super Bowl). One would think that some leeway would be given to an economically depressed city, such as Detroit, or a team in a smaller market, but this has not been the case. In fact, the “blackout” strategy has proven detrimental to teams that have had financial troubles in the past. The Los Angeles Rams blacked out games to the point where their fan base became alienated and disinterested. The franchise had to relocate to much less financially desirable St. Louis. This move has left the NFL without a team in the U.S.’ second largest TV market for years. This situation allows Jacksonville, a small market, to hang the threat of moving its franchise to L.A. over its fans’ heads every time another “blackout” is instituted.
Smaller markets have been shown no love as well. In the state of Oregon they have one sole professional sports franchise, the Portland Trail Blazers of the National Basketball Association (NBA). Due to the general lack of competition, and an upstart young and exciting team, the Blazers are growing in stature and are expected to have a good season this year. Still, local fans will not get to see roughly two-thirds of their games this season because Comcast spent $130 million for the rights to the team’s games for the next decade and cannot hammer out a deal with DirecTV and other cable providers in the Northwest to share the airing rights. Therefore, the games airing on Comcast Sportsnet Northwest are not available on any other platforms but Comcast. Fans have attempted to boycott the team’s sponsors in an effort to put pressure on the cable companies to work things out, but the situation has shown no signs of improving.
If you dig deep enough within most television markets, situations like the aforementioned can be discovered easily. And with the cable providers gearing up for rate wars with the broadcasters, these issues are unlikely to go away. Regulatory controls in the past have solved some concerns in the short term but, as is often the case, the industry behemoths find ways to dance around the rules or lobby politicians to make changes to benefit their bottom lines. In the end, it appears that it is the loyal customer and sports fan that gets the short end of the stick.