Sports Programming Adds Power to Carriage-Fee Demands

Andrew Shapiro, formerly with CBS Corp., analyzes the value of sports programming. A graduate of the Benjamin N. Cardozo School of Law and a member of the New York State Bar, he may be reached at shapiro.al@gmail.com.

Just a month into the New Year, the once mainly private battles between networks and cable operators over carriage fees have erupted into front-page news. As the calendar turned to 2010, no fewer than three major carriage disputes raged, capturing the attention of industry insiders and viewers alike. Coming out of these battles: the irrevocable truth that live sports programming can drive retransmission-consent negotiations and help networks achieve the carriage fees they desire.

Of the recent carriage-fee disputes, it was the one between Fox and Time Warner Cable that garnered the largest headlines. And of all the possible ramifications that could have sprung from this dispute, it was the threat of Fox’s pulling its broadcast signal in advance of the Jan. 1 Sugar Bowl matchup between #3 Florida and #5 Cincinnati that inspired instant panic.

The threat of losing this single live sporting event led to a Representative’s calling for a “cooling-off period,” a suggestion from a Senator that the two parties enter into binding arbitration, a request from the FCC chairman that the parties agree to a temporary extension, and the filing of a petition for a temporary injunction from two University of Florida alums that argued that, if the game was pulled, the two men could “never be made whole.”

The threat of losing the Sugar Bowl, as well as the NFL playoffs, was perhaps the leverage that Fox needed in reaching its eventual pact with Time Warner Cable. Reports vary, but, while Fox may have missed its $1-per-subscriber goal, it does seem that the broadcaster may have set a new industry standard, higher than the 50¢ CBS had been receiving.

As the economy continues to struggle, and advertising revenues along with it, broadcasters must increasingly rely on carriage fees, as their cable-network counterparts do. Accordingly, the value of sports programming must be calculated not just in terms of the ad revenues it can generate but also in terms of its effect on carriage fees and leverage potential.

To understand the value of sports programming, consider the ongoing discord between Scripps and Cablevision. Scripps’s networks, despite an incredibly loyal audience, were off Cablevision’s lineup for almost a month, with the service provider refusing to increase the 25¢ fee it paid for the tandem of Food Network and HGTV (versus the $3-plus it surely hands over for ESPN). Cablevision has been able to dig in as it would not be able to do with a network that had the option of keeping live sports off the air.

Still, a classic chicken-and-egg scenario is manifesting itself in broadcast television’s acquisition of sports-programming rights. Broadcasters need sports programming to demand higher carriage fees, but, at the same time, they need higher carriage fees to be able to outbid their cable rivals for the content. Traditional broadcasters, which derive the vast majority of their revenue from advertising, are rapidly falling behind ESPN and other cable entities.

Most notably, this past year, ESPN outbid Fox by $100 million for the rights to carry college football’s Bowl Championship Series for the 2011-14 period. The sports network was able to do this because of the extraordinary revenue it collects through carriage fees, estimated by SNL Kagan to average $3.65 a month per subscriber. ESPN acknowledged that the bid was based on calculations looking beyond potential ad revenue.

As traditional broadcasters turn more and more to carriage fees as a revenue source, they must do the same. ESPN, like Turner and other cable networks, is already using the advantage of its higher carriage-fee revenues to acquire sports content. Both the NBA and MLB have moved post-season games (though not the Finals or World Series) to Turner Networks, and ESPN has voiced its desire to acquire Olympic rights for 2014 and 2016.

With NBC having already announced that it expects to lose $250 million on the upcoming Winter Olympics because of lower than expected ad sales, traditional broadcasters are at a crossroads. At a time when sports leagues and organizations are increasingly comfortable with moving their content to cable, broadcasters must decide whether they are willing to spend more on sports rights than they can hope to recoup with ad revenues alone.

Perhaps one solution for broadcasters is to team up with cable networks in the acquisition of sports rights. Disney has long taken advantage of its tandem of ESPN and ABC, using the cable network to justify the costs of rights while using the broadcaster to provide a broader distribution platform. The proposed joint bid between CBS and TBS for the rights to the NCAA Basketball Tournament and possibly to the Olympics follows this pattern. Their compact, though, seems to be solely for the purpose of spreading the costs: under it, the finals will alternate between CBS and TBS, meaning that CBS will not be used for broader distribution.

Regardless, with carriage fees established as a valid and growing source of revenue, it is clear that broadcasters should look past ad sales as a justification for sports-rights procurement. They must continue to make strong investments in sports programming, aiming to make up any deficiencies in ad sales through increased carriage fees in the future. Otherwise, they risk losing sports programming to cable — and, with it, the foothold they have barely established in terms of demanding carriage fees.