Tuesday 10 December 2019

Something must give, as pay-TV costs keep on rising

More Americans have watched the US soccer team in this World Cup than ever before. The two biggest announced acquisitions in the world this year are for US pay-TV operators. Yes, there is a connection.

AT&T's bid for DirecTV and Comcast's merger with Time Warner Cable, totalling a combined US$134bn, are tied together by a thread that today is driving many of the decisions in the world of pay-TV sports.

AT&T will buy DirecTV only if the satellite-TV provider renews its exclusive Sunday night package of football games.

Time Warner Cable is selling because it's losing customers rebelling against high cable bills caused in part by the soaring cost of obtaining sports rights. The two deals are prime examples of how sports programming's immense popularity has become both the cause of, and solution to, pay-TV's slowdown.

The result: more media consolidation is on the way.

"In the 100-channel world today, when very expensive sports programming is showing up all over the dial, the cost is much less manageable, both for the system operators and, of course, for consumers," said Leo Hindery, co-founder of the YES Network, which broadcasts New York Yankees baseball games.

Sports programming comes at a price. Last year marked the first year in which fewer US households paid for TV than the previous year, with the number dropping by about 250,000.

Higher monthly bills are the main reason for the cancellations, as regional and national sports networks, like ESPN, which broadcasts the World Cup, are extracting ever-larger payments from such pay-TV operators as DirecTV, Time Warner Cable and Comcast. They in turn pass on the cost to customers, who are increasingly resorting to less expensive internet programming.

Much of the value of sports programming for pay-TV operators stems from its immediacy. Unlike shows that can be watched later on Netflix, sports are typically watched in real time. This is great for advertisers, because commercials aren't as frequently skipped, and it's great for the pay-TV systems, because online options can't offer a comparable substitute.

Comcast CEO Brian Roberts, for one, said that "some degree of cord cutting will continue," referring to cable cancellations.

"Against this backdrop, the more profitable and thus more valuable cable systems are those in the so-called NFL markets where household income and education levels and overall system size generate the highest returns on investment. For cable operators, it now matters greatly where their future high-volume broadband customers reside."

The losers in any coming consolidation will be small pay-TV operators and owners of non-premium, non-sports networks, according to Matthew Polka, the president of the American Cable Association, which represents more than 850 small and medium-sized independent operators throughout the US. In the long run, 
he said, the entire pay-TV world 
could perish if prices get so high 
that no one will pay them.

"The content companies are going to implode because of their own greed to continue to demand payment for the bundle at ever-escalating prices when consumers want less of it," Polka said.

However, there's no sign that Polka's view is gaining traction.

Even US soccer rights are starting to fetch huge dollars. Fox paid $425m for the 2018 and 2022 World Cup rights, more than quadrupling the $100m ESPN paid for the 2010 and this year's Cup.

ESPN charges operators nearly $6 a month for its network, by far the most expensive national channel, and no cable operator has dared drop it. Two new direct national competitors, Fox Sports 1 and NBC Sports Network, will be actively bidding up the price of sports in years to come.

Both AT&T and Comcast have said that their deals will help slow the increase of cable bills by giving them more scale, and thus more leverage over all programmers in the future.

As pay-TV providers get larger, more people will be relying on them to deliver the television they want. And guess what? You'll pay for it.

"The price escalation for sports is unrestrained," said Craig Moffett, co-founder of MoffettNathanson LLC, who has long followed the pay-TV industry. "It's fair to say the operators are now acutely aware of the unsustainability of the current price trajectory of the industry.

"At the same time, the programmers are revelling in the current pricing trajectory of the industry. Something has to give."

© Alex Sherman/Bloomberg

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