What Happens to the Professional Sports Business Model When the Pay-TV Business Model Changes?

by David Mitchel | Oct. 7, 2015

In recent decades, broadcast revenue (primarily from television) has become a much larger part of the revenue pie for professional sports teams, increasing team valuations and player salaries. The Dallas Cowboys were recently valued at $4 billion by Forbes, making the team the most valuable in U.S. professional sports. NFL teams as a whole were valued 38% higher by Forbes in 2015 than they were in 2014. The best lens to view the impact of player salaries is Major League Baseball, because player salaries are not capped. Before the 1999 season, the Los Angeles Dodgers made Kevin Brown the highest paid pitcher in baseball with a 7 year/$105 million contract, an average annual value of $15 million. In 2015, the Dodgers have the highest paid pitcher in baseball, with Clayton Kershaw earning $32 million.

Will the money train continue to roll in professional sports, or will it get derailed by an evolving pay-TV market?

There are numerous threats to pay-TV, but one of the key overarching threats is the consumer perception of the price-value proposition. The typical monthly bill for pay-TV service is the equivalent of a nice dinner-for-two on the town and the typical bill from an over-the-top provider is more like a delivery pizza on special. There comes a certain point where some consumers determine that the price-value proposition isn’t necessarily a good one. These consumers can downgrade to a less expensive pay-TV service tier or cut the cord entirely and rely upon various OTT services to fill their video consumption hours.

Sports serve as a double-edged sword for pay-TV providers. Sports content is expensive, increasing the price of the service to consumers. Sports programming is unique, popular, and is closely followed by segments of avid fans. The live element of sports promotes appointment-based viewing in an increasingly on-demand world. These factors make sports the hardest programming for consumers to replace. Will moderate sports fans be willing to reduce sports video consumption in order to save money? At the same time, should non-viewers of sports pay for the inclusion of sports in the price for a monthly pay-TV subscription?

Sports programming is just one component of video consumption hours. Video consumption hours have generally increased over time. In a recently published report, Parks Associates considered the breakdown of video consumption vs. video expenditure. For some segments of consumers, the amount spent on pay-TV service is disproportionately high compared to the number of hours spent consuming pay TV. In contrast OTT video service spending is disproportionately low compared to share of viewing hours.  While pay-TV content may be more current than most OTT video service content, the overall imbalance gives consumers incentive to “re-balance” their video portfolio.

The NFL, NBA, and MLB have all extended their national TV contracts with networks until the 2020s. The NBA was the league to have most recently extended a TV contract. In October 2014, the league reached a new agreement with ESPN and TNT that goes from the 2016-17 season through 2024-25 season, valued at $2.66 billion per year. The length of these deals locks sports leagues and networks into the status quo for the foreseeable future, suggesting that the pace of change for the sports business will be gradual. However, given the rapid shifts in viewing habits, these long term deals may ultimately be perilous.

Signs indicate that pay-TV providers are willing to re-evaluate their relationships with their content partners. Last year’s dispute between Suddenlink and Viacom provides a good example of the tensions involved and the potential outcomes. Pay-TV providers may be increasingly willing to play hardball with networks, including sports networks, a troubling thought for major sports networks like ESPN, FOX, or partially-team owned sports networks like the YES Network.

Data points and industry knowledge indicate that the pay-TV model is on the precipice of additional change due to the impact of Internet video options. While pro sports teams will remain a lucrative business and players will not be taking offseason jobs make ends meet, the pay-TV piggy back may eventually reach its limit. If leagues cannot rely on ever-increasing TV revenues, the consequences will cascade into arduous collective bargaining agreements and difficult decisions regarding the overall economic model.

In 10 to 15 years, sports franchises will still be worth billions of dollars and player salaries will still place them among the top 1% of income earners, but times may not be as rosy for either group as they have been for the past 20-30 years. 

Tags: OTT, pay TV, streaming

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