Friday, May 10, 2013

Economics of Sports A-La-Carte: Would You Pay and Does It Tilt The Playing Field?

Consider this post a discussion point.  Something to make you think.

John McCain introduced a bill on Thursday in the Senate and part of the goal of the bill is to allow consumer choice when selecting the programming they desire to pay.  Many other countries, like Canada and the UK, have various versions of a-la-carte offerings with the pay TV providers that serve households.

ESPN is an obvious target of the bill.  Per a Variety article on the bill citing SNL Kagan research, ESPN costs a cable provider $4.69 per subscriber, per month (here's a chart with several sports channels as of 2011).  As you can see from the chart, that's just the main ESPN as ESPN2, ESPNU and other networks have a much lower price.  In the case of ESPN2, it costs a cable provider just 13% of what ESPN costs.

If a-la-carte ever becomes a possibility for consumers, the question then becomes "What am I getting for my money?" on a channel-by-channel basis.  And let's not assume that we'll continue to pay $4.69 for ESPN.  Assume you'll pay more.  Even if 20% of cable subs opt-out of ESPN,the person that wants ESPN is likely paying at least 20% more to cover the loss of customers who don't want ESPN, assuming that Disney wants to maintain a consistent budget level and profit margin.  Let's be honest too.  If you elect not to pay for ESPN, you probably aren't paying for ESPN2, ESPNU, etc. either.  Maybe you are.  Maybe some of the niche items on those channels interest you like some of the action sports coverage, the NHRA or something else.

For all of us, we'd have to make decisions.  College sports is fairly unique because a large majority of the major conferences have their games delivered to us via national means.  Most of us aren't fans of just college sports though.

We luck out with the NFL, because its available on the broadcast networks.  There are out-of-market packages.  If you're in-market for the team playing on Monday or Thursday night, you're in luck because the game is on a local channel because the NFL mandates a local channel carrying those games as long as they aren't under a blackout.  So if you're out of market, you ask yourself  "Can I do without those games".   

MLB you can luck out with because of the alternate distribution means of RSNs for many ESPN games.  The out-of-market fan suffers very little and has multiple choices with MLB.TV and Extra Innings, with the exception of Sunday nights on ESPN...and most of the playoffs.
The main ESPN channel gets the prime content.  We can still point to UNC-Duke airing on ESPN2 over 15 years ago as a driving force behind more homes picking up ESPN2, but with the exception of the NHL's tenure on ESPN and concurrent events which necessitates moving an event to ESPN2, pro sports tends to stick on the main channel.   Even the college events that end up on ESPN2 are seen as lesser events when airing there, compared to whatever is on ESPN.  I really can't think of many concurrent college games lately, now that both ESPN and ESPN2 are in roughly the same number of homes, when looking over the games "on paper" (since we know once a game is played it can be a dog or not) and say "Wow, ESPN2 got the better game than ESPN."

The flipside of ESPN getting those prime events: the need for other channels.  Not a fan of any of NBCSN's or CBSSN's properties?  You probably aren't paying for them, and they probably are less willing spending the money to become more widely viewed and gain more television rights.  Even if NBCSN is willing to pay a premium compared to ESPN for a property, someone like MLB or the Big Ten might be less inclined to move because they know that a fan will have to move their TV subscription with them.  Diehards will move, diehards will pay.  Will the alum who isn't versed in the nuances of TV rights but discovers on Saturday morning that they now need to pay for a sports channel for one big property, and at a higher rate than they would today in a bundle, be willing to do so?  

Another way to look at it:  if I'm paying $8-$10 for 1-2 sports channels, and to get one more channel it will push my price to $13-$15 AND I don't intend to drop either of the original two channels because there is still plenty of other content that I find worthy, is it truly worth it?  And how would that compare to today's system if I'm paying $11-$12 for all of the content even if I'm only watching 3-4 of the 10-12 sports channels offered to me?

I can't say that bundling or a-la-carte is the right way to go.  I can find positives and negatives to each based on my personal situation, and so can you.  I can see where the variety of a channel will appeal to more consumers compared to a niche channel.  The goal is to be an educated consumer regardless of the system in use.


Mike Bauce said...

There was a company here in Canada (well my neck of the Canadian woods so to speak) called LookTV that tried a hybrid version of this. There was about 30-40 channels that you received as a basic package (might have been more but I am pretty sure it was around this number). Then you could choose from a list of about 100 channels to add on an individual basis. Each extra channel cost $1.50 I believe (some cost $2). At the time I thought it was a brilliant plan.

After a couple years of doing this, they reverted to the normal basic plus packages way of bundling channels. I don't know if they were losing money or not but I suspect they were (although it probably was more to do with the fact that they were a new up-and-coming company that couldn't compete with the big boys...almost sounds like I'm talking about a team competing with the SEC). I would definitely go this route if the number of channel options was quite varied. I can't get any ESPN channels or FSN (other than the main FOX network). Being able to choose from these would be great and would make it so I am paying for what I watch, not for the few hundred channels I don't.

Mark said...

I read an overview of McCain's proposal. It seemed to me he's not seeking a la carte at the consumer/subscriber level. Instead he is seeking to unbundle channels in contract negiotiations with providers. At least that was my take.

For instance Disney couldn't require DirecTV to carry LHN in order to also have ESPN. ESPN negotiations would have to be independent. Cable and satellite companies could then continue to package channels as they see fit (in bundles) to the subscriber.

Morgan Wick said...

If I had to guess, the cable company Mike talked about dropped its system not because of any relative profit or loss, but because networks wouldn't play ball.

Sports networks in general cost more than most other networks. Remember that FS1 is asking cable companies for nearly $1 a subscriber. Here are some more recent numbers; you see that FS1 zooms past the majority of channels on that list. ESPN has now crossed the $5 barrier; it might creep into premium territory in an a la carte world. And I bet TNT isn't in second place among non-3D networks without the NBA and to some extent NASCAR. In some sense, a la carte is already affecting sports channels, as some cable companies have begun offering sports-free channels. And keep in mind, some regional sports networks have even higher fees than ESPN, but don't get as much publicity for it because they aren't national.

ESPN has only been able to attract big-time events like the BCS Championship because of its broad penetration; otherwise HBO, Showtime, and pay-per-view would have a lot more sports than they do. As ESPN becomes more expensive and loses more and more customers, teams and leagues aren't going to want to settle for a glorified premium channel; none of them want to follow the path boxing took. A big-time sport adds a certain amount of value to a channel that raises its price and causes some people to drop it, though, so averting that fate and finding a platform with broad penetration is nearly impossible. As a result, I think you might see a renaissance of sports on free-to-air broadcast television, especially local teams, which could accelerate "cord-cutting". Worth noting that many broadcast stations have been working on something called "mobile DTV" that would allow over-the-air broadcast signals to be received by a smartphone or tablet, which ties this in to the Wall Street Journal article you tweeted earlier.