Sports rights: How much higher can they go?

By Sarah Barry James

No longer just an American pastime, sports have become an American obsession.

At least, that is what the leagues, conferences, network owners and even some pay TV operators seem to believe, given the announcement of so many multibillion-dollar deals for sports rights in 2012.

For instance, looking at some of the more recent agreements, ESPN in November signed a 12-year deal for the broadcast rights to college football playoff games starting in 2014, with SportsBusiness Daily citing industry sources as valuing the agreement at $500 million a year. Adding in the $215 million per year ESPN, owned by Walt Disney Co. and Hearst Corp., separately agreed to pay for "contract" bowls, the publication estimated that ESPN's college football postseason rights deals are worth $7.3 billion in total.

Also in November, News Corp. agreed to acquire a 49% equity stake in YES Network at a reported valuation of $3 billion. On top of that, the company agreed to provide the New York Yankees a cash payment in the range of $400 million to $500 million in two tranches to compensate the team for allowing the deal to go through and for extending the Yankees' rights agreement with YES through 2042.

A little less than two months earlier, News Corp.'s FOX, along with Time Warner Inc.'s TBS, each signed an eight-year deal with Major League Baseball, with FOX agreeing to pay roughly $4 billion across eight years, while TBS will pay $2.8 billion, also over eight years. Taken together with ESPN's baseball deal announced in August — reported to be worth $5.6 billion across eight years — the three contracts will deliver a combined $12.4 billion. MLB.com noted that the payments will represent a more than a 100% increase in annual rights fees to MLB compared to current deals.

Matthew Polka, CEO of the American Cable Association, told SNL Kagan that sports deals have gotten out of hand. "We are literally talking about hundreds and hundreds of billions of dollars in sports rights that are being forced down to the consumers," he said in an interview with SNL Kagan.

Polka's primary complaint is that every pay TV subscriber — regardless of whether they watch sports — is forced to shoulder the costs of these deals. "The sports programmers say, 'This is compelling content, and we have to pay for it because it's popular,'" he said. "Yes, it is popular and people do want it, but the sports networks would never agree to pay the rights fees that the leagues are asking for if they ... knew they couldn't get a return by shoving it down to every consumer."

He continued: "That's why they agree to pay these outrageous, inflated sports rights fees — because they know they can turn around and make everybody pay for it."

Polka, as the head of a group that represents small to midsize cable operators, would like to see distributors win more flexibility in how they bundle and distribute sports networks to consumers. "There should be some choice," he said. "We have said that maybe as an interim step, we as providers should be allowed to move that high-cost programming to a separate tier. That's the only way to give consumers some break from what they're paying today, because we'd discount the bundle once we took out the high-cost sports. So consumers would be paying less."

Of course, not everyone agrees that the increases in sports rights fees are a problem.

"The prices are going higher, but that's because the value and the cash flow keep on increasing," LHB Sports Entertainment & Media Inc. CEO Lee Berke told SNL Kagan. "I think it's just indicative of how important sports is to the overall system of offering television."

Berke previously noted in an interview with SNL Kagan that although distributors complain about the rising cost of sports content, they desperately need live sports because sports have become a major differentiator between traditional pay TV offerings and over-the-top services. "If you've got key live sports properties and key sports networks, then you are able to build and maintain market share from a distributor standpoint as compared to a Hulu [LLC] or a Netflix [Inc.] or some form of broadband television service," Berke said. "As long as that is the case, then we're talking about increased valuations being placed on [these networks] because they are so valuable and so vital to the core of the successful operations of these subscription television providers."

Even Polka acknowledged that network owners are unlikely to ever allow a cable operator to move a channel like ESPN or a local regional sports network to a sports tier. "They won't give us the right to do it because then their whole house of cards would crumble," he said.

But Polka noted that he does not believe sports rights can keep increasing at the current rate without the pay TV business suffering in some serious way. "It's gotten to a point, particularly with the economy and other circumstances that consumers are facing, that this has really become an issue," he said. "And the question is: How much higher can it go? I don't know the answer, but I don't think it can go much higher before either Congress steps in or, more likely, consumers really begin to revolt and then definitely Congress will step in. When you look at the billions of dollars that are being spent on sports rights, it just makes you wonder."

Berke, though, noted that people have been asking him for years whether there is a sports rights bubble that will eventually pop and come crashing down around the leagues and networks.

"I've been asked about it for a number of years — have we reached some sort of bubble," he said. "We haven't."

Indeed, SNL Kagan analyst Derek Baine noted in July that the trend of escalating sports programming costs goes all the way back to 1979, when ESPN first launched. "Some have questioned whether the sports programming business is a good one given the rapidly escalating cost of rights fees," Baine wrote. "We believe it is a great business and will continue to grow, particularly for ESPN. Clearly, there will continue to be fights with multichannel operators, but the problem with expensive rate hikes tied to sports rights deals is nothing new."

But Polka and others maintain that the pay TV industry is heading toward a breaking point with regards to sports.

"The problem is that right now, FOX and NBC are both just drooling over ABC's ability to charge $5 a month for ESPN, and that's what they want," ACA Vice Chairman and Massillon Cable TV President Bob Gessner said in a recent radio interview. "NBC is building the new NBC Sports [Network] into a national network, and FOX is building two new national networks out of SPEED and FOX Soccer. And let's face it, they want that same $5 a month. So it's not a question of going from 30 cents to 60 cents — it's going from 30 cents to $5 or more."

He continued: "It's just wildly out of control."

That is why worries that unless some change is made internally within the pay TV business — either in terms of sports tiers or smaller rights deals — external forces in the form of Congress or regulators may become involved. "If Congress gets involved, it's going to be messy," he said. "They don't come in typically with a fine-tooth comb — they come in with a hammer. And no one is going to be happy when that happens."