Comcast SportsNet Houston struggles for distribution

Wednesday, July 10, 2013 3:51 PM ET 

By Adam Swanson

The recent trend among regional sports networks has involved bidding wars over sports rights with the goal of forming new networks, significantly raising costs for both multichannel operators and consumers. This model has worked in some cases, like Time Warner Cable Inc.'s SportsNet, but for others — like a relatively new network in Houston — it has been a bust. 

Comcast SportsNet Houston launched in October 2012 as a result of a $1 billion deal between Comcast Corp., Major League Baseball's Houston Astros and the NBA's Houston Rockets. Comcast reportedly paid the two teams $80 million in 2012; factoring in a 5% escalator, that figure will rise to more than $124 million by 2021 or a total of more than $1 billion over the life of the 10-year contract. The table below shows our estimates for the rights fees for CSN Houston from 2012-2021. On top of other programming expenses such as production costs, that equates to $100 million in programming expenses straight out of the gate.

Prior to the launch of CSN Houston, News Corp.'s FOX Sports Houston had distributed the Rockets and Astros since 2004. The parties signed a 10- to 15-year deal that was valued at upwards of $600 million, however, the contract allowed for the teams to discuss terms of distribution with other carriers beginning in 2009. The following year, the teams signed a deal with Comcast, which had become the leading distributor in the area a few years prior. As a result of the deal with Comcast, the rest of the content on FOX Sports Houston was folded back into its sister network, FOX Sports Southwest.

Distribution has been an issue for CSN Houston from the start. While the network is available in 13 different markets across the South on Comcast and a few other smaller systems, it has struggled to gain deals with any of the country's DBS or telco providers as well as some large distributors in the area like Time Warner Cable and Suddenlink Communications. Many of these distributors are citing a license fee that they say is too high for a network with only limited regional appeal.

As is the case with most new RSN launches, it will be a few years before the channel's programming expenses will be covered by its ability to generate enough in license fees and ad revenues to become cash flow positive. We are projecting that by 2015, CSN Houston will be able to sign distribution deals with Time Warner Cable and DIRECTV, at which point the network will also reach nearly 3.0 million average subs at an average license fee of $3.54 per sub per month.

So far in 2013, CSN Houston has been unable to come to terms with any of the larger distributors in its footprint. Earlier this year, in an attempt to please fans and boost demand, the network even offered a 37-day free trial to cable, satellite and telco providers in a five-state region. Matt Hutchings, president and general manager of CSN Houston, said in a news release that the free trial "comes with a sizable loss that our network will take on, but we feel it is the right thing to do." By 2014, we are expecting that CSN Houston will have a distribution agreement in place with Suddenlink. While an agreement with Suddenlink will only provide 314,571 subscribers, those subs are spread across 11 of the 13 markets in CSN Houston's footprint.

The case of CSN Houston also shines a spotlight on the importance of satellite distribution in rural markets, in this case in the South. Within the footprint of CSN Houston, a partnership with DIRECTV — which we expect will be forthcoming by 2015 — could add 1.3 million subs to these 13 markets alone, according to SNL Kagan MediaCensus figures. And a deal with DISH Network Corp. — which we think is fairly unlikely given the company's public stance on RSNs — could add another 937,823 subs. A deal with Time Warner Cable could be more difficult to negotiate because Texas markets like Waco, San Antonio and Austin are barred from showing Rockets games due to NBA rules, but those markets could serve Astros fans.

While CSN Houston's exclusive contract to carry the Rockets and the Astros can mean cost savings for Comcast over the life of the contract, it can mean higher costs for consumers. Meanwhile, the Rockets barely made the NBA Playoffs this year as the Western Conference's No. 8 seed before losing in the first round, while the Astros are in last place in the American League's West Division and have the worst winning percentage in MLB. The Rockets do have an agreement in place with free agent center Dwight Howard, which should give them a boost for the 2013-2014 season. But unless the Rockets and Astros can step up their game, few fans are going to tune in and give CSN Houston the ratings that would warrant wider distribution within its footprint.