Broadband Cable Association of Pennsylvania


July 16, 2013

When the Houston Astros and Rockets decided to launch their own cable network last year, their owners hoped to reap a sports-television bonanza. It hasn't worked out that way.

Comcast Corp., one of the region's biggest cable-TV providers, took a 22% stake in the network and now carries the games. But AT&T Inc. and DirecTV have refused to carry the new network, saying it was demanding too much money for programming that their research shows viewers aren't all that interested in. Today, CSN Houston is available in only 40% of area households. Cable and satellite-TV providers have complained for years about the rising cost of sports programming. Now, armed with detailed new viewing data that they claim show most subscribers aren't big fans, they are beginning to fight back. Houston, the 10th-largest television market in the nation, is the latest battlefield.

It is a well-kept secret of sports on television: Aside from the National Football League and the biggest games of the year in a handful of other sports, such as Tuesday night's Major League Baseball All-Star Game, the TV audience for sports is tiny, amounting to about 4% or less of households on average, according to media-research firm Nielsen's data provided by a major media company. Less than 3% of households with television in any given market, on average, will tune in to watch their hometown National Basketball Association teams play, and less than 2% will watch their National Hockey League teams. Yet in the average market, sports channels such as ESPN and regional sports networks account for 19.5% of fees paid by cable and satellite operators, according to media-research firm SNL Kagan. The average monthly cable bill in the U.S., before taxes, is now $73.44, Kagan estimates.

Some industry veterans contend the rising cost of sports programming is throwing the entire TV ecosystem out of whack. Leo Hindery, one of the few executives to have run both a cable company (Tele-Communications Inc.) and a major regional sports network (YES Network), says the question being asked is whether sports viewership numbers justify the fees being charged. "I expect every operator and programmer is going to be thrust into this debate sooner rather than later," he says. By some measures, sports programming is a better bet for network broadcasters than almost anything else. The rise of online video outlets such as Netflix and the growing use of digital recording devices are giving viewers unprecedented choice about what they watch and when they watch it. In the television season that finished in May, ratings for most major TV networks fell sharply.

Sports, so far, has been unaffected by those trends. According to a Nielsen study, viewers watched 97% of sports programming live last year, down slightly from 98% in 2008. They watched just 75% of nonsports programming live, down sharply from 93% in 2008. Advertisers like it when viewers watch live because they are less likely to skip commercials. The size of the audiences for prime-time sports, while smaller than those for prime-time network entertainment, has remained consistent during the past 10 years, even as audiences on the four major broadcast networks have diminished. Nevertheless, over the past 18 months, cable and satellite TV operators have started looking more closely at sports-viewing habits, using data collected from set-top boxes.

The data have given them a better sense for how often individual customers tune in to home-team games, and for how long. They have created algorithms to gauge this level of "engagement," and are now using the findings to make decisions about whether to add sports networks and pass on the fees to all subscribers. AT&T says it used such data in deciding not to carry the new Houston sports network, although it declined to disclose details about the data. "We'd like to make the channel available to our customers, but the proposed cost is not fair to pass to all of our customers across Texas, Oklahoma, Louisiana and Arkansas, especially based upon our subscribers' historical lack of viewership of Rockets and Astros games," the company said in a statement. "We've offered to make CSN Houston available on an a la carte basis for those fans that want to watch." The new network wants the channel to be part of all digital basic cable. Tad Brown, chief executive of the Rockets, predicts the network eventually will gain full distribution. "Any metrics that suggest a market as vibrant and wealthy and passionate as Houston isn't engaged with its teams-I would say those metrics are wrong," he says. The Astros referred questions about the network to Comcast.

In an interview this spring, Jeff Weber, president of content and advertising sales for AT&T, says the company determines not just whether customers watch a specific team, but whether they are watching only high-profile games, and for how long they tuned in. "You start to think about not just viewership, but a broader phrase-viewership intensity." Michael Nathanson, a veteran media analyst formerly with Nomura Securities who plans to join an independent firm in September, says some pay TV operators believe access to sports networks drives new subscriptions. But recent data on cable and satellite TV subscriptions, he says, suggests that sports may not be the magic bullet many consider it to be.

Data showing that more Americans are shifting viewing habits and going without cable or satellite television altogether further complicates the picture. In the past three years, the percentage of households subscribing to pay television has stagnated at about 90%, or about 100 million households, after years of steady growth, according to Nielsen. Last year there were 213,000 new pay-television households, although 997,000 new households were formed, according to Nomura Securities. As recently as 2007, new pay-television customers were outpacing new households at a rate of 3.2 to 1, according to Nomura. There are now five million "zero-TV" households in the U.S., compared with two million in 2007, according to Nielsen.

A younger generation is starting to treat cable and satellite television the way they treat landline phones. All major sports leagues allow fans to subscribe to services that stream games online, and security systems to prevent fans from watching pirated sports streams sometimes don't work. Some sports and media executives, though, contend that forcing fans and nonfans alike to bear the cost of TV programming isn't a viable long-term strategy. They worry that because consumers have so many entertainment options, they will turn away from sports that aren't readily available online. "Eventually we are going to have to figure out a way to get to a world where, if a fan wants to watch a game on whatever device that is that they want to watch it on, we have to be able to provide that to them," says Chris Schlosser, vice president of digital media for Major League Soccer. Some sports-media executives say that the consistent audience for prime-time sports programming shows that there is nothing fundamentally wrong with the current model. Media companies have been willing to pay more and more for that consistent audience.

The most recent deals for rights to national telecasts of Major League Baseball, the U.S. Open tennis tournament, the National Football League, as well as regional deals for the Texas Rangers and the Los Angeles Lakers and Pac-12 college football and basketball, require broadcasters to pay anywhere from 30% to 70% more than under prior deals. The networks hope to cover those higher costs by collecting higher monthly fees from cable companies. The fees cable operators pay to carry sports networks have risen 113% since 2002, according to Kagan. Last year cable operators paid regional sports networks on average $2.47 per subscriber to carry their channels as part of their digital basic programming, up from $1.12 in 2002. Fees for ESPN and ESPN2 jumped to a combined $5.71 in 2012, from $1.84 in 2002, according to Kagan.

Jeff Krolik, an executive vice president at Fox Sports Networks, says failed sports networks and deals under which broadcasters overpaid for rights aren't evidence that the sports media landscape is about to be significantly disrupted. "We don't think there is a bubble. But we think you can pay too much for something," he says. "Our world is filled with cautionary tales and deals that don't work." Over the past decade, several regional sports networks launched by professional teams have collapsed after failing to gain traction. The Kansas City Royals, Minnesota Twins and Charlotte Bobcats all launched networks that weren't picked up by enough local providers, prompting the teams to give up and sell the broadcast rights to other networks. But Mr. Krolik says the failures are exceptions, and the basic delivery model is sound. "Five years from now, it's going to be more of the same," he says. Fox Sports, which controls the television rights to 45 major U.S. sports teams, is a unit of 21st Century Fox, which until late June was part of the same company as Wall Street Journal owner News Corp.

When Houston's Astros and Rockets launched their own cable network last October, they were following the lead of other professional-sports teams that have given up guaranteed rights payments from broadcasters for equity in a potentially valuable asset. The new owners of the Los Angeles Dodgers, for example, have a similar plan to launch their own sports network next year. Texas entrepreneur James Crane had bought the Astros for more than $600 million in 2011 and began a major rebuilding program. After dumping high-price talent, the team currently has the worst record in baseball. Mr. Crane didn't respond to requests for comment. Basketball's Rockets, which are owned by investor Leslie Alexander, were a middling 45-37 last season and recently signed all-star center Dwight Howard to try to make the team better.

People with knowledge of the television negotiations say the Astros and Rockets turned down deals from longtime broadcaster Fox Sports Southwest valued at about $60 million per year for the Astros and $25 million per year for the Rockets. By forming a partnership with Comcast, the biggest pay-TV operator in the U.S., the two teams hoped their network would become part of the basic programming offered by Texas' television providers. The network asked providers to pay a monthly fee of $3.40 for each of their subscribers, making it one of the most expensive cable sports networks in the country. Partner Comcast has made CSN Houston available to its customers in the region, but AT&T and DirecTV, which together control more than one-third of the Houston market, has so far refused, as have various smaller providers.

Mr. Brown, president of the Rockets, says CSN Houston deserves the same distribution and fees that other top regional sports networks in the country's biggest markets receive and will eventually be available to all subscribers in the region. "This is all part of the growing pains of establishing a new network," he says of the current stalemate. Jon Litner, president of the Comcast-owned NBC Sports Group, which oversees Comcast's cable sports networks, says regardless of what is happening in Houston, sports have proven to be valuable programming that consumers want to have, especially when their home teams are playing well. "For pennies a day, we provide a terrific service," he says.

It remains to be seen whether cable and satellite-TV providers can use new types of data on sports viewership to pressure networks to either reduce the fees they charge or to allow only the fans who want the channels to purchase them. Fox Sports has lately been touting the affordability of its channels. It plans to launch FoxSports1, a new national sports cable network next month, and plans to charge distributors less than $1 per month for each subscriber.

The company used to charge cable distributors about $2.85 per subscriber for Fox Sports Southwest when it carried the Astros and Rockets, as well as baseball's Texas Rangers, basketball's Dallas Mavericks and San Antonio Spurs, and hockey's Stars. That is roughly 16% less than what CSN Houston has asked for the Astros and Rockets. For the Houston Astros, failing to get picked up by more TV providers could affect how much money Mr. Crane, the owner, has to spend on his team and could depress the value of the franchise. The more vexing potential problem for the Astros and the Rockets isn't cable-company pricing, but trends in how people want to consume media moving forward. "Right now you can basically get anything you want online except HBO, Showtime and sports," says Mr. Nathanson. Wall Street Journal

Pennsylvania's last bill related to the 2013-14 state budget is on its way to the governor's desk following passage in the House. State House representatives approved the fiscal code legislation by a 103 to 85 vote on Monday during a rare return to Harrisburg after the start of their annual summer break. They then recessed. The unusual voting session was required after the Senate stripped out a provision that suggested Republican leaders in both chambers favored legalization of the high-interest payday loans. State budget officials said passage of the fiscal code was needed to avoid negative effects on state government. Gov. Tom Corbett signed the primary budget bill on June 30. He's said getting budgets passed before the new fiscal year starts on July 1 has been a major accomplishment. Associated Press