Cable companies balk at rising costs for sports programming

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It is a golden era of TV rights deals in sports, where some teams have seen their television-related revenue increase more than 900 percent from previous contracts. But for the networks that signed those deals, often agreeing to pay billions of dollars, the future is not looking so bright.

Cable companies are now more prone to reject the higher subscriber fees that sports networks are trying to charge. Last month, the Federal Communications Commission voted 4-1 in favor of Butler-based Armstrong Cable in an arbitration case over rising subscriber rates against DirecTV-owned Root Sports, the regional sports network that owns the rights to Penguins and Pirates broadcasts.

It was a significant win for a cable company at a time when several of its peers are balking at rising costs for sports programming. Disputes in Los Angeles, Houston and San Diego have left millions without access to local game broadcasts, and the networks that pay small fortunes to own those sports TV rights are struggling financially as a result.

The standoffs jeopardize the cash windfall for teams and leagues, threatening to burst a bubble of inflated TV deals because consumers don’t want to pay.

“Sports programming could be the straw that breaks the camel’s back,” said Matt Polka, chief executive of the American Cable Association, a Green Tree-based national trade association that represents 850 small cable companies nationwide.

“That’s why we’ve seen so many customers today — they’re not buying cable. They’re buying broadband. They’re not interested in what’s on TV. They consume what they want, when they want it and do not want to be told what to take.

“That, combined with rising prices and lack of choice, is really going to be a come-to-the-altar moment for these sports programmers and sports leagues.”

Time Warner goes big

The best example of the problem may be in Los Angeles. The Dodgers were the envy of the industry when the team negotiated a new TV rights deal in 2012 worth $8.35 billion over the next 25 years. It was a record for any individual sports team in the United States.

The deal means the ball club will earn $335 million in TV revenue each year, almost 10 times as much as from its previous deal worth $39 million per year.

The Pirates, by contrast, earned $204 million in gross revenue in 2013, according to Forbes. The team earns about $20 million per year from its TV contract, according to previous Post-Gazette reports, though the Pirates deny that figure and claim it is much higher.

The Dodgers deal, so far, has not proved as lucrative for the company that agreed to pay the $8.35 billion and build an entire network around Dodgers programming. Time Warner Cable has yet to gain much traction with its new network — SportsNet LA — because a majority of cable companies in Southern California refuse to carry it.

Time Warner Cable is seeking between $4 and $5 from every cable subscriber each month for access to that network from any cable provider, according to the Economist. That’s the largest fee of any cable network not named ESPN, which charges more than $5 per subscriber.

The Los Angeles Times reports that the new all-Dodgers network is not available on 70 percent of televisions in the Los Angeles market — the second-largest TV market in the nation.

The impasse is largely to blame for the 26 percent decrease in sports unit earnings that the New York-based cable giant disclosed during its second quarter earnings announcement last month.

At the urging of eight U.S. representatives, FCC chairman Tom Wheeler scolded Time Warner CEO Robert Marcus in a letter last month, saying, “I am troubled by the negative impact that your apparent actions are having on consumers and the overall video marketplace.”

Though the FCC has limited jurisdiction in such negotiations, Mr. Wheeler said the dispute could hinder growth of broadband in the Los Angeles area because the games are not available online in Southern California. There, the FCC has some authority.

“The FCC intends to monitor this situation closely in order to determine whether intervention is appropriate and necessary,” Mr. Wheeler wrote.

It is unlikely Time Warner Cable, which is in the midst of a merger with Comcast, would fail to meet its obligation to the Dodgers. But the situation could scare off future distributors from taking such large gambles with sports programming.

Everyone pays

For those who are not sports fans, cable packages are often a raw deal. Customers who subscribe to anything more than just a bare-bones plan pay about $12 or $15 each month for sports-related programming, Mr. Polka said. Consumers pay about $30 each month total in programming costs.

ESPN charges more than $5 per subscriber. Root Sports locally charges about $2.50 per subscriber. The Big Ten Network charges about $1 per subscriber.

Nonsports networks are nowhere near those figures: CNN charges 57 cents; Nickelodeon charges 50 cents, and Comedy Central charges 16 cents.

The majority of cable subscribers are required to pay for these networks because the networks have forcefully lobbied cable providers to remain on nonpremium tiers by packaging a regional sports network with other popular cable programming. Just as DirecTV owns Root Sports, Fox owns 51 percent of the Big Ten Network. ESPN owns the newly launched SEC Network, devoted to the Southeastern Conference in the NCAA and has already started pressuring cable providers to carry the new product.

DirecTV, a satellite company that also owns TV networks, has offered to carry SportsNet LA on a premium tier, but Time Warner Cable has refused any such agreement.

“I think it’s driven largely because the sports programmers are afraid that if they did have to provide more choice to consumers, consumers would say, ‘I don’t want to pay for it,’ ” Mr. Polka said.

With a larger subscriber base, costs for individual sports channels stay lower than premium channels, such as HBO or Showtime, and the networks that can promise a broader audience are in better position to sell advertising.

“Sports networks are not interesting and valuable to all viewers,” said Jeff Kagan, an Atlanta-based industry analyst. He said about 30 percent of all cable subscribers are sports fans, meaning the majority of customers are paying a lot of money for programming they rarely, if ever, watch.

Challenges to cable TV

But that 30 percent has clout, and they often drive ratings. Penguins and Pirates broadcasts on Root Sports are routinely the highest-rated cable broadcasts in the Pittsburgh market each week, according to Nielsen figures.

“You have a very, very vocal minority who are sports fans,” Mr. Kagan said.

In the past, networks have used that vocal minority as leverage. When the Big Ten Network launched in 2007, it quickly struck a deal with the satellite service Dish Network while many cable companies scoffed at the new network’s demands. But as those companies lost market share to Dish, they quickly settled with the Big Ten Network.

The strategy is not working as well these days because fleeing customers aren’t leaving for competitors anymore. They’re leaving cable television altogether.

Nontraditional entertainment options — such as Netflix, Hulu and Amazon Prime Instant Video — are growing in popularity for cost-conscious consumers who want more choice over what they pay and watch.

In Los Angeles, DirecTV is distributed in 27 percent of homes and its market share has actually grown since the dispute with Time Warner Cable, according to the Economist.

“The industry is broken,” Mr. Kagan said. “That’s why you see a lot of people fleeing the cable TV monster for these new technologies. These new technologies are often very good.”

Disputes between sports networks and cable providers are not new, said Rick Gentile, director of the Seton Hall University sports poll and a former executive producer and senior vice president of CBS Sports.

The YES Network, which broadcasts New York Yankees games, struggled to get carriage when it first launched. The NFL Network had issues as well, and the Big Ten Network’s slow launch drove many Ohio State fans in Columbus crazy when Time Warner Cable held out and the games weren’t available elsewhere.

Eventually, Mr. Gentile said, the disputes all get settled. And he believes the latest ones will work themselves out as well.

But he also believes the size of TV sports deals could start to come down from the stratosphere.

That’s bad news for teams who fail to capitalize on the big contract bonanza. The Pirates’ contract with Root Sport does not expire until after the 2019 season.

“If I were them, I would be talking now about a renewal,” Mr. Gentile said. “I definitely would be in there saying, ‘Let’s renegotiate and extend.’ ”

Michael Sanserino:, 412-263-1969 and Twitter @msanserino.

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