Media Uncategorized

Leagues, teams and media companies may already be facing a bursting bubble

An introduction into a four-part piece on TV rights and the business problems associated with skyrocketing fees.

Joe Clayton, president and CEO of Dish Network (AP Photo/Jae C. Hong)
Joe Clayton, president and CEO of Dish Network (AP Photo/Jae C. Hong)

Media rights for live sports have risen consistently over the past 20 years. Now most leagues have billion dollar deals and rely heavily on revenue generated by their distribution deals. However, there could be an issue. We are now at a crossroads in terms of how fans consume entertainment. This four-part series takes a look at the overall market, regional sports networks, national television rights and what could be next for sports entertainment. Part 1: 

The rising costs of television rights have led to regional sports networks struggling, talent leaving ESPN due to rising costs of production and distribution, and cord cutters impacting cable distributors. This may just be a blip on the radar or could signify a bubble.  Sports media companies may not be able to avoid the upcoming economic correction.

The truth is that media rights have been increasingly significantly the past 20 years. They are now one of the largest drivers of sports teams’ revenue, and a main reason for the recent increase in team valuations. If an owner knows he can count on high revenue no matter how the team performs, how his sponsorship sales corps executes, or how many tickets he sells, it creates stability.

Ted Leonsis, John Skipper and Adam Silver (Photo by David Dow/NBAE via Getty Images)
Ted Leonsis, John Skipper and Adam Silver (Photo by David Dow/NBAE via Getty Images)

There is another side to that revenue number: who is paying the expensive television rights fees. As sports media has evolved, so have the competitors and methods of distribution. Some of the money thrown around has been ridiculous. The Dodgers’ valuation was based heavily on a local Regional Sports Network (RSN) deal. The NBA will receive a huge jump in revenue from its TV deal to $2.66 billion per year. The NFL sent out $226 million this year in revenue sharing, most coming from the over $6 billion TV deals  – thanks Packers for that information – and these TV deals are only increasing.

A lot of that is due to every major media company wanting to get in the game. Think about the recent explosion of sports dedicated networks. CBS Sports Network, FS1 and NBC Sports all entered the game in the past 5-10 years and that doesn’t even include local team networks popping up such as Time Warner SportsNet LA, and NESN and YES before that (note: This doesn’t account for the multiple Fox Sports Regional Networks or Comcast Sports Regional Networks). There are specialized conference-based networks such as the SEC Network, Pac-12 Network and Longhorn Network. Each major league also has its own network with 24-hour content. Once stakeholders realized that sports was relatively DVR proof, they wanted content to sell to advertisers.

US Open Tennis

It’s simple economics. The more competitors, the higher the rights deals will go. Supply meets demand. That is the main driving factor in the deals, and it has been very beneficial to the teams and leagues. A lot is made of the fact that these deals are partnerships. The leagues and teams get extra money for a better product, the media companies then sell ad times and can provide compelling content to fans while also getting extra coverage benefits from its partners. And in the end, the advertisers reach as many eyeballs as possible to sell products. All of this is consumption-driven by the fans, who are more than happy to watch and cheer on their favorite team and sports.

The problem comes when there is a break in the chain, and we are either starting to see the beginning of that break or a change in how the business will work. As of now there are only small cracks, digital distribution upticks causing lower viewership and subscription fee revenue, media companies being forced to part ways with top talent, parent companies missing revenue targets and distributors simply refusing to carry a network. But all those cracks can lead to the foundation crumbling.

This four-piece commentary isn’t to say that everyone is doomed, but as with any bubble, it is a good idea to examine how we got here and what might come next.

Michael Colangelo is Managing Editor of The Fields of Green and Assistant Director at the USC Sports Business Institute.

Follow @MikeColange or @fog_sports on Twitter and like our Fields of Green Facebook page for updates.

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