Minus the TV Subsidy, Whither College Sports?

Bad news for Scott; good news for the rest of us

The revolution is coming. It may happen next month, next year, or maybe not for five years or so. But it’s coming.

The current system for delivering cable TV programming is highly dysfunctional, very expensive, and the source of growing consumer frustration. Right now, the average cable TV bill is approaching $100 per month, with roughly half that amount going toward sports television. Monthly charges are growing at twice the inflation rate. The expanded basic bundle, which most subscribers purchase, contains roughly 180 channels, up from 120 channels a few years back. The bundle continues to grow in size and expense. Yet, according to Variety Magazine, the average household continues to watch only about 17 channels, the same now as when our bill covered only 120 channels.

So why is this happening? The distributors of cable programming, each offering a very similar bundle, are not the problem. It is rather the content providers that are forcing more and more channels into the expanded bundle. To be sure, behemoths like Comcast work both ends – Comcast is the largest cable TV distributor AND the owner of NBC Universal, one of the largest content providers. There are still some distributors, Direct TV and Dish are examples, that function primarily as distributors. In that capacity, they, like cable TV subscribers, are increasingly frustrated with being forced to add more and more channels to the bundle.

Signs of the pending revolution abound. One of those signs is Direct TV’s refusal to add the Pac-12 Network to the bundle. Another is the refusal of virtually all Southern California distributors (other than network owner Time Warner Cable) to add the L.A. Dodgers' network to the bundle. That leaves roughly 70 percent of Southern California subscribers without access to Dodger games. Yet another is the increasing number of cord cutters or never-corders, so far mostly young people, who find the $100 a month charge too pricey. These viewers are looking for less expensive ways (so far primarily the Internet) to receive video programming.

Content providers continue to insist on being included in the bundle because it’s very profitable, albeit at the expense of consumers who pay for never-watched channels. Consider the ESPN channels, which currently cost subscribers around $5 per month. There are 100 million cable subscribers in the United States. If each of them pays $5 a month for ESPN, that’s a revenue flow of $6 billion. Yet only 20 percent of viewers are estimated to watch sports on a regular basis. If we cautiously estimate that, given a choice, only half of cable subscribers would choose to pay for ESPN, that would be a $3 billion dollar yearly revenue loss for ESPN. Some of that loss could be offset by raising the monthly rate for loyal viewers, but the more ESPN charges, the more it risks losing viewers who find the rate too expensive.

One of the consequences of the current system is the substantial subsidy for sports television that comes from the pocketbooks of consumers who have no interest in sports. That benefits team owners, highly paid athletes, and college football coaches (Alabama football coach Nick Saban reportedly gets around $7 million each year), but ask a non-sports television viewer how they feel about paying this subsidy. The problem affects even those of us who do watch sports. In my case, I watch Pac-12 sports, but have little interest in professional sports. I don’t want to subsidize Nick Saban’s salary and, although residing in Southern California, I would not pay a dime to receive the Dodgers or Lakers games. I, like most other sports fans, would like to be able to pick and choose which teams to support with my viewing dollars.

So what will finally spark the revolution? The revolution may come slowly as the system self-destructs. All sports organizations at the college and professional level continue to insist that their networks be included in the bundle. In this sense, the Pac-12 Network is one of many content providers all over the country that are insisting on being added. As the elephantine bundles become increasingly unwieldy and expensive, the number of viewers who give up on cable will increase. This will ultimately force change. There are, however, other scenarios under which the revolution could come more quickly. Antitrust litigation in the federal court in New York City is aimed at ending the forced bundling. An unfair competition suit is pending in the California courts and targets Time Warner Cable’s inclusion of the Dodgers and Lakers games in the bundle. If any of these suits are successful, the house of cards could collapse quickly. Also, Senator John McCain (R-Ariz.) has a bill pending in Congress to end bundling practices. So far, powerful content providers have blocked this bill, but mounting consumer frustration could force Congress to act. Finally, the FCC may choose to follow the path of their Canadian counterparts and force more consumer friendly packages with meaningful choices.

How will this affect a Pac-12 sports fan? Fans of any sport will end up paying more to get their favorite televised sports. Right now, if you get the Pac-12 Network, it probably adds roughly $2 per month to your bill. Under an a la carte system, you will pay more to get Pac-12 programming, perhaps $5 to $10 a month, or perhaps several dollars to watch individual sporting events. Overall, most consumers will end up saving money because they will no longer pay for channels they seldom or never watch. A sports junkie who wants access to all sports channels, however, could end up paying more than under the current system.

How will this affect athletics at the Pac-12 schools? According to the Los Angeles Times, UCLA currently receives about $14 million each year from the Pac-12 Network. This amount is probably comparable for all the conference members. Commissioner Larry Scott has estimated that the payments could increase to as much as $25 million over the next few years. This estimate apparently assumes that the current bundling system will continue and that Direct TV will fall into line in carrying the network. If viewers are allowed to choose whether to subscribe to the network, it is likely that revenues will fall significantly. Conference members will still receive substantial amounts from television, but these amounts could be reduced by as much as 50 percent. Athletic Directors should plan accordingly.

Is the pending revolution a good thing? Absolutely. There will be winners and losers, but allowing consumers to choose with our dollars which programming to support is the way of competition. It’s the best way.

The Bootleg contributor Warren Grimes is a professor of antitrust law at Southwestern Law School. He has published an op-ed in the L.A. Times on this topic, and, per the Times, served as a consultant to an unsuccessful lawsuit that challenged bundling practices.

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