How The $7 Billion Dodgers TV Deal Could Actually Be Good For Consumers

Josh LugerFeb 8, 2013, 02:00 IST

APLast week, the Los Angeles Dodgers announced a new television contract with Time Warner Cable (TWC), valued between $7 billion to $8 billion, which calls for the creation of a new "SportsNet LA" channel that will be the exclusive home of everything Dodgers. The deal is simple: the Dodgers have to play baseball and collect the $7 billion or $8 billion TWC will pay them over the life of the 25-year agreement. TWC owns the programming, must produce the channel, and get it carried (and paid for) on other cable and satellite systems in the DMA. The deal was met with smiles from the new ownership group that purchased the team just last year for a record $2.15 billion. However, it was met with almost universal outrage and disgust by everyone else. The Los Angeles Times exclaimed that "rising sports programming costs could have consumers crying foul." Industry analysts labeled the deal a "game changer," "essentially a high tax on a lot of households," and "for some, the straw that breaks the camel's back." Consumers, such as Vincent Castellanos, 51, a fashion stylist who lives in Los Feliz, were quoted as complaining "I've never once gone to a single sports channel. I wasn't even aware I was paying for it." This kind of outrage is expected, easy to understand, and on the face of it, entirely logical. But, a deeper analysis of the deal shows that it may also be short-sighted and incomplete. Over the long-term, this deal could actually save pay-TV consumers a whole lot of money. The pay-TV industry is booming To analyze the deal, we must first understand the broader dynamics surrounding the pay-TV industry. To start, let's lay down the basics:

Consumers are watching more TV now than they were a few years ago: We are more connected than we've ever been. The quality and selection of screens and devices have never been better. As a result, Americans are spending a staggering 34 hours per week in front of a TV set.
There are more pay-TV consumers now than there were a few years ago: In 1990, there roughly 52 million pay-TV subscribers in the US. In 2000, this number had climbed to 67 million. Today, that number is nearly 105 million.
Consumers are paying more for TV now than they were a few years ago: The average monthly cable is now $86, more than double the $40 average in 2001.

The industry has responded to increased demand with increased supply. Programmers have aggressively expanded their pay-TV footprint over the last few years, constantly creating new channels and spending more on original content than ever before. Taking advantage of the basic concept of the "bundle" - packaging many channels together for one simple price - programmers and distributors alike have made record amounts. Cable industry revenue has nearly quadrupled since 1996, rising from $27 billion to nearly $100 billion by the end of 2011. In the last five years alone, industry revenue is up by more than 30%. The pay-TV industry, quite simply, is booming. But, price has become a problem Nearly 70% of annual industry revenues, or roughly $70 billion, comes directly from consumers via subscription fees. This is the amount each consumer must pay for each of their channels every month. Programmers increasingly ask for higher fees and go to great lengths to get them. They bundle their own programming together (i.e. Walt Disney Co. makes TWC pay for ESPN channels, ABC, and Disney channels all at once) during negotiations to maximized leverage. And lately, they are requiring that more of their channels be placed on the basic subscription tier. Pay-TV providers fight the increases as much as they can. But they're distributors. They need content. And so they ultimately pay for it. To protect their profit margins, providers simply pass along these costs along to consumers.

This has caused massive inflationary pressure on the costs of a pay-TV subscription. The average price of a subscription has not only doubled since 2001 - it's projected to skyrocket to a whopping $200 by 2020! In the industry's earlier days, this kind of inflationary pressure was acceptable and could be absorbed by consumers. Today's might not be. Providers have to sell a product directly to consumers, and the more expensive their product is, the more attractive cord-cutting or cord-nevering becomes. Price, therefore, is starting to become an issue that pay-TV providers need to combat in a serious way. It's not the only one Consumer preferences and behavior are evolving:

Consumers are watching lots of TV but... After years of growth, traditional TV viewing has seemingly flatlined, while the use of other screens is exploding. Americans also spent close to five hours a week on a computer screen, using the Internet and watching video content, a number that is increasing rapidly. The traditional TV set- the only screen that distributors actually control - is losing its share as a percentage of the overall viewing time.
And a lot of consumers are paying for TV but... After years of growth, 1.5 millions households cut the cord in the U.S. in 2011. And 30% of Netflix subscribers ages 17-24 in 2010 said they didn't have any pay-TV subscription. It looks as if subscriber growth has peaked.

As a result, there is an increasing nervousness among pay-TV executives about being the owner of a single-screen in an increasingly multi-screen world. This concerns represent a real long-term risk that providers are trying to mitigate. Pay-TV providers as programmers In other words, the greatest threats to pay-TV providers is a sense of powerlessness over the two key components of their business: price and distribution. So, amidst the evolution of cable prices and consumer consumption, what’s a pay-TV provider to do? Buy some control. More specifically, they’ve decided that to best guarantee their relevance as a distributor in the long-term, they need to become more like a programmer in the short-term. Why? Because being a programmer generally means two things: control over the distribution and pricing of content. Enter sports programming Sports programming is exclusive, original, and live. It forces consumers to tune-in at a specific time in a world where they are doing so less and less. Leagues have established brand equity and built-in promotional power. Teams have large and devoted fan bases that watch each of the many games religiously. When it comes to programming, sports is simply top shelf. Consequently, sports programming is also the most expensive. By some estimates, half of an average cable bill goes to sports related subscriber fees.

Here's why:

Lots of new national sports channels: All together, there are close to 30 national cable networks devoted to sports. Each of the four broadcast networks and each of the four major professional sports leagues now has their own cable channel.
Higher costs for this programming: The most recent national sports deals all resulted in massive increases in rights fees. The NFL recently received 63% and 73% increases in separate rights deals (totaling over $40 billion), and both MLB and the NHL more than doubled their take in recent deals.
Lots of new local sports channels: Regional Sports Channels, or RSNs, are a new phenomena. Teams own their local programming rights and are increasingly deciding to start their own channels. There are now over 20 RSNs nationally. In the Los Angeles DMA alone, there will now be seven RSNs in 2014.
Higher costs for this programming: In the last year, TWC created two new sports channels as part of a $3 billion deal with the Los Angeles Lakers, Fox acquired a 49% stake in the New York Yankees' YES Network that values the channel at some $3 billion, and Fox renewed its deal with the Angels for $3 billion over 20 years. All Los Angelites may soon be paying upwards of $20 a month just for local sports programming (see graph above).

With TWC looking for control over distribution and price, there's nothing better than control over sports programming - the most premium and expensive content there is. So, while there is a cash incentive for TWC in the deal... TWC will get a good initial return on:

Subscription revenue: The Los Angeles DMA has roughly 5.6 million TV-viewing households. TWC will immediately seek to pass along a $5 a month subscriber fee to each and every one of them. That comes out to approximately to $336m a year – or $56 million more than they’re slated to pay the Dodgers.
Advertising revenue: TWC will reportedly have the exclusive rights to sell advertising on SportsNet LA.

Their other core objectives could result in long-term gain for consumers Consumers can expect higher cable costs in the immediate term. And yes, it sucks to pay for any channels you don't watch, let alone expensive ones. But consumers were already paying for lots of channels they didn't watch before. That’s the price you pay when you choose to buy in a bundle. The only difference is that now they're beginning to feel that they pay too much for channels they don't watch. And that is one of the primary reasons why TWC stepped in here. Over the long-term, consumers could benefit from the deal because TWC will have:

Incentives that are aligned with the consumer: TWC's #1 goal is the same as their consumers - to keep the price of the bundle down. The more they have the ability to achieve that, the better off the consumer will be in the long-term.
More leverage with programmers: The more TWC pays for and owns its own premium content, the less they have to spend and less they need to buy others'. This gives them even more incentive and ability to keep prices for other programming down.
Ability to cut out a middleman: Without a programmer such as Fox in the middle, there's simply one less hand in the cookie jar, one less company that needs to turn a profit.
Long-term cost control: Programming deals typically run 10 years, at a maximum. When they expire, the massive fee increases detailed above usually kick in. TWC was able to lock in rights for 25 years, which will allow them to keep fees constant for the duration of the agreement if they choose.

On the other hand, if a programmer like Fox had won the Dodgers rights for $6 billion, they would have:

Immediately sought rate increases at least as high the one that will be coming down the pike
Used Dodgers' programming as leverage to get more from TWC for other programming they own by bundling them into one negotiation
Likely entered into a 10-year agreement (meaning a significant bump could be expected when the deal is up)

So, as ironic as it may be, the $7 billion dollar deal with pay-TV provider TWC could very well be preferable for consumers in the long-term. They should want the company whose goal is to keep the size of the pie down to have control over the ingredients - not the programmers who only care about getting a bigger piece of the pie for themselves. Who should consumers really be angry at?

Themselves! Consumers allow the bundle to exist in the first place by paying for lots of stuff they don’t consume. The only reason programmers and distributors can pass down an increasing amount of mandatory and ancillary costs via a bundle is because the market allows for it (i.e. consumers keep paying for it)! We live in an age of massive technological upheaval, where consumers are increasingly exerting more control over how and what they consume, and over how much they pay to consume it. Opposition to bundles in principal may grow over time, and bundles may become untenable at any cost. If and when that day comes, TWC will definitely not be a consumer's friend. But, as of today, we're still a nation of bundlers. While we are, it's best to have someone fully incentivized to keep the bundle reasonable and affordable with as much control over programming as possible. As odd as it may seem on the heals of this massive local TV rights deal, TWC might just be the best friend a pay-TV consumer has at the moment. And it always helps to have friends in high places.

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How The $7 Billion Dodgers TV Deal Could Actually Be Good For Consumers