Wednesday, December 27, 2006

How the NFL Blitzes in Business, Part 1

Here’s a surprise, the NFL is not primarily a sports league – it’s just another business with football as the product. Once you realize this, you’ll be prepared to understand the reasons why many of us can’t see Thursday and Saturday night football games and those reasons will shock you. There is much more to it than the greed of the cable company vs. the greed of the NFL. The most important component is the possible change in content from the traditional buffet model, where the cable company gives you a channel package with channels you like and some you don’t, to an a la carte model, where you tell the cable company what channels you want in your package. The probable long term effect of the NFL Network’s position is a challenge to cable’s status quo and content providers asking why can’t the customers pay for just the channels they want? Verizon’s IPTV will allow customers to pick and pay for the channels that interest them and their households. This seems to be the future of subscriber based television.

As the pre-eminent sports league, bringing in big ratings and bigger advertising revenue, the NFL Network now wants placement in everyone’s homes while providing just 20 hours of new programming for an entire year. Those 20 hours consist of 8 late-season football games. That doesn’t sound like a lot of extra programming–especially for a year-round, 24-hour network…and there’s the rub.

The NFL Network wants cable companies such as Charter Communications and Time Warner to carry its programming as part of their basic cable package. The cable companies say such an arrangement would hike the cable rates of all its subscribers, which they contend would be unfair to customers who have no interest in the NFL Network. The NFL Network wants to force its way onto basic cable so it can reach more viewers and charge higher advertising rates. That’s in addition to the hefty fees the NFL Network already charges cable companies to carry its programming.

Originally, the NFL Network charged cable providers $0.20 per subscriber to carry the channel but this was before they added live games to their broadcast schedule. The addition of live games raised that cost to $0.70. That’s a 250% increase – outrageous! When the additional costs are added together, the cost to each subscriber rises from approximately $0.57 to $2.00 per subscriber per month (Note: the per subscriber cost varies among cable providers with the range being anywhere from $1.00 to $2.00, for this blog we took the high end of the range, $2.00). If the NFL Network remained a premium channel, then only the subscribers interested in that content would pay that higher rate. Once they become a basic cable channel then every subscriber would be forced to absorb that cost and add 24.00 dollars annually to those already high cable bills. Thus, if the cable companies were to accept the NFL's terms, the NFL Network would immediately vault to being the third or fourth most expensive channel on the dial.

The first question you might want to ask yourself is: “Why is the NFL adding such expensive fare to their channel?” The easy answer is that since they are the NFL Network, they should probably be showing NFL games. Like I said – that’s the easy answer. Here is what actually led to the additional eight games. The owners of the smallest-revenue NFL teams felt they had fallen far behind those of the biggest money-makers. See, the NFL tries to ensure team economic parity but even though all the teams equally share the league's enormous television and licensing contracts, in addition to being further restrained by a firm cap on player salaries, the disparity between big-market and small market teams was showing itself in other ways. An obvious example is that franchises in bigger markets could generate money from suite sales that smaller-market teams couldn't touch…I’m sure you can think of others.

Continues in How the NFL Blitzes in Business, Part II (01/02/07)


GU Prof said...

Although you identify a travesty that is going on, brought about by the omnipotent sports-media complex, you might not be aware of the real "elephant in the room." The NFL Network is ILLEGAL!!! The principle law on the books, the Sports Broadcasting Act of 1961 that allows the NFL (and NBA & NHL, as well - the MLB is protected by their anti-trust exemption (the only entity in America to enjoy such a status)) strictly prohibits these professional sports leagues from entering into agreements to telecast on subscriber-based cable tv. On two seperate occasions, Congress asked the NFL Commissioner (once Pete Rozell, once Paul Tag.) whether they understood that their exemption from the Sherman Antitrust Law (the intent of the SBA 1961) did not permit anything except an "over-the-air", sponsored broadcast. Both responded in the affirmative. Yes, there WAS cable in 1961!!! Unfortunately, no legislator has the gumption to challenge their practices (when some have done so, they either were threatened with PAC action against them or convienently were awarded a team for their constituency.)
BTW, this same unparalled influence is one of the major reasons that a la carte will probably never be enacted (think about the devestation to the Regional Sports Network business model!) Hey, if you doubt this... think about the $36 million fleecing of the DC market brought about by a $2 increase in fees since September 1 for three weeks of Nationals baseball (or are there games to watch between October and April of which I am not aware?)

Panamaican said...

GU Prof, I tihnk you've misunderstood the law. The Sport Broadcasting Act of 1961 doesn't limit broadcasting to "over-the-air" networks. It's purpose is to allow the NFL (and other sprots leagues) to negotiate broadcasting rights as an entity rather than forcing each team to negotiate individual broadcast deals. In simpler terms, you negotiate with the NFL, not with the Dallas Cowboys and then with the Denver Broncos and so on.