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10/9/2003

Brawling over TV and sports

By Steven Pearlstein
The Washington Post

A battle royal is brewing in the world of television sports that promises to be every bit as entertaining as the contests on the field, with much higher stakes.

Essentially, this is a contest among three monopolists unaccustomed to the kind of competition most businesses face.

They include the professional sports leagues and team owners, who face no competition, along with the players unions, which have a monopoly on supplying labor for the teams.

There are the cable programmers, ESPN and Fox Sports, which have essentially bought the right to leverage the sports monopolies through exclusive television contracts.

And there are our friendly cable operators, which until recently have effectively enjoyed a monopoly on distributing television programming to most American homes.

While appearing to bargain hard with one another all these years, in reality these monopolists conspired to raise prices all along the value chain at a rate two or three times the price of just about everything else. The players all became millionaires, the team owners saw the value of franchises soar, the sports networks turned into bonanzas for the media conglomerates that own them, and cable rates went through the roof — not just for the 25 percent who regularly watch professional sports but also for the 75 percent who don’t.

Don’t blame us, said the cable operators — we’re just passing on the 20 percent annual price increases forced on us by ESPN and Fox.

Don’t blame us, say the sports channels: How else do you think we are going to recoup the billions we had to bid to win exclusive television rights?

And don’t blame us, say the leagues. Even with television revenue, most teams actually lose money, thanks to overpaid superstars and rapacious players unions.

All of them were right, of course. That’s just how uncompetitive markets work. When push comes to shove, they all raise prices because they can.

Now, however, all that is beginning to come unraveled, thanks largely to competition from satellite television services, which have grabbed 20 percent of the market from cable operators in the past few years. To protect their franchise, cable operators have scrambled to improve service and enhance offerings by bundling in telephone and Internet access. At the same time, they are determined to hold down prices by refusing to pass on increases for sports channels that account for less than 10 percent of their customers’ viewing hours but as much as a third of their programming costs.

“Somebody had to draw the line, and I guess I’m the unlucky one,” explained James Robbins, president of Cox Communications, one of the largest cable operators, who is going public with his campaign as he enters contract-renewal talks with ESPN and Fox.

Robbins says that unless the sports channels moderate their fees, or agree to allow their channels to be offered to subscribers as premium options, he’s prepared to drop the services. If it comes to that, he knows he’ll get howls of protest from sports fans.

Of course, it doesn’t have to come to that. With gross margins of 70 percent, cable operators could afford to swallow some of the onerous price increases and still make a respectable profit. And with ESPN generating $1 billion in cash a year for its parent, Walt Disney, on $4 billion in revenue, surely it could afford to accept something less than 20 percent annual rate increases.