SBJ/Dec. 6-12, 2010/Media

Cable/satellite execs see cord cutting as threat to sports channels

Cord cutting is a real threat that could wind up hurting sports networks more than any other cable channels.

That was one of the key themes I took away from our FSA Sports Media & Technology conference in New York last month. It was a theme that surprised me. For more than a year, the cable industry had dismissed cord cutting — the term for customers dropping their cable or satellite service — as a media-created myth. The companies didn’t see any evidence that their customers were giving up cable subscriptions in favor of a broadband connection and a Netflix account.

But after seeing subscriber numbers for cable, satellite and telco operators drop for two quarters in a row, distribution executives are beginning to view cord cutting as something they have to address.

“The question is, What’s driving the cord cutting?” said Derek Chang, DirecTV’s executive vice president of content strategy and development, speaking to conference attendees. “Is it that there are alternatives on a digital front that are a substitute product? That’s not true. The economics are what’s driving cord cutting right now.”

So, why should sports media executives be concerned with this trend?

According to Melinda Witmer, Time Warner Cable’s executive vice president and chief programming officer, because sports networks are the most expensive channels Time Warner carries, they will be disproportionately hurt by customers who give up their subscriptions.



SHANA WITTENWYLER

DirecTV's Derek Chang and Time Warner
Cable's Melinda Witmer

“Cord cutting is potentially one of the biggest issues that the sports industry needs to think about,” said Witmer, speaking on a separate panel at the conference. “[Sports rely] on a large consumer base, a substantial percentage of which don’t consume sports, to pay for it and to provide the advertising base that will pay for it. For every consumer that wants to watch cooking shows and decides that cord cutting satisfies that itch, the loss economically to sports providers is disproportionate to the potential loss of the network providing cooking programming.”

Let’s be honest. Nobody is really being affected by cord cutting today. It doesn’t pose any kind of imminent threat to either distributors or programmers. If distributors show subscriber gains over the next several quarters, this issue will be returned to the back burner.

But for the distributors, the threat of cord cutting adds a new wrinkle to their decades-long quest to try to keep the cost of sports programming down. The threat is why operators such as DirecTV and Time Warner are testing low-cost tiers that essentially shun sports networks.

DirecTV is testing a tier that features only three sports channels, all from ESPN, for $45 per month (SportsBusiness Journal, Oct. 18-24 issue). Time Warner is testing a similar tier called “TV Essentials” that carries no sports channels for about $50 per month, about half of what the cable operator charges for its basic package, with a DVR and HDTV.

These low-cost tiers won’t be big. Many of the bigger networks, like ESPN, have triggers in their affiliate deals that ensure their channels appear on any tier that rises above a specific percentage of a distributor’s total subscriber base. That means that if Time Warner’s low-cost tier gains traction, the cable operator then has to put ESPN’s main networks on it.

Still, these tiers carry the potential to irritate sports networks. What if only 1 percent of Time Warner’s total subscriber base decides to take the tier? That would be about 130,000 subscribers of Time Warner’s 13 million base. Time Warner pays ESPN around $4.50 per subscriber per month. At just 1 percent, that means ESPN could lose more than $7 million off its bottom line per year.

That’s not nearly enough to hurt ESPN, but it is probably enough for the network to take notice.

“We know that we have substantial percentages of our consumers that are not consuming sports,” Witmer said, citing Time Warner’s set-top box data. “The question is, What happens to our ability to support the sports industry and the sports industry’s ability to support itself?”

For DirecTV’s Chang, that means dropping poorly viewed channels from the lineup. Chang oversaw DirecTV’s strategy when it dropped Versus from its lineup last year, and Chang still has not cut a deal for Comcast SportsNet in Portland.

“One of the side effects of it is … that there [are] going to be other channels that are going to come down,” he said. “If we’re going to try and do anything to mitigate the rising costs elsewhere on programming that we consider must-have, it’s got to come from somewhere.”

Both Chang and Witmer said the high cost of sports networks has pushed consumer bills to a point that it increases the likelihood of cord cutting.

“At some point, if they don’t continue to bear it, the whole thing falls apart,” Chang said.

John Ourand can be reached at jourand@sportsbusinessjournal.com. Follow him on Twitter @Ourand_SBJ.

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