SBJ/January 21-27, 2013/In Depth

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  • A different game for DirecTV

    Floating above Sun Life Stadium during the BCS championship game this month, DirecTV’s blimp delivered a simple message to the 80,000 fans in attendance: True sports fans subscribe to DirecTV.

    As Alabama trounced Notre Dame on the field, the blimp rotated messages touting DirecTV’s many sports offerings, from its exclusive NFL Sunday Ticket package to MLB’s out-of-market Extra Innings package.

    That message is not a new one for DirecTV. Since it launched in 1994, the satellite provider has embraced sports more than any other distributor, seeing it as the best way to attract subscribers away from cable operators.

    But that embrace isn’t as strong as it once was.

    The company that was the first to sign a carriage deal for the Big Ten Network has not been able to reach deals for the Longhorn Network or Pac-12 Networks. The distributor that was the first to make all out-of-market MLB, NBA and NHL games available in high-definition has not been able to reach deals with several regional sports networks.

    The future of DirecTV’s ties to the NFL and its popular Sunday Ticket product are still up in the air.
    Photo by: Getty Images

    DirecTV shut down NASCAR Hot Pass; started assessing surcharges in markets that have more than one RSN; and has not carried ESPN services such as ESPN3, WatchESPN, Goal Line and Buzzer Beater.

    The possibility that DirecTV could allow its exclusive NFL Sunday Ticket deal to expire after the 2014 season, when its contract expires, is something that regularly is talked about in sports media circles these days.

    The change hasn’t happened because DirecTV has fallen out of love with sports. DirecTV has built its business on sports and still provides, arguably, the strongest sports portfolio in the industry.

    Rather, the company says a shifting marketplace has forced it to take a harder look at whether it makes sense to carry specific sports networks. It’s a move that has frustrated some programmers more accustomed to doing deals with the satellite provider instead of engaging in a public war of words.

    This situation isn’t unique to DirecTV. All distributors — cable, telecommunications and satellite — are trying to figure out how to deal with increased programming costs. All have made decisions that keep some programming off their systems.

    The problem now is that programming costs, particularly from retransmission consent and sports, are rising at a much faster pace than other programming genres. The value of sports programming is at its highest level because it is one of the few genres that still brings mass audiences to TV — 16 of the 20 most-watched shows on pay TV last year were sports games.

    So networks are paying more for sports rights and are developing more cable TV businesses around sports, such as CBS Sports Network, NBC Sports Network and Fox Sports 1. Then there’s the league networks, conference networks and RSNs that are seeking higher license fees from distributors such as DirecTV to help pay for the higher rights.

    “With prices going up so rapidly, it’s hard to see who in the chain will be making money other than the left-handed pitcher with the 100-mph fastball and team owners because of the seemingly endless supply of trophy property seekers,” said Derek Chang, a former DirecTV executive who left the company earlier this month.

    DirecTV always has seemed impervious to these problems. Anyone trying to launch a sports channel would head to DirecTV first. It was a natural fit. With nearly 20 million subscribers, a DirecTV deal brought instant viability to a network. If a channel didn’t launch on DirecTV, odds are it wouldn’t launch anywhere else either.

    But that’s now changed. With more networks now seeking more money, DirecTV is becoming more comfortable with not carrying specific channels that they consider too expensive. The result has been the type of public battles that, historically, had never included DirecTV.

    It started in September 2009 as DirecTV shocked the industry when it dropped Versus (now known as NBC Sports Network) during a public and acrimonious negotiation. DirecTV kept the sports channel off its system for nearly seven months, comprising the entire NHL regular season, finally reaching an agreement just before the hockey playoffs began.

    It marked the first time any sports channel had gone dark in the 15 years DirecTV was in existence. For DirecTV, its hard stance on a Comcast-owned network served as a bold stake in the ground, serving as a strong precursor to other disputes. Two years later, DirecTV had rancorous negotiations with YES Network and News Corp. that both went public. Those disputes were resolved before any channels were dropped.

    The public nature of those battles tarnished DirecTV’s image as the sports leader in pay-TV. That designation still holds true, industry executives say, but DirecTV’s lead in sports isn’t as big as it once was.

    “The choice of a satellite, cable and telco provider is not made over sports anymore,” said financial analyst Rich Greenfield of BTIG. “DirecTV’s business is getting more challenged. Programming rights are going up, and their margins are getting squeezed.”

    Meet the new boss

    DirecTV executives have not been shy about publicly addressing the rising cost of sports rights, particularly local sports costs. A company that grew its business on the back of sports now seems to be fighting the escalating cost of sports rights at every turn.

    DirecTV CEO Mike White says RSN costs are out of control.
    Photo by: Getty Images

    At a Citigroup investor conference this month, DirecTV Chairman, CEO and President Mike White said 20 percent of the country has “regional sports network costs that are out of control.” DirecTV pays $10 billion a year in affiliate fees, a figure that rises $1 billion a year, its executives say.

    Some view White, who joined DirecTV from PepsiCo in January 2010, as much more of a hard-liner on sports rights than his predecessor, Chase Carey. During his tenure, Carey used sports to grow the business of the California-based company.

    But DirecTV executives say White has not adopted a new, anti-sports strategy. Rather, they say the model has changed and Carey oversaw a different business at a different time — a time when programming costs weren’t rising as fast as they are now.

    DirecTV cited programming costs as the main reason it is increasing its consumer prices by 4.5 percent. It cited RSN costs for the need to establish a $3 per month surcharge in markets that have more than one RSN.

    DirecTV by the numbers

    Subscribers

    Year Total subscribers (000s) % Change
    Sept. 30, 2012 19,900 0.1%
    2011 19,885 3.4%
    2010 19,223 3.6%
    2009 18,560 5.3%
    2008 17,621 4.7%
    2007 16,831 5.5%
    2006 15,953 5.4%
    2005 15,133 8.6%
    2004 13,940 14.2%
    2003 12,212 9.3%
    2002 11,176

    Source: DirecTV annual and quarterly reports filed with the SEC

    Stock price

    Market cap: $31.87 billion
    Historical high: 9/13/12 at $54.19
    Historical low: 11/30/05 at $13.19
    12-month change: +21%

    Note: As of Jan. 16 close of market
    Source: finance.Yahoo.com

    Sports ad spending (millions)

    DirecTV was among the top 12 sports advertisers each year from 2007-11

    2004 2005 2006 2007 2008 2009 2010 2011
    $29.9 $28.2 $51.1 $85.4 $153.5 $168.4 $175.4 $138.0

    Income statement (millions)

        Annual  
      Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2011
    Total revenue $21,565 $24,102 $27,226
    Expenses $10,930 $12,105 $13,955
    Gross profit $10,635 $11,997 $13,271
    Operating income (loss) $2,673 $3,896 $4,629
        Recent quarters  
      March 31, 2012 June 30, 2012 Sept. 30, 2012
    Total revenue $7,046 $7,224 $7,416
    Expenses $3,567 $3,627 $3,957
    Gross profit $3,479 $3,597 $3,450
    Operating income (loss) $1,308 $1,411 $1,068

    Source: DirecTV annual and quarterly reports filed with the SEC

    “It’s not a change at all in philosophy,” said Dan York, DirecTV’s chief content officer. “You’re just seeing a marketplace where the pricing of programming in a couple of categories in particular — retrans and sports — are escalating at an unsustainable pace. It’s not good for our customers.”

    Still, business has been good for the satellite provider. It is the country’s second-largest distributor, with around 20 million subscribers. Only Comcast has more. DirecTV added 100,000 net subscribers in the fourth quarter. Despite its complaints about rising programming costs, DirecTV reported a 9 percent jump in profits and an 8 percent jump in revenue from the third quarter last year, which is its most recent earnings report.

    Historically, DirecTV’s financials have been the envy of the pay-TV industry. Thanks largely to its focus on sports, its subscriber base typically is more affluent than cable’s and spends more on programming services than cable’s.

    But those margins have been shrinking as sports rights climb higher. That has resulted in more public carriage battles than the industry has ever seen from DirecTV. Many are with RSN providers.

    Late last month, NBC Universal executives traveled to DirecTV’s Los Angeles headquarters to finalize carriage negotiations over a handful of smaller channels, such as Style and G4.

    The NBC team made a final push to have its newest regional sports network, Comcast SportsNet Houston, included in the deal. DirecTV said no, believing the price, at more than $4 per subscriber per month, was too high for teams like the Astros, which lost 107 games last season, and the Rockets.

    DirecTV also passed on carrying college channels the Longhorn Network and the Pac-12 Networks. It has never carried CSN Philadelphia or CSN Portland.

    “What can’t keep going on is the continued reslicing of the pie of the same sports content that’s been available as part of previous deals for a substantially higher incremental price,” York said. “That’s an unsustainable model.”

    One of the new channels, the Pac-12 Networks, launched last year with 60 distributors, including Comcast, Time Warner Cable, Cox and Dish Network.

    The channel didn’t launch on AT&T, Charter or Verizon, but it’s DirecTV’s decision to not cut a deal that the Pac-12 Networks’ executives find most frustrating, even though Pac-12 Enterprises President Gary Stevenson said the two have a good relationship and talk regularly.

    “It’s baffling how DirecTV, which built its brand off of the broadest array of sports including the Big Ten Network and others, can turn around now and say that the Pac-12 has no place on their dial,” Stevenson said. “It’s hard to position yourself as the sports leader.”

    The NFL experience

    Most eyes are on the NFL to see if Sunday Ticket will become available to cable operators. The NFL has long vexed the cable industry by selling its Sunday Ticket out-of-market package exclusively to DirecTV.

    DirecTV has carried Sunday Ticket since its launched in 1994. The exclusive NFL package helped DirecTV grow its business in much the same way that the NFL helped grow Fox’s broadcast network around the same time.

    Initially, DirecTV used the package to attract new subscribers. It worked. In recent years, DirecTV has discounted the package as a way to keep subscribers from leaving. After nearly two decades, it’s hard to picture DirecTV without the package.

    DirecTV’s four-year, $4 billion deal for Sunday Ticket (an average of $1 billion per year) expires at the end of next season. While the league and DirecTV talk regularly, they have not yet started formal talks about renewing the package. In the past, cable operators aggressively sought to pick up the package, and sources said they plan to try to gain the rights again next year.

    A problem with the package today is that it is not as strong as it once was. The NFL launched a full season of Thursday night games this year, which took a game from Sunday Ticket’s Sunday afternoon schedule.

    Plus, the league created NFL RedZone and made it available to cable operators, diminishing the appeal of having every game on Sunday afternoons for DirecTV. While cable can’t provide the full games, NFL RedZone shows all the Sunday afternoon highlights in real time. Financial analysts believe the league’s moves have hurt DirecTV’s offering.

    “One of the greatest programming advantages DirecTV has had has been withered down quite a bit,” BTIG’s Greenfield said.

    DirecTV’s York said the satellite provider still considers the NFL to be an important relationship to foster.

    “It’s important content that we deliver to our customers. We look forward to continuing to deliver it to NFL fans in the future,” York said. “We see more of a fragmentation of NFL rights, with games on different days at different times. Plus the availability of RedZone does, to some extent, have an impact on the uniqueness of Sunday Ticket.”

    It’s a constant theme facing DirecTV, and will affect its future as the industry’s sports leader.

    The Programmers

    ESPN

    Top programming executives:

    Sean Bratches, executive vice president, sales and marketing
    David Preschlack, executive vice president, affiliate sales and marketing

    Top sports networks (millions of homes):

    ABC (114)
    ESPN (99)
    ESPN2 (99)
    ESPNU (74)
    ESPNews (75)
    ESPN Classic (32)

    Top sports properties:

    NFL, MLB, NBA, BCS, NASCAR

    Fox

    Top programming executives:

    Mike Hopkins, president, distribution
    Mike Biard, executive vice president, distribution

    Top sports networks (millions of homes):

    Fox (114)
    Speed (81)
    Fox Soccer Channel (42)
    Fuel (38)
    21 regional sports networks

    Top sports properties:

    NFL, MLB, NASCAR, college

    NBC

    Top programming executives:

    Matt Bond, executive vice president, content distribution
    Mac Budill, president, TV networks distribution

    Top sports networks (millions of homes):

    NBC (114)
    Golf Channel (84)
    NBC Sports Network (78)
    10 regional sports networks

    Top sports properties:

    NFL, NHL, MLS, Notre Dame, Olympics

    CBS

    Top programming executives:

    Martin Franks, executive vice president, planning, policy and government affairs
    Joan Nicolais, senior vice president, business development, CBS Corp.

    Top sports networks (millions of homes):

    CBS (114)
    CBS Sports Network (48 million)*
    Showtime (unavailable)
    * Not Nielsen rated

    Top sports properties:

    NFL, SEC football, The Masters, U.S. Open tennis, NCAA tournament

    Turner

    Top sports executives:

    David Levy, president, sales, distribution and sports
    Coleman Breland, chief operating officer, Turner Network Sales

    Top sports networks (millions of homes):

    TBS (100)
    TNT (99)
    truTV (92)

    Top sports properties:

    MLB, NBA, NASCAR, NCAA tournament



    The Distributors

    Comcast

    Top programming executives:

    Greg Rigdon, executive vice president, content acquisition
    Alan Dannenbaum, senior vice president, content acquisition
    Jennifer Gaiski, senior vice president, content acquisition

    Sports holdings (through NBC Sports Group):

    10 regional sports networks
    Golf Channel
    NBC Sports Network

    Recent sports negotiations:

    Comcast opened 2012 by signing a massive carriage deal with Disney/ESPN. It closed the year working on an extension to Fox’s carriage deal, which ended Dec. 31, 2012. The two worked out a temporary extension and a new long-term deal is expected to come soon.

    DirecTV

    Top programming executives:

    Dan York, chief content officer
    Reagan Feeney, vice president, programming acquisitions
    Todd Mathers, vice president, programming

    Sports holdings:

    3 Root Sports RSNs

    Recent sports negotiations:

    DirecTV agreed to carry the Los Angeles Lakers channel in the fall. It has not signed deals with the Pac-12 Networks, Longhorn Network and various RSNs.

    Dish Network

    Top programming executives:

    Dave Shull, senior vice president, programming
    Carolyn Crawford, vice president, programming

    Sports holdings:

    None

    Recent sports negotiations:

    Dish Network signed a carriage deal for the Pac-12 Networks. Big Ten Network went dark on the Dish system for a short time in the fall before Dish renewed that carriage deal.

    Time Warner Cable

    Top programming executives:

    Melinda Witmer, chief video and content officer
    Andrew Rosenberg, senior vice president, content acquisition
    Mike Angus, senior vice president, content acquisition

    Sports holdings:

    Time Warner Cable Sports
    Time Warner Cable Deportes
    16 other local sports channels

    Recent sports negotiations:

    Time Warner Cable signed new carriage deals with the NFL Network and Pac-12 Networks last year. It also renewed its deal with MSG Network after the network went dark for several weeks on Time Warner Cable in New York.

    Cox

    Top programming executives:

    Bob Wilson, senior vice president
    Kathy Payne, vice president, content acquisition
    Andy Albert, vice president, content acquisition

    Sports holdings:

    Cox Sports Louisiana

    Recent sports negotiations:

    Cox last year shut down RSNs in New Orleans and San Diego and decided not to bid on rights to the New Orleans Hornets or San Diego Padres. It signed a large carriage deal with Disney/ESPN last year.

    — Compiled by John Ourand


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  • DirecTV's competitors see an opening

    DirecTV’s competitors have had their own battles over rising programming costs, but they believe they have some built-in advantages that allow them to weather these costs more efficiently.

    Cable and telecommunications companies offer broadband and telephone service, which can help them subsidize programming costs better than DirecTV, which can’t compete in those areas.

    The situation has caused cable operators to see an opening. The two biggest cable operators, Comcast and Time Warner

    Cable, increasingly are using sports in their marketing efforts. Time Warner, for example, signed New York Giants wide receiver Victor Cruz and golfer Ian Poulter to star in national marketing campaigns.

    “We’re trying to put our message out,” said Time Warner Cable’s chief video and content officer, Melinda Witmer. “Southern California is helping us with the branding around our channels there.”

    Like DirecTV, cable’s carriage battles sometimes become public. MSG Network went dark on Time Warner Cable’s New York-area systems for a month and a half at the beginning of last year. A few months later, Time Warner Cable signed a deal with the NFL Network, ending a years-long negotiation between the two.

    Witmer said that sports costs, while high, are not as big of an issue for Time Warner Cable as retransmission consent fees that broadcasters are seeking.

    “The biggest problem we have is retrans,” Witmer said. “Sports is more high profile. But it is not going up at the same rate.”

    With reams of viewership data from set-top boxes, distributors say they are better able to determine the channels they can afford to lose.

    “We’re taking a much harder look at content, in general, but in particular sports because sports costs are rising so fast,” said Jeff Weber, AT&T’s president of content. “We’re really looking at does it make sense or not for our customers.”

    AT&T does not base its decisions on total viewership data. Rather, it looks to see how intense fans are, based on how often they tune in. The more intense the fans, the more likely they will drop a service that doesn’t carry channels they want.

    “We get to a point where we are willing to pay a certain amount based on really precise data about intensity of viewership. We are absolutely willing to walk away,” Weber said. “Viewership tells you an average story. But intensity of viewership — how often, how long — really tells you if these customers are passionate and if they are going to leave if they can’t get this content.”

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