End game

The cable guys in America have pretty much a monopoly when it comes to truly high-speed wired Internet access – except in areas where Verizon’s FiOS has been rolled out – but they do compete for market share when it comes to video. For must-have programming that cable subscribers want, there may not be substitutes. And so the cable guys are frequently left negotiating with a single source for a single product. When that product gets more expensive, the wholesale costs paid by the cable distributors for programming get passed on to subscribers. If cable distributors got fed up with programming costs, they’d lose market share to satellite or telephone companies who are also selling video and might be foolish enough to keep buying programming. So they’re stuck – as long as their subscribers are willing to pay incrementally higher costs.

Nowhere is this story more dramatic – nowhere are the margin squeezes and skyrocketing programming costs more colorful – than in the sports arena. Craig Moffett of Bernstein Research put out a note on this late this week that captured the moment well.

Here’s the progression: : Rights to broadcast games get more expensive; people buying the team rights pay billions; to recoup their investment, the people owning the rights charge stupendous affiliate fees to the cable guys; consumers foot the cost, whether or not they’re sports fans.

ESPN is the truck rolling downhill, the monster player in this story. Moffett says, based on SNL Kagan data, that cable distributors pay almost $4.70 per month per subscriber for the right to distribute ESPN programming. Disney, owner of ESPN, has the cable distributors over a barrel: If distributors don’t put ESPN in their basic tier (the most widely distributed bundle of programming, the place you want to be if you want to make ad revenue based on wide distribution) for subscribers, the distributor will lose access to ALL Disney programming. ABC the network, the Disney Channel, everything. This bundling behavior by Disney isn’t unlawful, at least at the moment. No distributor with a Pay TV revenue stream on which it’s relying can risk losing access to the world of Disney.

The whole situation continues to get worse. Sports rights keep getting more expensive: $2 billion paid for the LA Dodgers, 4X 2011 fees sought by Fox Sports San Diego for Padres games, Lakers rumored to be getting $5 billion over 20 years from Time Warner Cable. Moffett calls all of this “ridiculous escalation.”

Non-sports fans are subsidizing sports fans, because although sports costs are climbing to nearly half the programming costs paid by cable Pay TV subscribers, only 20% of subscribers are devoted to sports. Some subscribers may get sick of paying for programming they don’t want and end their video subscriptions.

The cable guys have built in a hedge against this possibility: they can always sell high-speed wired transmission services. They can choose (on their own terms, slowly) to operate primarily in the market where they have unquestioned dominance, while gliding away from programming that their subscribers no longer want. That programming is being sold as part of a market in which they do face competition. By contrast, they can sell their high-speed wired transmission product at whatever price they like, because no one else can provide it.

So the cable guys have an exit strategy when it comes to stupendous, soaring, ridiculous, bone-crunching sports programming costs. Consumers don’t have an exit strategy from any of this.

If they’re enthralled by programming, they’re stuck with the high rates that are being passed onto them for bundles they don’t necessarily want. If they want globally-standard wired transmission (cheap symmetric fiber transmissions), they don’t have the choice to buy it – the cable guys aren’t selling that. And whatever high-speed wired product they buy, they’ll likely be buying it from their local cable incumbent at whatever price that actor wants to charge.