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Stable Sports :: The Sports Bubble Is About to Pop

Your favorite sports team is massively overvalued right now. It’s not that you ought to be losing sleep over Jerry Jones’s or Mark Cuban’s finances—they were rich before and will be rich after. But the popping and cracking noises emanating from the key support beam in our Temple of Athletics—the TV sports business—foreshadow wild disruptions ahead for the world of sports.

Like the barking dogs that sense an earth tremor before we do, ESPN’s annus horribilis is a harbinger of the Internet’s coming disintermediation of America’s half-trillion dollar sports industry. Just since mid-summer, the Disney-owned 800-pound linebacker of sports TV announced falling subscriber counts and weak ad revenues that led to a devastating media stock price rout. The network has elected to let some of its highest-profile talent go, has announced a round of significant rank-and-file layoffs, and then last month shuttered its prestigious sports journalism site.

Then, last week, ESPN’s SEC filing revealed a bombshell: The company had lost 7 million subscribers over the last two years.

For more than 30 years prior, ESPN enjoyed an unbroken stream of growth and innovation on its way to becoming the immovable Gibraltar of the cable bundle. By pioneering the neat trick of partnering with cable television operators to drill directly into the wallets of almost all cable subscribers—every face-painting team fanatic and couldn’t-give-a-flip, sports-hating HGTV obsessive alike paid the channel’s highest-in-the-industry fees, whether they knew it or not, in their cable bills—ESPN reached ever more Jordan-esque heights in revenue and profitability.

As the keystone of the “bundle”—the core multi-channel offering from cable and satellite operators—ESPN was able to jack the wholesale rates charged to cable operators each and every year while letting those same operators take all the heat for consumer rate increases. The network’s bulging wallet allowed it to outbid competitors for all nature of sports programming rights, and sadly for consumers, its successful business model was quickly copied by new regional, collegiate, and team-owned sports networks.

The resulting fearsome sports arms race now is estimated by longtime cable TV and sports industry executive Leo Hindery to cost each cable household $35 to $40 per month. And, again, that’s whether those households watch sports or not.

Appearing on Bloomberg TV last August, Hindery added that “…if you ask (the average subscriber) that question, ‘Are you comfortable with that?’, firstly they’d pass out at the question. They have no sense that they’re paying that kind of number.”

Television sports rights fees have mushroomed so vastly that a study by the accounting firm PWC recently suggested they’d overtake tickets to the actual game as the largest source of revenue for sports franchises by 2018. Think about that: All those swells in the private boxes and all those regular Joes and Josephines in the cheap seats at all 2,430 Major League Baseball games and all 1,230 NHL hockey games, plus all the inflated playoff tickets multiplied across all professional sports in every single city? They still aren’t projected to add up to more than the cable cabal drains, IV-infusion-style, from our bank accounts month after month for sports programming.

But now the cable bundle is on the receiving end of massive blasts of the same disintermediating forces the Internet has brought to dozens of other industries. Basically, there were ever a sports bubble in the United States, it may have already existed in this last decade.

And that sports bubble is about to pop.

The transparency, direct access, and choice that consumers have come to love in the “over-the-top” world of Netflix and Hulu is the mortal enemy of the cable industry. Those places don’t have the hide-the-ball billing and bundling practices that jack up prices and rebill millions of people monthly.

Somehow, when the Netflix movie cornucopia costs you $7.99 a month, realizing you’re paying 40 bucks for tedious Major League Baseball games and sleep-inducing PGA golf tournaments seems like a lot-lot-lot of money.

As consumers figure out the con and start making value judgments, they’re throwing extraneous programming overboard like a balloonist dropping sandbags. Over the side goes premium pay TV, like HBO and Showtime, and out goes the “bundle” from more and more households. And for the record, only 12 percent of cable subscribers in a recent survey say they’d pay more than $20 per month for a stand-alone sports bundle, if such a thing were separately available.

So when Hindery’s $40-per-month figure comes into a broader public consciousness, the likelihood of a “look out below” moment for the sports industry grows exponentially.

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Posted by Daisy Gregory | on