On April 19th, telecom giant Verizon introduced a customizable cable package that will limit which channels their customers will have access to in exchange for a much lower monthly bill. This plan does not sit well with most cable networks, and recently the New York Times reported that the biggest one of them all, ESPN, is suing Verizon for breach of contract.
Verizon won’t be the only telecom company to poke the Worldwide Leader, which until this point has enjoyed a cozy existence as a staple on most American televisions over the last two decades. Telecom companies like Verizon offer the network on their basic cable packages.
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In exchange for their programming, telecom companies pay ESPN a little over $6 per subscriber each month (more than three times the cost of the second most expensive channel on cable) for the primary networks, and more for any one of its eight sister channels, which makes up a good chunk of the network’s $50 billion net worth. This model had made ESPN by far the biggest juggernaut on cable television; Verizon now intends to shake up that model.
Verizon FiOS Custom TV offers customers a basic package plus two of seven smaller packages for $65 a month. Verizon will still pay ESPN $6 per subscriber per month for their programming, but they have stated that ESPN will not be included in their basic package, instead allowing their customers the choice of whether they want to pay for ESPN or not. ESPN is understandably concerned that fewer customers will pay for ESPN now, and without a substantial increase in how much Verizon pays for their programming, the network fears it will lose revenue. This does not sit well with ESPN, which yesterday began the process of what will surely be a contentious lawsuit.
Verizon did not have a choice in the matter. The success of streaming services like Netflix, Hulu, HBO Go, and ESPN’s own WatchESPN has proven that customers are willing to ditch their cable plans in favor of customizable internet-based television content. The best way telecom companies like Verizon can convince their customers to keep their cable plans is by allowing the same customization that customers get with online streaming services. Customers will inevitably drop channels they’d prefer not to watch, and unless cable channels can find another way to grab their viewers’ attention and subscription money, these channels will lose substantial revenue.
If anything, this lawsuit allows Verizon to tell their subscribers that the only thing interfering with them offering cheaper cable subscriptions to their customers is the cable networks themselves.
We have yet to see how this will fare with consumers. If Verizon wins the lawsuit, other telecom giants like Time Warner and Comcast may follow suit and offer their customers similar custom packages. This in turn might expedite ESPN’s eventual exit from the cable market into the streaming world. But how much would streaming ESPN cost?
Forbes estimates that ESPN could reasonably offer their content a la carte for $36 a month, which is great for customers paying hundreds of dollars a month for superfluous sports content, but will essentially raise the price of watching ESPN by a factor of six. This is an easy argument for telecom companies to exploit: would you pay $30 more a month for cordless ESPN? Or would you rather pay substantially less per month than you already pay for ESPN and forty other customizable channels?
Of course, there is the possibility that ESPN could win the suit, which could further complicate the scenario. The next move from cable networks and telecom companies will probably reflect consumer demand. If enough customers stick with their cable packages, the status quo might remain for a few years, so long as cable broadcasting remains a more reliable content delivery platform than the Internet. But if customers begin to flock to streaming services as a replacement for their cable subscriptions, networks will have no choice but to adapt to their savvy online demands.
Cord cutting benefits consumers who want to pay less for more efficient content delivery. Cord cutting could also potentially benefit networks and telecom companies if they soon develop systems by which they can profit off the Internet. However, cord cutting could potentially wreak devastation on the whole system of professional sports by disrupting the income stream of one particularly important entity: the local sports franchise.
Take Los Angeles, for example. In early 2013, the Los Angeles Dodgers agreed to a 25-year deal with Time Warner Cable valued at over $8 billion for the rights to local broadcasts of Dodger games. That deal has tanked for Time Warner, which assumed that other companies like Comcast and DirecTV would pay substantial fees to offer the channel on their own packages. No other provider has taken Time Warner up on their offer, and the only subscribers in the Los Angeles area who can watch Dodger games are those whose area allows them access to Time Warner Cable, or about one-third of subscribers in the city.
But that’s small potatoes in comparison to this harrowing possibility: that the terms of the contract will soon be too unwieldy to meet. Will enough people still be paying for cable in 2038? How about within the next five years?
The lucrative local deal the Dodgers signed with Time Warner is a main reason the team has been able to amplify their payroll and become a winning and marketable franchise over the last couple of years. But if people stop paying Time Warner to watch their games, Time Warner will have no money to pay the franchise, which will then have no money to pay its players. It’s a real possibility that cord-cutting could seriously devalue professional sports franchises.
That might be the natural effect of free-market economics, and there may be nothing that can be done about it, but no one should expect owners and players to give up the exorbitant amount of money they have been making over the last twenty years without a fight.
Of course, all of this is just speculation. ESPN changed the way we watch sports on television, and it’s likely that an even bigger change is soon to come. But for right now, the status quo remains, and the state of American sports on television is stable. Just don’t expect it to last for much longer.