Is the Cable TV Bubble shrinking and did the Nats miss their window?

An article on Sports Business Daily about ESPN’s shrinking customer base caught my attention today. ESPN, by far the most profitable cable channel, peaked in customers May 2011 at just over 100 million subscribers. They are now closer to 93 million, their lowest total since 2007.

This shouldn’t be surprising. Cable TV has become increasing expensive and services like Netlix and Amazon make it easy for customers to receive quality television content without paying $200 a month to Comcast or Time Warner.

To understand the reason for ESPN’s “demise” it’s important to understand the business model of Cable TV networks. ESPN, while unquestionably the king of cable, lived in a palace built on quicksand. ESPN’s model is simple: corner the market on popular live sports programming (like Monday Night Football) and then charge exorbitant monthly fees to cable companies to deliver their network to the customer. The last time I checked, ESPN charged cable companies like Comcast over $6 a month for the right to deliver the ESPN family of networks into your home. The cost of course is passed on to you, which is why you pay so much for cable. Through “bundling” non-sports fans don’t even have the option to avoid paying over $6 a month for a channel they don’t watch. Your grandmother who doesn’t even watch sports still pays over $70 a year for ESPN.

You can see why the model is unsustainable. Other channels sought to mimic ESPN’s success, such as Turner Broadcasting (TBS and TNT) and on a regional level, networks like MASN. This, of course, directly relates to the Nationals, who are currently at the mercy of their MLB-negotiated contract of adhesion, but one day hope to own their own cable rights. The Phillies, Dodgers, and other teams cashed in on the Sports TV Bubble, signing long-term deals with local cable channels who in theory pass on high-subscriber fees to local cable customers—whether they watch baseball or not.

As the price of cable started to outgrow the demand for the product, younger customers started to “cut the cord” in favor of Netlix and cable providers like Verizon started to offer non-sports cable packages. As this trend continues—and it’s hard to imagine a reason why it won’t–the value of sports programming will shrink. There are a few implications here for the Washington Nationals:

-Even if the Nationals achieve their dream of winning their TV rights back from MASN, the rewards of that victory will be less than they were in 2011, the peak of the Cable TV Bubble according to ESPN’s numbers. The Dodgers fueled their outrageous spending spree the past few seasons by signing a cable deal at the peak of the bubble. From the outside, that deal now looks like a disaster. The cable company fueling the Dodgers spending spree is having trouble getting the Dodgers’ cable network on the air as some providers refuse to pay the fee necessary to make the deal profitable. In a future where many young DC residents don’t even have cable, and non-sports fans won’t pay for a cable package containing a newly-formed Washington Nationals Sports Network, it’s almost impossible to imagine a Dodger-sized deal in DC.

-It’s worth noting this trend may impact the litigation with MLB, the Orioles, and MASN. The Nationals are guaranteed “fair market value” under the existing contract, which of course will be less if the value for sports programming decreases. However, the MASN contract situation is so complicated, this is barely worth bringing up. There are so many factors in the MASN case, it’s impossible to predict how the existence of declining cable customers will affect it.

-It’s also worth noting that no one trend happens in a vacuum. Declining cable customers may hurt the overall value of sports programming, but sports programming by itself has never been more valuable to advertisers. The trend in entertainment, as you know, is away from live TV. As customers turn towards Netflix they turn away from ads. Desperate advertisers will continue value programming like baseball games. Pretty soon Nationals fans may be the only people watching TV ads in the DC area on a nightly basis. While the overall trends seem to be hurting the value of sports programming, the situation is far from bleak for teams like the Nats who depend on television as a main source of revenue.

-This is the most important point. As artificial demand for sports TV programming disappears, teams will be forced to compete for your dollar. The Nats will have huge incentive to grow the fan base, rather than sit on the fact that millions are forced to buy the product whether it’s good or not. Teams will fight to get you in the stadium and they’ll be forced to be competitive on the field, lest they lose their TV audience. In other words, capitalism will force the Nats to get better at everything, from quality of play to presentation of the product. Aside from your grandmother’s smaller cable bill, that’s the best possible outcome.

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4 thoughts on “Is the Cable TV Bubble shrinking and did the Nats miss their window?”

  1. I agree there’s a bubble, but what will the Dodgers and others do when the cable company that have them a 1 billion dollar deal go bankrupt?

    Personally, I think MLB figures out a way to satisfy regional networks while streaming games. Personally, I cut the chord and now just wait until 10:30 to watch the recorded version on mlb.tv. This had the added benefit of allowing me to fast forward through the Nats half of the 8th inning in the field.

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