Crying foul over cable fees

Kai Ryssdal Nov 16, 2006

KAI RYSSDAL: Football fans are in for the best week of the year ’til the playoffs. Games this weekend and next of course. But in between … Thanksgiving. The traditional games featuring Dallas and Detroit, and a Thursday night matchup between the Denver Broncos and Kansas City Chiefs. There’s another contest, though. Between the NFL and the cable companies. That might leave fans out in the cold for that Denver game. Our business-of-sports analyst, Ed Derse, has the story for us. Hey Ed.

ED DERSE: Hi, Kai.

RYSSDAL: Thanksgiving very nearly upon us and yet here you are to tell me that there are millions of football fans out there who might not be able to get these games?

DERSE: Well, they won’t be able to see the Denver Broncos and the Kansas City Chiefs play if the NFL Network and Time Warner Cable and some of the other cable companies can’t work out a deal for carriage distribution of the NFL Network.

RYSSDAL: Carriage distribution, NFL Network — makes my brain hurt. So, make me smart here. What does this all mean?

DERSE: Alright, well, this is the fundamental battle between new cable networks and the cable companies. The cable networks want as broad a distribution as they can get, being placed on basic tiers, and they want to be paid as much money per sub as possible.

RYSSDAL: Per sub . . . subscription.

DERSE: Exactly. And the cable companies, of course, they want to limit the amount of money they pay out because they have to control costs because, you know, their universe is a bit limited by region and the number of subscribers they can really get.

RYSSDAL: OK. So, the NFL has established its own, now, NFL Network, trying to get that onto these cable companies.

DERSE: Exactly. So, three years ago the NFL launched the NFL Network and it’s grown to about 41 million households nationwide. However, it hasn’t done quite as well as they’d hoped. They’d hoped they were in about 70 million households nationwide. Now, what they did in this last round of negotiations for all of the rights to the games, is they withheld eight live games that they said, “Oh, we’re going to put these on the NFL Network. Now, that cost them about $400 million that they could have gotten for those games from the other networks. But, they’re making a bet that having these games in hand is going to force the cable companies to carry them on basic cable.

So, let’s do the numbers like we do here on Marketplace.

RYSSDAL: OK, go ahead.

DERSE: They’re in 41 million households. They’re getting about 20 cents [a month] per sub. That comes to about $98 million a year. Where they want to be is in 70 million households at 70 cents per sub which would make them one of the most expensive cable channels. But that’s about $588 million a year. And, of course, with 70 million households, your consumer advertisiing revenue is a lot higher as well. So, as you can see, the NFL has a lot predicated on this. Their business model means they have to get into a lot of households.

RYSSDAL: Lot of money being left on the table here by the NFL if this doesn’t work out, and a lot of money that cable companies are going to have to pay. Just a lot of money in general. Things are, I gather, sort of heating up.

DERSE: Well, there’s been an argument for a while between the cable companies and the sports networks over the cost of their channels. See, the leagues charge more money for sports rights. The channels have to pass that on and amortize that, so they try to pass it on to the cable companies. The cable companies say, “Hold it. Not everybody that subscribes to our service is a sports fan. Why should we have to pass that cost onto all of them? We just want to put it on a digital sports tier and make hardcore sports fans pay additional money for that. Of course, that gives them incremental revenue.

RYSSDAL: Sure. Is there a way to figure out who’s got the upper hand? I mean, the NFL has this product that you can’t really run down to the Safeway and get. Yet, they do need the distribution channel.

DERSE: Well, it’s unclear. Historically, the sports channels have tended to get the upper hand in these kinds of negotiations. However, in this case, the NFL really needs the basic carriage and needs significant increase in its per-sub revenue. It’s not really clear whether the NFL Network is compelling enough. How many people nationwide are going to cancel their cable subscriptions and defect to DirectTV, for example, if that doesn’t happen? And that’s really what the balance is right here.

RYSSDAL: Right, and as you mentioned, not all subscribers to, say, Time Warner, just for instance, are hardcore football fans. And so they may not want to pay that additional fee. Right?

DERSE: Exactly. So while the NFL would like to tell you that, “Hey, we’re only charging the cost of a movie ticket for this entire channel for the entire year, you know, for Time Warner that’s spread across 13.5 million subscribers, not all of whom are NFL football fans.

RYSSDAL: Alright, we’ll see what happens. Ed Derse is our business-of-sports analyst. He’s also a VP at FoxSports Interactive. We oughta tell ya his opinions are his, and not those of Fox Sports. Thanks a lot, Ed.

DERSE: Thank you, Kai.

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