The Money Bubble

A few weeks ago, this write-up on the cable TV sports-bubble appeared on the Daily Beast web site.

If that analysis is correct, cable TV money deals funding the outsized salaries of MLB players, NBA stars, et. al., is in the process of a fundamental shift to much cheaper video streaming services in place of fixed, monthly, bundled cable TV entertainment charges, including cable TV charges for sporting events.

Disney, which owns ESPN, has recently lost about 7 million viewers, largely due to the competition from much less costly streaming services, which many consumers have chosen in place of bundled packages offered by cable TV. With such a large loss in viewership, ESPN has also suffered from a significant loss of income from the bundled cable TV industry. So have cable TV operators. Fewer viewers mean less income from the smaller number of cable subscribers.

Verizon FIOS has now announced that it is unbundling its cable TV offerings, including sporting events, with substantially cheaper charges to consumers, in order to meet the challenge posed by streaming services.

ESPN is not amused, as the new Verizon policy will also result in a reduction to ESPN of income from advertisers because of the reduced viewership that unbundling of sporting events will cause, and is suing Verizon:

With the video streaming paradigm the fan base has much more control over the service provider’s revenue stream, compared to the teams, or the service providers themselves, under the current arrangement. With the fans able to choose the cheapest viewing option, from multiple service providers, the winning service providers will be those able to offer services at the lowest cost to consumers. Profit margins are bound to take a hit.

Wireless technology makes an even bigger difference, eliminating cable as a necessary medium, altogether. The past ten years, or so, may have been the horse and buggy days of the sports money jackpot.

Paradigm shifts almost always involve tectonic level reductions in costs to consumers, who ultimately control how they spend their own money. When Ford made the Model T affordable to the average Joe, the horse and buggy days were doomed to cultural oblivion – having a car became a lot cheaper than feeding, housing, and caring for horses, and more convenient, too.

People who really want to see a game will be able to catch it on their smart phones, no matter where they are, and the streaming services offering the least cost to them will get their business. Then it will become a race to see who can provide the streaming customers what they want at the lowest cost, with the profit margins of the winning providers being cut to the lowest level they can afford, and still stay in business.

Owners counting on the big bucks from cable to keep on rolling in may be living in a fantasy world. Going to the park, or the arena, may become even more of a premium ticket than it is now. That experience is still unique, and electronic media cannot make that experience a commodity open to the cheapest service provider among them, no matter what.

Smart owners will adjust. Advertising will reach even more people when fans can view sporting events on their smart phones, portable tablets, etc. The big market teams with more viewers will continue to command the largest bank accounts, just as they do now, due to even bigger advertising revenues. The Lerners would benefit, relative to Angelos, by being able to operate in a bigger market with bigger advertising revenues than the much smaller market in Baltimore, and there would be nothing Angelos could do about that.

So what if Angelos refused to televise Nats games on his cable network, when fans will be catching the game via wireless connections provided by a streaming service?

Complex systems, in a free market, create their own chaos – Schumpeter’s principle of creative destruction rules in a fee market economy. Angelos is a totalitarian, and wants to dictate economic outcomes, killing the dynamic of creative destruction that rules a free economy.

As I was writing this up, ESPN announced that it will be offering streaming services of its own to Verizon FIOS cable customers.

The chaos is just beginning.

This entry was posted in Analysis, MASN. Bookmark the permalink.