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12

Jul

Why The Tea Party Should Hate ESPN

(Originally published on Forbes.com)

If the Tea Party took a closer look, they’d start calling out sports fans as closet socialists. Sports fans may project an all-American image of baseball and apple pie, but they are bilking most of the population out of billions of dollars every year. Their ruling party is ESPN. It is a finely tuned machine that efficiently redistributes wealth from the many to benefit the few. In an election year where the Tea Party holds sway over a number of economic issues, fighting the tax levied through cable bundling by ESPN and its followers should be front and center. Let me explain.

Cable television started out over a half century ago as a way to get better reception for broadcast channels. Beginning in the 80s, a host of basic cable networks – MTV, CNN, USA, ESPN - sprung up that changed the face of the business. These networks benefited from a dual revenue stream - traditional television advertising and carriage fees that were assessed on a per subscriber basis.

Cable operators combined these channels into bundles to try to achieve the highest average revenue per subscriber possible. They were largely successful. Annual cable subscription fees increased from a couple hundred dollars to nearly $1,000 per household for digital cable today. However, this cost has been driven in large part by escalating carriage fees. Programmers are generally insulated from criticism for this increase because the consumer sends their check each month to the cable company.

It is fair to point out that cable service improved dramatically over that period, expanding from dozens to hundreds of channels, most of which are now in HD. Networks such as History and Food have committed viewers that value their programming. But one group benefited at the expense of most others – the sports fan. ESPN wrote the playbook and if the revolutionary war era Sons of Liberty were still around they would be tossing TVs into Boston Harbor.

For starters, as one of the first name brand cable networks, ESPN locked up universal carriage early on. Further, sports fans who want to see a game scream bloody murder if their access is limited. Sports networks know this and have successfully used it. From the beginning ESPN insisted that it be placed on the most basic commercial tier. So other than a government mandated service that only has a few broadcast channels and the local city council hearings, all cable packages include ESPN. That puts ESPN in 100 million homes in the U.S.

While sports entertainment is enormously influential in our culture, the little secret inside the business is that only a small minority of the population are hardcore sports fans. In the week ending June 10, 2012 which included the NBA playoffs, the average prime time ESPN viewership was 4.7 million. That’s a good number for a cable network but less than 5% of cable households. This sets up a great disconnect when you consider that ESPN is almost 20 times as expensive as the average cable network. ESPN may have ever-increasing sports rights costs, but they also have leverage with cable operators that lets them name their price.

Let’s do the math. The average cable network charges a carriage fee to the cable operator of $0.26 per subscriber per month. This cost is passed on to all of us as part of our monthly subscription fee.  ESPN, on the other hand, charges north of $5 per subscriber per month just for its flagship channel. There is an incremental cost for ESPN’s sister channels. Even if we more than double the prime time viewership from early June  and assume that 10 million homes are regular ESPN viewers, there are 90 million that are paying for but rarely or never use the service. That equates to a mandatory annual subsidy of $5.4 billion per year most of us must pay on behalf of ESPN viewers.

We have entered into an on-demand world where consumers are insisting they get just what they want, when they want it; no more and no less. A younger generation of consumers is leading the charge and they, in particular, have a low tolerance for entertainment packaging. Just ask the record companies about the future prospects for albums if you need verification. The Tea Party may not be paying attention but consumers are. The days are numbered for the practice of bundling channels to force subscribers to pay for something they don’t want while subsidizing a minority of viewers that love very expensive programming.

- Alan McGlade is the Managing Director of DEV (Digital Entertainment Ventures). DEV is investing in companies that are fueling the transformation of the television business. He was formerly the CEO of a cable network and an MSO executive.

27

Feb

Digital Music on Rewind

In this guest column on Digital Media Wire, Alan McGlade reflects on subscription versus paid download and a la carte business models from his perspective as Digital Entertainment Ventures managing director and former MediaNet CEOClick on the headline above to read the full post.

I was at the Digital Music East Forum in NYC last week listening to Sachan Doshi talk about Spotify. While he was sharing his vision for the future of music, I couldn’t help but reflect on the transformation the broadcast industry went through when cable television was introduced several decades ago.