Sports Costs White Paper

Rising sports costs top of mind with both programmers, multi-channel operators

DEREK BAINE, SCOTT ROBSON, JOHN FLETCHER & ADAM GAJO

JANUARY 2015

Rising sports costs top of mind with both programmers, multichannel operators

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Multichannel operators have been suffering a decline in margin on video for years, in large part due to the rapidly escalating cost of sports. However, there are other factors at play such as retransmission consent payments and the expanding size of the bundle.

We took a deep dive into the subject to look at a number of issues, including how many channels multichannel subs are getting, what the cost per channel by genre is, and how retrans factors in.

Our detailed analysis that follows shows that since 1995, the average number of channels each consumer gets has exploded from just 27 to roughly 100 in 2014. Keep in mind that this is a weighted average that excludes broadcast networks, pay-per-view and some a la carte channels (we looked at basic, HD, premium and regional sports networks). Most consumers get well over 100 channels in their multichannel package.

During the past 20 years, the cost per channel has grown at a CAGR of 2.0%, from 26 cents per sub in 1995 to 39 cents in 2014.

Of the 100 channels covered in our survey, there were roughly 14 each in the arts & entertainment, general/variety and sports genres, and about 10 (in the 9-to-11 range) each in the family/kids, music, news and niche categories.

Looking at the cost side, though, the picture is much different. In 2014, sports channels are indeed the most expensive; they cost on average $1.03 each. However, there is a wide range from those like Outdoor Channel, Outside Television and Sportsman Channel at 4 cents to 5 cents per sub per month to ESPN at $6.04/sub/month.

Those in the film genre are the second most expensive at an average of 81 cents, followed by general/variety at 39 cents,

family/kids at 29 cents and news at 28 cents — again, there is a wide range of prices in each genre.

Looking at growth, sports channels have increased prices at an average CAGR of 5.1% per year between 2000 and 2014. (However, they are expected to grow at a CAGR of 7.3% per year between 2014 and 2018.)

The 2000-2014 sports CAGR is actually behind the 6.7% increase in the niche genre — although many of these have grown off of an extremely low base — and news at 5.6%. The general/variety segments have grown in the same ballpark as sports, up 5.0% on average between 2000 and 2014.

There have been an increasing number of bidders in recent years for large sports rights deals as cable networks have become more and more profitable. The average cash flow margin at cable networks has grown from less than 30% in 1995 to around 40% in 2014.

With FOX Sports 1 and FOX Sports 2, NBC Sports and the Turner Networks (TBS/TNT, etc.) now in the market bidding on sports rights along with ESPN and the broadcast networks (which have more money to spend as they share in retransmission consent payments), the market has gotten fiercer than ever.

And although it is not as large of a market as the national scene, the RSN market has become increasingly competitive as well. Once content to simply license their local broadcast rights to an RSN, teams are now demanding equity in RSNs, further complicating the situation.

Everyone has read the numerous trade articles about fights between various programmers and multichannel operators. There is no question that these battles will continue to go on. As cable network margins have expanded from 30% to 40% over the past 20 years, margins on video for cable operators have declined precipitously during the same time frame, dipping from 76% in 1995 to less than 44% in 2014.

One way multichannel operators are hoping to deal with declining margins is to add on additional fees to the monthly bill in the form of sports surcharges or sports and broadcast surcharges, the latter to combat rising retrans fees.


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DIRECTV first implemented a monthly sports surcharge of $3 to some of its subscribers in September 2012. The charge was initially passed on to the customer to account for the rising costs of RSNs. The result was a surcharge to customers on four of its packages — including Choice and Choice Plus — that live in areas with more than one RSN. DIRECTV will be expanding the $3 surcharge to other tiers in the upcoming spring season of 2015.

In February 2013, Verizon Communications Inc.’s FiOS became the next pay TV provider to pass along the rising sports fees to subscribers, charging $2.42/sub/month for customers in California, Texas and Florida, and in all remaining states in March 2013, except Maryland and Virginia, where the fee was passed to subscribers a month later. Not all states were treated equally, however, as a fee of $3.48 was passed along to subscribers in the New York market.

Cablevision Systems Corp. was the next pay TV provider to implement a monthly sports surcharge in April 2013, passing along a fee of $2.98/sub/month. The fee was raised by $2 in May 2014 to $4.98 and most recently by another $1 to $5.98 as of January, this time referred to as a “Sports and Broadcast TV surcharge.” This represents a 100.7% increase since the fee was introduced, outpacing the growth of the provider’s various other services and packages.

Multichannel operators will likely continue to try and divide the bill into small pieces like this, where they can raise the price in the double digits for surcharges and equipment rentals but not raise prices dramatically on the overall video bill.

Other examples of recent additions to the bill include RCN Corp., which in January 2014 began charging subscribers a sports surcharge fee of $1.97/sub/month, which was then increased by $2 to $3.97 starting in January 2015.

Comcast Corp. also introduced a “Regional Sports Fee” of $1/sub/month to subscribers, beginning in January.

Cable One Inc. followed the trend, introducing a $2.94/sub/month sports surcharge in January.

Mediacom Communications Corp. began charging subscribers a variable sports surcharge depending on location of an average of $1.83/sub/month in September 2014 and is planning on raising that by 20 cents to an average of $2.03 “on or about” Jan. 15.

WOW! also began charging a $2/sub/month sports surcharge fee in January.

Charter Communications Inc., already at the high end of the spectrum, is only raising its “Broadcast TV Surcharge” by 25 cents/sub/month in 2015, but that will bring it to a hefty $5.25 per sub per month.

DISH Network Corp. has no surcharge, but management has said in the past that it is inevitable that the company will have to implement one at some point.

Time Warner Cable is another one of the latest to jump on this bandwagon. It is implementing a $2.75/month sports surcharge, as well as raising its broadcast surcharge from $2.25/sub/month to $2.75/sub/month.

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Sports Costs White Paper

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