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Sports Giants Like ESPN Suffering From Cord Cutting, Cord Shaving

The following post comes from Kagan, a media research group within S&P Global Market Intelligence. To learn more about this research, please request a call.

When it comes to TV network economics, sports nets are in a league of their own. Given that live sports are DVR-proof, national sports networks like ESPN pay leagues like the NBA and NFL an exorbitant amount of money to broadcast games and keep them away from competitors like FOX Sports and NBC Sports.

This business model has worked, but the high license fees distributors pay have taken its toll on even giants like ESPN. The five major English-language ESPN networks lost a combined 58.9 million subs since 2009 due to cord cutting and cord shaving.

The high cost of live sports is being handed from network to operator to consumer. Programming costs per subscriber, which is calculated by dividing a network's programming expenses by the average subscriber universe, for ESPN in 2016 is estimated at $81.16, while the weighted average for all networks is just $4.73. Meanwhile, networks tied into expensive long-term contracts for sports rights have been trimming costs in other places, with ESPN shedding staff to compensate for a contracting multichannel subscriber base.

Sports programming costs as a percentage of cable ARPU was an estimated 24.1% in 2016, up from 23.2% in 2015. This has increased at a CAGR of 7.9% since 2002. The average sports programming cost per subscriber grew at an 11.9% CAGR during the same time period, from $3.50 in 2002 to $16.88 in 2016. We expect this growth rate to moderate to 7.8% from 2016 to 2020, down from a 10.1% CAGR from 2012 through 2016.

Programming costs analysis for MSO

Kagan, a media research group within S&P Global Market Intelligence, 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.

The average number of channels each consumer receives grew from roughly 27 in 1995 to 101 in 2016. This is a weighted average that includes basic, HD, premium, and regional sports networks. It excludes broadcast networks, pay-per-view, and some a la carte channels. Most consumers get well over 100 channels in their multichannel package. The times are changing, however, as the growth rate for the past several years has slowed starting in 2014. Year-over-year channel growth peaked in 2002, and growth was steady at about four additional channels per year for the next 11 years. In 2014, growth slowed to two additional channels, then down to one net new channel in 2015, and again in 2016.

Click here for programming costs data in Excel format.

Average number of channels per multichannel subscriber

The overall cost per channel has grown at a CAGR of 2.6% from 26 cents per sub in 1996 to 44 cents in 2016. Of the 101 channels covered in our survey, there were 15 dedicated to sports, with arts/education and general/variety right behind with roughly 14 each.

Average number of channels multichannel sub by genre

In 2016, sports channels were the most expensive at $1.12 per sub per month on average. However, there is a wide range from those like Outside Television, Outdoor Channel, and Sportsman Channel at 5 cents to 6 cents per sub per month to ESPN at $7.21 per sub per month.

The NFL Network and Fox Sports 1 are the only other national sports networks that charged over $1 per sub per month in 2016. The NFL Network has the rights to the regular season "Thursday Night Football" games; however, 10 of those games are also broadcast on either CBS and NBC.

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Fox Sports 1 was able to demand a higher carriage fee from operators by securing valuable sports rights, including MLB playoff games.

Sports channel costs have increased prices at an average CAGR of 5.1% between 2002 and 2016, and we expect them to grow at a CAGR of 6.4% between 2016 and 2020.

The 2002-2016 sports cost CAGR is actually behind the 6.9% increase in the niche genre, although many of these have grown off an extremely low base, and it's also behind news at 6.8%. The general/variety segments have grown in the same ballpark as sports, up 5.5% on average between 2002 and 2016.

There are a growing list of bidders for sports rights deals as cable networks have shown increases in profitability, with newer players like beIN SPORTS driving up the price of some soccer content, for example. The average cash flow margin at cable networks has grown from less than 30% in 1995 to more than 40% in 2016.

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