A FEW YEARS AGO, when digital video recorders first appeared on the scene, many predicted big trouble for the TV industry. Broadcasters sued or threatened to.
After all, if people could record their favourite shows and zip through commercials when watching them hours or even days later how long would it take advertisers who want their messages to be seen and acted on rightnow to lose faith in television's all-encompassing power?
But while many feared the power of the DVR (or PVR), those on the sports side almost welcomed it as an affirmation of the drawing power of that content. They argue that sports are bulletproof because, unlike NCIS or Big Bang Theory, they need to be seen live.
If anything, the live nature of sports should increase its value to advertisers and that certainly appears to be the case. Ad revenues are up and rights fees paid to leagues and teams are stratospheric as the rights holders cash in on their properties' increased value.
“Rights in Canada are escalating at a far greater rate than the revenues can match and I see that as problematic going forward." – Keith Pelley
The DVR however, now seems like a quaint technology gap-filler whose time is passing. Since the first of those units arrived about a decade ago via pioneers like TiVo and Replay and later from subscription TV companies like cablecos, there has been an explosion of technology that threatens to undermine the bedrock that supports the broadcasting world.
Online piracy has created additional panic as more and more viewers — especially those coveted under-30s – have started cutting the cord with cable and satellite providers (or who complete school and decide they never need subscription television, just a broadband connection). The emergence of virtual broadcast net
works, mainly Netflix, has siphoned viewers away from the traditional providers.
Then there are threats from the likes of Apple and Google entering the broadcast world to cut the pie into even smaller pieces, or worse, steal much of that pie away from the traditional system thanks to the newcomers’ vastly better user interface and easy anytime, anywhere, any device capabilities.
Despite all of these new threats, and the prospects of others yet to come, broadcasters remain firm in their belief that sports will not only continue to be the strongest brick in the broadcasting wall but will become even stronger in this brave new world. “I don't think the belief that the live nature of sports will drive the TV business has changed," says Phil King, CTV's president of programming and sports. “In fact, I believe it's going to increasingly separate itself from the pack. Sports is the defence against cord-cutting.
“Five years from now, only sports will draw the big numbers. And if you're an advertiser and are having a sale on Saturday, you have to get your message on that Friday night or Saturday game."
CBC Sports head Jeffrey Orridge says that as long as sports continue to draw huge, passionate audiences they will continue to drive the business because advertisers need what they can deliver. “Advertisers and sponsors do understand that live entertainment is at a premium and certainly live sports entertainment is even more of a premium because of the drama, the unpredictability of sports," he says. “That's why people want to watch it live. They don't want to miss the moment.
“There is a premium that they're willing to pay for that type of content."
The numbers bear that out.
“Five years from now, only sports will draw the big numbers. And if you're an advertiser and are having a sale on Saturday, you have to get your message on that Friday night or Saturday game." – Phil King
Canada's sports channels, led by Bell-owned TSN and Rogers Sportsnet, are the priciest maintstream channels on the BDU lineups after premium movie channels like HBO and TMN. They perennially rank at the top of the subscriber and ratings lists. Subcription and ad revenues continue to grow. TSN’s ad sales in the 2012 broadcast year were $133.1 million. In 2008, that figure was $94.2 million. Its overall revenues in that 12 month span (ended August 30, 2012, the latest available from the CRTC) rose 29.5% over 2011 to $375 million.
But if there is a dark cloud on this sunny horizon, it's not just online piracy like IP masking, DVRs, the fear of cord-cutting or even the federal government's recent promise to force cable and satellite companies to offer all channels a la carte.
It’s the rapidly escalating rights fees.
It's a given that rights fees are always rising, but the pace of that escalation is shows no sign of abating. When TSN signed a ne
w deal with the Canadian Football League this year, the cost was $200 million for five years – a 250% increase over the previous deal.
Fox, ESPN and TBS agreed last year to fork over $12.4 billion for Major League Baseball rights – double the asking fee the last time.
When the National Hockey League finalized its new $5.2 billion, 12-year deal with Rogers Communications last week, the league will be taking in approximately 215% more per season than the last time around from its old deals with the CBC and TSN.
On the rare occasion when major rights decline in value, there are usually extenuating circumstances. For example, according to sources, CBC paid between $80 and $90 million for the rights to the 2014 and 2016 Olympics Games – substantially less than the $150 million CTV overpaid for the previous package.
While that deal included a home Games – Vancouver – and CTV spread out some of the risk by bringing in broadcasting consortium partners, the Games broadcasts and multiplatform efforts lost millions of dollars. This time around, CBC outbid other broadcasters.
But again, whoever gets the next package will probably pay more than the CBC did this time.
But is it sustainable? “Rights in Canada are escalating at a far greater rate than the revenues can match and I see that as problematic going forward," says Rogers Media president Keith Pelley in an interview with Cartt.ca prior to the announcement of his new NHL deal.
One of the contributing culprits in the rise of fees is the desire to bring sports to everybody, wherever they want it, on phones, tablets and laptops – and the belief by the leagues and other rights holders that this will be a brand new cash-cow instead of just another TV screen to serve. The broadcast networks (and their vertically integrated owners) are pushing digital, mobile and tablet capabilities to users and ad clients and the leagues are anxious to cash in, too.
“We're not going forward to acquire rights that don't include TV everywhere," said Pelley. “The consumer wants to consume the product on their device at their choice. We won't purchase rights that don't include TV everywhere."
How much these rights may be adding to the total cost is anybody's guess, but they surely do add to the price tag – and since we
're still in the early days of mobile advertising and hybrid subscription models, the real problem for the network players is that so far, the digital side isn't paying for itself. “It's what the public wants, but I've yet to see a golden goose," says King. “I suspect we're too early in the game, but it's not as lucrative as people assume."
Pelley agrees.
“Right now we're in the infancy stages of mobile advertising, similar to TV anywhere and tablet advertising," he says. “Until that becomes robust enough to become meaningful it's just part of the regular negotiations."
Orridge says there is a pot of gold at the end of the rainbow, but nobody's certain when it will be found. “There are several reports that say mobility rights will be a ‘hockey-stick’ model," he says. “It will chug along at a certain pace and suddenly explode depending on new devices or more proliferation of adoption. That's up for debate, but that could mean more value for that."
Until then, all networks are hedging their bets by securing more and more longer-term deals on sports properties in order to get cost certainty and keep things away from the opposition. The last NFL contract extension with U.S. broadcasters was a nine-year agreement. “The trend is to go into 10-year packages rather than two or three years, says IMG Canada vice-president Peter Sisam. “Wimbledon is 10 years. The U.S. Open tennis is 10 years.
“You've got to keep feeding the elephant and people are willing to pay a bit of a premium to keep it away from the competition."
Doing long-term deals gives the networks a bit of breathing room as they try to figure out exactly where things are headed because in truth, no one knows. “You want the rights for a long term, but you're uncertain of where it's going and you want the time to determine how to monetize it," says Pelley, who now faces the biggest challenge in Canadian sports TV in trying to figure out where multiplatform viewing is going and how to make a profit from something he’s just committed $5.2 billion to.
Ultimately though, the consumer will have to pay for these long-term deals and rapidly rising rights fees. Since ad rates aren't keeping pace (and can’t, really), the networks' only other source of income is subscriber fees.
But that presents a real challenge thanks to Canada's unique broadcast system, which regulated subscriber fees for some time so Canadian sports channels are only now able to demand higher returns from carriers. For example, for over a decade, as long as carriers placed TSN on basic cable, it only had to pay the channel $1.07 per subscriber per month. When regulation of the sports genre went away in 2010, carriers have since seen those fees soar and took their fight to the CRTC.
The Commission also responded to the Bell-Astral deal with conditions saying that wholesale agreements have to be passed through the Regulator – and hammered out well in advance. All the while, if there is a fight, the regs say that neither the broadcaster nor the carrier can remove a signal from their customers/viewers.
“The U.S. has a free market and we have an artificial market," says King. “The cost of sports is going up the same way it is around the world. Everywhere else, you find out what the market will bear.
“In Canada, we're constricted by the regulatory system that we're not even allowed to test that market."
Eventually, King says, that could result in the public having less choice.
“If the regulators think we should be a $2 TSN and we believe we are delivering a $3 TSN, eventually it'll just dictate that we have to give people a $2 TSN and our competitors will be in the same boat," he says. “We're not going to operate a non-profit organization."
