I've long assumed that live sports carried on cable TV networks (e.g. ESPN, Fox Sports, TNT, TBS, NFL Network, regional sports networks, etc.) would be a key firewall against cord-cutting since the games they air are unavailable online. In other words, if you're a sports fan, dropping your pay-TV subscription would be unthinkable. While I still believe that's mostly true, recently I've started wondering if it's possible that sports actually may also be an albatross for pay-TV operators, limiting their ability to effectively compete with online-only alternatives.
I use the word albatross because pay-TV providers actually have very little flexibility to offer non-sports fans lower-priced packages that don't include sports-oriented channels. In fact, the most surprising aspect of last week's announcement by Time Warner Cable of a new lower-priced tier called "TV Essentials" it's testing is that it will exclude ESPN, which is virtually unheard-of in pay-TV packaging. Because the underlying deals that cable networks have with sports leagues and rights-holders are so expensive, the networks try to get carried on the most popular pay-TV service tiers, thereby ensuring the highest number of subscriber homes (basic cable networks are paid by distributors on a per subscriber basis, so the more subscriber homes, the higher their revenue).
Obviously, the problem with this model is that pay-TV subscribers who are not sports fans are effectively subsidizing those who are. And as the networks' underlying deals with the leagues/rights-holders have become ever more expensive, the subsidies are getting higher and higher. Networks' escalating fees are necessary due to the ever-higher player salaries. In effect, when you read about yet another astronomical player deal like pitcher CC Sabathia receiving $161 million over 7 years from the Yankees, or quarterback Tom Brady getting $78 million over 4 years from the Patriots, you can be sure that those salaries will be partly funded by more expensive cable TV deals. It is no coincidence that ESPN is by far the most expensive cable TV network, costing pay-TV operators more than $4/mo/subscriber.
Historically, most people who subscribe to pay-TV services haven't given much thought to what channels they watch or what the underlying cost per channel might be to their pay-TV operator. When they got their monthly pay-TV bill, they may have fumed a bit when there was yet another rate increase, but they would rarely be moved to drop their service.
Now however, there are several new factors at work that could undermine pay-TV's traditional sports subsidization model. First is that there are multiple over-the-top entertainment-centric choices (e.g. Netflix, Hulu, iTunes, etc.) that are relatively inexpensive and offer lots of anytime/anywhere viewing options to non-sports fans. Second is that many people are financially distressed by the ongoing economic downturn and therefore are examining every discretionary household expenditure. For those who do the math on what they spend on pay-TV each month, what shows they actually watch, and what cheaper alternatives may be available to them, there are tempting savings available by cutting the cord. Last but not least, there are still lots of games available on free broadcast TV, plus many leagues (e.g. MLB, NBA) have begun offering their games on a subscription basis through over-the-top and mobile devices.
So does all of this mean that we'll see a wave of cord-cutting? If you believe recent research that suggests live sports viewing is extremely popular and therefore indispensable, then probably not. But if you believe some consumers are getting savvier about their choices and pruning their pay-TV services, then probably yes. You could argue that by rolling out its TV Essentials trial, Time Warner Cable believes the latter, and is trying to figure out how to protect against cord-cutting and its mounting quarterly subscriber losses. However, while ESPN is being excluded from the trial package, one wonders whether the lack of HD programming in TV Essentials, and the absence of traditional dual and triple-play discounts for TV Essential subscribers - both of which significantly reduce the trial package's appeal - were quid pro quos Time Warner Cable agreed to in order to get ESPN to consent to being excluded. If this is the model for future non-sports packages, they are unlikely to meet with much success.
It is still very early days in the evolution of over-the-top online-delivered video to TVs, and as I've argued, there's little hard data on cord-cutting available just yet. However, I suspect that as the cord-cutting debate continues to heat up, access or lack of access to live sports is going to play a very significant role in how individual consumers determine what service is right for them. For pay-TV operators to compete effectively they'll need maximum flexibility in serving both sports and non-sports fans alike.
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