Friday, May 1, 2015, 8:45 AM ET|Posted by Will Richmond
We've seen a lot of surprising moves in the pay-TV industry in 2015, but at the top of the list has to be how Verizon is trying to put ESPN into a public relations headlock with its new "Custom TV" packaging plan.
If you haven't been watching this closely, Verizon announced "Custom TV" last week. Under the plan, Verizon FiOS subscribers can take a base package of 45 channels, including the 4 broadcast TV networks, for $54.99 per month, and get 2 "channel packs" which are smaller groups of genre-based such as lifestyle, Entertainment, News & Info, Sports, etc. Additional channel packs are $10 per month.
The big controversy here is that ESPN, ESPN2, Fox Sports, NBC Sports Network and regional sports networks ("RSNs") are not included in the base package. All of these sports networks immediately objected to Verizon's packaging plan, on the grounds that it violates their contracts with Verizon. This past Monday, ESPN ratcheted things up, suing Verizon in New York Supreme Court.
From my experience, it's very difficult to believe that Verizon has the right to unbundle ESPN as it has done, under any reasonable interpretation of their contract. ESPN has long had contractual guarantees to be carried on the most popular tier of a pay-TV operator's service and it's awfully hard to see how Verizon wasn't subject to that provision.
However, with Custom TV, I think Verizon has hit upon a strategy that is brazen, unconventional, and quite possibly, already starting to succeed. In my view, Verizon doesn't just want to gain more flexibility over how it packages TV networks to better compete with OTT providers like Netflix, Amazon and Hulu. I think it's aiming far higher: trying to bring to heel expensive sports-oriented TV networks that have become an albatross to their video P&Ls and the primary cause of pay-TV's spiraling cost.
This is all part of an issue I have been writing about on VideoNuze for years - the billions of dollars per year that non-sports fans have been paying for sports-oriented TV networks that they don't watch. As I've explained, the dirty little secret behind the massive salaries pro athletes are paid and the rise in pro sports franchise values can all be traced directly to lucrative broadcast/cable TV rights deals that are subsidized by non-sports fans as a result of multi-channel bundling.
This consequences of this "sports tax" - which can be hundreds of dollars per year per subscriber in certain markets - have taken on increasing urgency for pay-TV operators because they fully recognize that entertainment-oriented, budget-minded and younger viewers all now have unprecedented, inexpensive OTT choices. If you don't care about sports, an $8 per month Netflix subscription (plus broadband) looks pretty appealing. As I recently wrote, the launch of HBO Now has taken the risk of cord-cutting and cord-nevering to an entirely new level.
Verizon has provoked ESPN and the other sports networks into high-profile actions that will ultimately shine more light than ever on the sports tax, an opaque issue only a small minority of pay-TV subscribers are aware of. ESPN and others are surely reluctant to have the sports-tax become a mainstream concern, not only because it makes them look greedy and anti-consumer, but also because it would fuel a cycle of even more pay-TV subscribers re-examining their monthly bill and inevitably dropping pay-TV (which of course diminishes their revenue).
An even bigger wildcard is that a progressive legislator like Al Franken could use the Verizon initiative as a prompt to open some type of inquiry into industry bundling practices (remember - between net neutrality passing and the Comcast-Time Warner Cable deal being rejected, there's currently a strong pro-consumer regulatory context).
But if ESPN and the others were not to do anything, that would be an even riskier route. If Verizon were to be given a pass to put expensive sports networks on a separate tier, many other pay-TV operators would likely try to do something similar. That would create a situation where sports networks could suffer massive declines in their revenue, as only sports fans choose to subscribe to these networks, rather than ALL pay-TV subscribers being forced to, as is currently the situation. This scenario should send a shiver down the spine of every single team, coach, player, owner and other constituent in the sports ecosystem.
Ironically, the Verizon Custom TV package isn't even that compelling from a subscriber's standpoint. Any rational subscriber would quickly conclude it's more cost effective to simply subscribe to the full Verizon lineup (even Sling TV, which is seriously deficient, is a better value).
So it's extremely unlikely Custom TV will get much traction. But that's beside the point. Verizon is pursuing a very gutsy strategy here that already appears to be working. Peruse the reader comments of this WSJ article from Monday and the ESPN-loathing is already on full display. Major media outlets will be focusing on this angle in short order, shedding more light on the sports tax issue. Verizon is no doubt hoping other pay-TV operators will follow its lead and start an anti-sports insurrection.
In a year when the pay-TV bundle is under attack from all sides, the Verizon move is by far the most startling one yet. It appears to have put ESPN and the other sports networks into a peculiar and very sensitive PR situation. Predicting what might happen next in the fast-evolving pay-TV industry is getting harder all the time.
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