Tuesday, 21 June 2016

How long can cable television support the business of professional sports?

This is a good basketball time to be from Northeastern Ohio. This blogger, having grown up in the Cleveland, Ohio area, is basking in the victory of the hometown Cleveland Cavaliers in the finals of the National Basketball Association playoffs. The final game of the series on Sunday evening attracted one of the largest television viewing audiences ever for a basketball
game. Lebron James, the leader of the Cavaliers, makes Croesus-like amounts of money. While others do not earn his gargantuan sums, the compensation being paid to professional athletes is such, that it raises the question: is this sustainable?

Based on a recent piece by Louis Menand (“Show Them the Money: Is the sports business a bubble?”) about the financial structure of professional sports, which appeared in the May 16, 2016 issue of The New Yorker magazine, the answer may be “no”. Relying on the analysis set forth by Matthew Futterman in his book, “Players: the Story of Sports and Money, and the Visionaries Who Fought to Create a Revolution”, Menand describes how this salary cost structure, with its overreliance on broadcast-based revenues, may be leading professional sports to a deep and painful fall.

The principal reason for this dystopic vision of professional sports going forward is, according to Futterman, that the industry has overshot the scope of its audience. In Futterman’s words, “One of the great illusions of the sports industry is mass fascination.” The intention is not the Olympics or the World Cup, or even Euro 2016, all of which still attract a large audience for a short period. But what about the rest of the time? It is claimed that the day-by-day audience for most sports is in fact, “tiny”. Thus, far from the spotlight of the playoffs, the NBA attracts an audience of less than 3% for its local games.

The only exception to this is that National Football League, which is distinguished by the fact that its games are broadcast via television networks, which means that it is possible to get a reasonably accurate indication of actual viewership. For most other sports, however, broadcasts of games are provided through arrangements with cable companies, and in that lies the nub of the problem. Why is this so? It all has to do with bundling. As anyone who pays a monthly bill for cable (at least in the U.S.) knows, a viewer is offered a bundle of programs, many of which the viewer has no interest in ever watching. No matter—the bill is then split according to a formula among all the channels provided by the carrier.

It transpires that approximately 20% of the average cable bill goes to the channels that broadcast sporting events, which then pays out to the various sports teams a certain (and substantial) amount for the right to broadcast their games. These amounts are paid whether or not any given viewer actually is watching a game, with the result that the sums paid out to the teams bear no direct relationship to the actual number of viewers. In the words of Menand, this “means sports are currently enjoying a very large subsidy from a public that doesn’t watch them.”

But this subsidy may be coming to an end. According to Menand, the cable industry may be on the way to “disaggregation”, which means that viewers will then pay only for the programs that they actual view. If this comes to pass, the sums being paid will reflect the small numbers of viewers for all sports except for American football, and these amounts will not be able to support the current salary structure. What will happen to the sports teams in a post-subsidy world is a matter of various speculation, none of which is positive for the sports industry.

Something that is not sustainable ultimately cannot be sustained. Is this the path for professional sports, based on its current funding model?

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