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How Technology Disruption Could Devalue Sports Franchises

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Twenty years ago, I wondered why sports teams were being sold for hundreds of millions of dollars, a seemingly exorbitant amount. Today, almost every NFL team is worth at least one billion dollars, according to Forbes. Most large market Baseball and Basketball teams are now worth over $500 million.  Why the high value? Is it only wacky owners like Mark Cuban and Daniel Snyder who are willing to pay those high prices? The reality is they’re savvy and have made a wise investment. A few years ago, the NFL negotiated with the major networks and sealed a $27 billion deal in television contracts, according to the New York Times. These rights, as well as the local sports programming fee (commonly known as the sports tax), have helped provide lucrative revenue streams whether the viewer is watching or not. By some estimates, this is costing subscriber households $100 per year.
The Cord cutting band wagon has been accelerating for the last few months, with MoffettNathanson Research estimating 31K customers have cut their cable television subscriptions. That may not sound like much, considering Time Warner Cable generates $20 billion a year, but it’s concerns Verizon Fios, who launched slimmed down offerings for customers last month, increasing options for subcribers.  While it’s not quite “pay for what you want”, it’s a step in the right direction for consumers.
While cable and phone companies are starting to address consumer demand for increased choice, sports teams are at the highest risk since consumers pay the most for sports channel access. According to SNL Kagan, Yankees Entertainment Sports charges the cable companies $2.99 per month for access. That’s almost $36 per year per household. When you factor in the 7.3 million households in the New York Metro area, that’s  half a billion dollars per year for YES, whether someone is watching or not. For a network that averages 68K viewers during primetime, this clearly shows the vast majority of viewers who pay for the service aren’t tuning in. While the Yankees currently own 20% (Fox Owns 80%)  20% these days (Fox owns 80%), there’s a vested interest for the Yankees in making sure the entire New York Metro area pays this fee.
However, with consumers gravitating to services like NetFlix, Hulu and the recently launched HBO Now, we’re seeing sports leagues react. The NFL, for example,  is responding with their games being offered on Verizon Mobile. The reality is, however, these new services are not new revenue streams for sports teams, but a replacement. For example, if  $3MM million households decided to drop the YES network, this would result in $108 million in lost fees. To make up that gap the sports networks will have to offer their core fan base new experiences they’re willing to pay for, as well as creatively sell the franchise abroad, much like the Manchester United has done in the states.
Either way, I don’t see how these fees can continue to last. This is one issue Libertarians and Liberals can agree on.

Written by Derek Reese

June 8, 2015 at 3:04 am

Posted in Uncategorized

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