Conference Realignment Fool's Gold?

Because you are reading this on a sports site, the chances are you are going to find some of things I'm about to tell you completely unbelievable. You (like me) are a sports fan and most everyone you know watches sports so this will seem implausible.

According to research by Nielsen, reported in the Wall Street Journal, only about 4% of Americans regularly watch any sports other than the NFL.

The most watched college football game last year was the BCS championship, it was the most watched sports event outside of the NFL and the Olympics. It was seen in 24 million households out of the 99 million (roughly) homes that have ESPN. In other words more than 75% of the homes that could have watched the game did not. The Super Bowl was watched by more people than ESPN has customers. The second most watched game (NFC championship) drew about half as many viewers.

We have just completed an extremely tumultuous period of realignment in college football in the pursuit of ever larger television rights fees. Conventional wisdom says that rights fees have skyrocketed because sports are DVR proof. People watch sports live so they don't skip commercials but many estimates place advertising as only 25% of ESPN's revenue.

ESPN generates as much as $5.50 per month per subscriber (less under older agreements) so that is about $60 per subscriber times 100 million or so subscribers. If the 25% figure for ads is accurate, their ad sales are about $2 billion a year vs. $6 billion in subscription fees.

There is some speculation that "cord-cutting" (giving up cable/satellite/IPTV (ATT Uverse, Verizon Fios) will be the future but cord-cutting isn't simple to do and viewers wishing to see the major networks or local programs need an antenna which isn't always a simple answer in many places. The transition to digital TV makes it harder for many people to get an acceptable over-the-air signal and in some places it means losing access to one or more national network.

The greater danger isn't technology, but rather household budgets.

There was a bit of a stir as Wall Street learned that Wal-Mart, Dollar General, and Family Dollar Stores, three businesses expected to thrive in a sluggish economy as the go-to stores for people trying to save money have all had falling earnings. Initially it was thought to be a result of slow income tax refund processing and the end of the payroll tax holiday but sales have not recovered as their customers are making fewer discretionary purchases.

Since the start of the recession discretionary income has fallen in the bottom five quintiles of US earning. In simpler terms, 80% of Americans have less money after paying rent/mortgage, utilities, food, and transportation costs than they did five years ago and the outlook is for those numbers to continue to fall.

Currently Dish Network, Comcast, ATT Uverse and likely others offer one or more deeply discounted TV package that does not include ESPN. When you consider that only about 4.5 million households regularly watch any sports other than the NFL and about 100 million have ESPN and about 91 million households have less disposable income than 5 years ago, there is likely a lot of potential homes that would be willing to give up ESPN to save money if their TV provider offered them the right package.

This is some big money we are talking about. How much? Let's say 10% of current ESPN subscribers became cord-cutters or opted for a low cost cable/satellite/IPTV package that didn't include ESPN. The loss of revenue per year would be more than what ESPN currently pays the ACC, SEC, and Big XII each year.

The picture becomes even more troubling for Fox. The company is launching Fox Sports 1 in a matter of weeks and expects to reach about 90 million homes. The network hopes that paying top dollar for attractive events will allow them to increase their reach and increase the fee charged per subscriber, but if the market is unable or unwilling to absorb those added fees the attractiveness of limited TV packages without sports channels will increase.

Less clear is what the American taste in sports will be in another decade or decade and a half. You likely have living relatives who recall a time when the big three sports in the US were baseball, boxing and horse racing and the NFL was seen as an inferior product compared to college football.

Last year of the 50 most watched sports events that weren't the Olympics or NFL, 15 were college football games. There is no guarantee that will be true in a decade. College football might grow, but it might lose viewers as well.

With the exception of the top tier rights of the Big 10 that expire in 2016, most of the power conference TV deals expire in the 2024 to 2027 time frame. If ESPN and Fox Sport are struggling to hold on to subscribers and command large subscriber fees, the trend of ever escalating rights fees may be over.

College football might move into a model similar to UFC where top events are pay-per-view while lesser events are available to more viewers or it might be in a scenario like the NHL or MLS where smaller audiences command lower fees and less air time.

The bottom line though is if TV providers take to heart the research showing 96% of Americans do not regularly watch sports outside of the NFL, the leverage that ESPN has held and Fox hopes to soon hold may be greatly reduced and our last big round of a realignment may soon seem to be as foolish as investing in AAA rated mortgage derivative securities.

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