Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (25 page)

These tactics have clearly won Comcast some advantages. In the end, it negotiated a price for NFL Network (approximately fifty cents a subscriber per month) that was far below the rate it had previously paid or the rate paid by most other cable systems. Comcast's friends also did well in this transaction—large cable systems that do not directly compete with Comcast (including Time Warner and Cablevision) had their contracts renegotiated to lower prices.
¹⁷
As Andy Schwartzman, one of the consumer advocate witnesses at the February 2010 hearing, told the Senate Judiciary Committee: “Even the NFL, with its vast resources, couldn't crack the Comcast stranglehold without lawsuits, FCC proceedings, and years of uncertainty before it reached a negotiated settlement which was less than what it wanted.”
¹⁸
As a result of a settlement in 2009, the NFL Network ended up on a lower-penetrated digital tier that reached about 11 million customers. This was better than the Siberia of a premium sports tier, but not what the NFL had sought from Comcast.

The sports industry has learned its lesson. When MLB started its own network in 2008, five years after the NFL launched its network, it gave equity to Comcast right away while asking for distribution. No one needed to be beaten up twice.
¹⁹

When Comcast acquired rights to show NHL games in 2011, the company paid an enormous premium—$200 million, far more than the $60 million ESPN was willing to pay. It was, in a sense, a foreclosure premium, a bet that hockey would be a prize that ESPN eventually would not be able to do without. (Rupert Murdoch made the same bet when he bought exclusive
rights to NFL broadcasts on behalf of Fox—and lost $350 million—in 1994. He dismissed the loss, calling it “an investment” in altering audience perceptions of his then low-rated network.) Comcast chief operating officer Steve Burke must not have been worried about the NHL's low ratings or concerned that Comcast paid more than ESPN would have for the same rights. Hockey has a deep, passionate fan base, and Comcast was game to challenge ESPN with hockey as its anchor sport. With the NBC Universal merger, hockey has paid off: Thanks to a tw0-billion-dollar deal with the NHL, the new NBC Sports Network cable channel will have up to a hundred regular-season games to air in primetime each year for the next ten years. NHL television ratings in the United States climbed 84 percent between 2007 and 2011, and the league's seasonal revenue is up to nearly three billion dollars.
²⁰

According to an article published in the
Sports Business Journal
in 2010, “If the [Comcast-NBCU] deal is approved, the sports industry stands to be one of the biggest beneficiaries,” because Comcast will “become even more aggressive buying up sports rights.”
²¹
That's exactly what has happened. Even more than run-of-the-mill sports rights, which are unique and valuable, Comcast wants rights to once-in-a-lifetime signature events because those are even more valuable. Just months after the merger between Comcast and NBC Universal was approved, Comcast spent $4.4 billion—outbidding Disney-ABC and News Corp.–Fox by a billion dollars—to acquire rights to the Olympics through 2016.
²²

Once Comcast has the rights it wants, its clustering strategy allows the company to charge higher prices for its sports content than non–vertically integrated regional sports networks can command. Portland is a good example. Before Comcast signed its ten-year deal, Fox Sports (FSN Northwest) held a five-year television contract for the sports rights in the area. At the time the Fox contract was signed in 2002, Comcast had little presence in the Portland area; it soon acquired AT&T Broadband and became the dominant pay-TV provider in that city. When the Trail Blazers television rights contract came up for bid for the first time after the AT&T-Comcast merger in 2007, Comcast offered
three times
the annual price (approximately $14 million per year) that Fox was willing to pay. Once it had the rights, Comcast reportedly asked competing pay-TV providers to pay more
than two dollars per subscriber per month in Portland for the same programming—substantially more than FSN Northwest had previously charged. Predictably, no other major pay-TV provider in Portland was willing to pay such high prices.
²³

Same thing for the NFL content. Although Comcast has not been able to exclude other pay-TV providers from NFL programming altogether, it has achieved its goal of forcing competing distributors (satellite, overbuilders, and telephone companies) to pay higher affiliation fees than it pays. When it comes to sports programming, Verizon, for one, is willing to stand up and talk about Comcast's abusive pricing and strategic withholding practices. In a 2011 document filed with the FCC, Verizon stated that Comcast had a “long history” of withholding access to regional sports networks.
²⁴

The same thing will undoubtedly happen with Olympics programming. Comcast is planning to make money by charging other video distributors, such as Cablevision and DirectTV, more for its Olympic-content channels (NBC-the-network, and Versus—now, predictably, renamed the NBC Sports Network—and any special Olympic channel created by Comcast), raising advertising rates, and charging for access to Olympic events through tablets, mobile devices, or whatever else somebody comes up with.
²⁵
It is a big play, but it is not surprising.

It is no wonder Comcast focused on sports in acquiring NBC Universal: the company could lock in long-term customers for its general-purpose pipe and high profits by locking up additional local, national, and international sports programming. And it could try to expand the sports dollar-extraction marketplace. In 2008, Brian Roberts was not considered one of the top hundred most influential people in sports—but in 2009 he and Steve Burke shared fifth place and Steve Burke alone was named the most influential person in the sports business at the end of 2011 by
Sports Business Journal
. The reason was the NBCU transaction.
²⁶

Murdoch was right: sports could be a battering ram. But this wasn't a one-sided joust. Comcast needed its own defenses against ESPN. ESPN was a Goliath, a master at extracting fees from customers, and Comcast needed leverage on its side of the deal.

Sixty years ago, sports helped television take off, and NBC led the pack: the first network television sporting event was NBC's
Gillette Cavalcade of Sports
in 1944. After several years in prime time, televised sports eventually moved to the weekends. There it attracted substantial advertising and sponsorship, and fees for broadcast rights skyrocketed. The 1970s rights for NFL, NBA, and MLB broadcasts cost $50 million, $2 million, and $18 million respectively; by 1985 those same rights cost $450 million, $45 million, and $160 million. Players were paid more, and sports was getting to be an enormous business.
²⁷

If the twentieth-century paradigm was sports driving television—people buying televisions in order to watch games for free—the twenty-first-century-paradigm is sports working with pay television to charge subscribers. These days satellite and cable providers can charge for both advertising and subscriptions, earning two streams of revenue, money that allows them to pay the sports leagues more for the rights to their games. In turn, the distributors can charge consumers to watch.

The pay-TV sports story starts with ESPN. Launched in 1979 by an unemployed sports announcer named Bill Rasmussen, ESPN began on a flyer, taking advantage of unused capacity on an RCA satellite. Initially, its all-sports programming was advertising supported and free to the many independent cable systems then in existence, reaching about 5 percent of all subscribers. After a change in management in the early 1980s, ESPN decided to start charging cable operators a small monthly fee. The major cable companies went along, setting the stage for an enormous twenty-first-century marketplace: today, pay-TV distributors pay on average between twenty and fifty cents for most cable channels they carry, though ESPN may be getting as much as seven dollars per subscriber.
²⁸

ESPN quickly became the largest cable network in the country, distributed to almost 29 million households by 1983. Its purchase by ABC in 1984 drove the story farther, because having distribution across the ABC-TV network as well as through the cable channel gave ESPN the negotiating strength (and cash) to sign up all the major sports leagues for broadcasting rights: NBA, NHL, NFL, and MLB all held long-term broadcasting contracts with ABC-ESPN during the 1980s. ESPN's rights to Sunday night NFL football and the Major League Baseball playoffs made it the top cable
channel starting in 1999. This trend has continued, with ESPN broadcasting all college football Bowl Championship Series games and many other major league events. ESPN makes about $6.3 billion a year, up from $1.8 billion a decade ago. It can bid for and win whatever game rights it wants.
²⁹
Or, at least, it could.

After witnessing ESPN's success, Comcast began its own efforts to build a sports portfolio. By buying the broadcast rights from sports leagues, it could then charge competing distributors to show the leagues’ games. Another strategy was to buy up teams and existing sports networks. Comcast moved to control Chicago by taking over Fox's regional sports network there, and replicated this strategy across the country. It now owns eleven regional sports networks (RSNs) that control all or most of the rights to carry local professional teams in baseball, basketball, soccer, and hockey in particular areas.
³⁰
As Richard Sandomir of the
New York Times
puts it, RSNs are now “the primary local outlets on which to see professional teams play.”
³¹
Comcast has control over RSNs in seven key regions across the country, all of them in markets where the company has 60 percent or more of the area's cable customers.
³²
Fans who want to watch their teams will have to sign up with Comcast, and Comcast's strength in video raises even higher barriers to entry for any business that wants to compete in providing wire for Internet access into homes.

Comcast's next move was its abortive attempt to purchase Disney, including Disney's ABC and ESPN channels, in 2004.
³³
According to Steve Burke, then president of Comcast Cable, Comcast's primary motivation for the deal was to gain control of ESPN, the only major national sports network. Burke described ESPN (and presumably sports programming generally) as a business with tough entry barriers: “ESPN is a great castle with a very big moat.”
³⁴
When the Disney deal failed, Comcast had to find other ways to reduce the pressure of ESPN's high fees. As the
Wall Street Journal
reported in 2011, Comcast's Versus cable channel premerger was small compared to ESPN: it was seen in only 80 million homes, while ESPN was seen in more than 100 million, and “Versus costs cable operators about 28 cents per month per subscriber … compared with more than $5 for the full lineup of basic ESPN channels.”
³⁵
Comcast executive Jeff
Shell said in 2009 that expanding Comcast's sports business was the “top of our list over the next five years.”
³⁶
NBC Universal provided the path.

The NBCU deal allowed Brian Roberts to do several things. It gave him the standing to win rights to broadcast the Olympics, thus keeping them out of ESPN's hands; he can bid up the cost of rights in sports events, thus raising ESPN's costs; he can pay less for ESPN, which he claims now receives about a quarter of Comcast's revenue, or $6 billion a year, by showing that he has substantial programming rights that ESPN needs; he can demand that competing video distributors pay more for new bundles of programming; and he can be far more aggressive in buying up rights to NFL, MLB, and NBA games.
³⁷
According to sports media analyst Dan Shanoff, Comcast can take all this content online under the TV Everywhere umbrella and instantly become a toptier online site “with massive growth potential in local media and social/mobile media.”
³⁸

What's more, because none of the program-access rights discussed in Chapter 2 apply to the online world, and because the FCC's jurisdiction to impose that kind of structure online is unclear, ESPN, which accounts for 75 percent of Disney's cable networks earnings and nearly a third of its overall earnings, may not be able to run footage from ComcastNBC events on its online site. Comcast can simply move its buffed-up NBC Sports Network (formerly Versus) online, with all the NBC content and all the regional sports networks added to it, and then put these shows behind a firewall, allowing only Comcast cable subscribers to see certain games or events. Even if ComcastNBC decided not to block content entirely through authentication, it could still use it to charge other cable providers higher prices for NBC content than the network currently does. These higher prices would be passed on to subscribers. There is a precedent for this behavior: NBC put certain Olympics events behind a firewall in 2010.
³⁹

The most obvious thing Comcast could do to hurt ESPN, though it is not likely to do so, is refuse to carry the channel or threaten to move it to a higher tier with lower penetration. Such threats would be useful in price negotiations for ESPN programming. But there are many other incremental steps Comcast could take. For example, what if ESPN's sports events were less interactive than Comcast sports events? Comcast already provides interactive access to
Sunday Night Football
games by way of Xfinity.com,
feeding viewers online chats, statistics, and analysis while streaming the games. As the owner of the pipe, it would be within Comcast's power to reduce interest in ESPN by slow-rolling access to similar functions accompanying access to ESPN content. Another scenario is that whatever sports content Comcast-NBCU acquired, like the Olympics, could be exclusive to Comcast-NBCU.