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 sub-scribers. 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 top-tier 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 Comcast-NBC 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 Comcast-NBC 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.
All the fees for advertising and subscriptions Comcast-NBCU can now charge will support the overall strength of Comcast's sports operations—allowing it to outbid other networks for future rights and, in turn, think of ways to raise its rivals’ cost of access to that programming. Comcast-NBCU's sports operations may not be bigger than ESPN, but the cable company may be able to squeeze CBS and Fox out of the game. And with hockey, Sunday Night Football, and the Olympics, it can put pressure on ESPN on a national scale.
More generally, the sea of revenue and exclusive arrangements that Comcast now commands will allow it to transform its premerger sports operations into must-have content (the NBC Sports Network) for most of the households in its regions—thus locking in those subscribers for the long term. This is the apotheosis of the TV Everywhere model: streaming sports content on an iPad to users who have paid for a cable subscription.
Comcast wants a share of the enormous revenues ESPN is now commanding. It wants its own quasi-online version of ESPN, but bigger, and it wants to be the only source of the sports content that it controls. As ESPN vice president Damon Phillips told the Chicago Tribune in 2008, with broadband Internet today, “people base their decision on speed and price. We think that will change, with content being the deciding factor.”40 The ability of a wire distributor to decide what content goes to which consumers carries with it the ability to monetize that content—charge differentially for it—and Comcast is unquestionably looking to have these additional revenue flows in place. As long as people are willing to pa
y a lot for sports, Comcast will keep making money.
There are lots of synergies here: Comcast grows sports, sports grows Comcast, and consumers are apparently willing to pay more every year for Comcast's sports packages. You might think that competition between Comcast and ESPN would drive prices down. But because Comcast controls distribution, Comcast can bid more for rights and pass those increases on to consumers; ESPN then has to bid more and pass those increases on to Comcast. The competition is over revenue share between ESPN and Comcast, and it is the sports lover who pays. The daily cost of bundled programming is about the same as a nice lunch. And who wouldn't enjoy a nice lunch, even if the only restaurant in town keeps raising its prices?
The Comcast-NBCU merger is probably only the first of a series of transactions that will integrate content—particularly sports content—with distribution networks. In that way, Comcast-NBCU now resembles Rupert Murdoch's News Corporation. That giant media conglomerate says proudly that it communicates with 70 percent of the world's population on a daily basis. In the United States, News Corp.’s profits from its Fox cable channels alone amount to around $700 million a year, and it also controls sixteen RSNs, 20th Century Fox, vertically integrated satellite distributors in Italy and the United Kingdom, the Wall Street Journal, and 45 percent of Hulu, among many other holdings.41 News Corp. has been clear from the beginning of the convergence era that it sees subscription models as the future. It is not enthusiastic about ad-supported online content: “Good programming is expensive,” Rupert Murdoch has told shareholders. “[It] can no longer be supported solely by advertising revenues.”42 Free content, to Murdoch, is a joke. Only the 2011 phone-hacking scandals involving Murdoch and his News of the World stopped News Corp. from buying BSkyB and its premium sports channels, and using them to squash competition from other pay-TV distributors.
As Comcast gets as big as News Corp., how will regulators in the United States react? When free broadcast of sports has been completely replaced by pay TV over a big Internet Protocol pipe, what will constrain the market-powerful distributor from raising prices every six months? Without rate regulation, and in the absence of competitive pressure, what can any federal agency do about ever-increasing prices being charged to loyal consumers? How will competing distributors get access to this programming without rules that govern what happens online, where the FCC's jurisdiction is highly uncertain? Will any programmer put sports online on a one-off basis, faced with almost certain retribution from the giant cable distributors?
With NBC Universal's sports content under its tent, Comcast is now in a position to direct the future of subscription sports in the United States—or at least to give ESPN a run for a lot of money. Comcast's control of its own distribution network changes its incentives and gives it more ways to beat down competitors than ESPN has: it can refuse to supply programming to rival distributors on reasonable terms; deny carriage of independent sports networks so new sports channels cannot reach Comcast's subscribers; extract equity in any channel that wants carriage; ensure that anyone signing deals with Comcast makes sports content available online only through the TV Everywhere authentication scheme, which requires that the viewer subscribe to Comcast pay-TV services; and force everyone else to pay exorbitantly for Olympics content bundled with a lot of lower-value programming. Sports is the battering ram.43
8
When Cable Met Wireless
BY 2012 THE WORLD WAS GOING MOBILE, with major consequences for the data and video industries. People around the world love their handheld devices and prize mobility; in dozens of countries, there are more mobile subscriptions than there are people. For billions, a handheld device is always within reach. By 2011, Apple had logged 15 billion downloads of its apps; nearly 90 percent of all app downloads were of Apple-approved applications, and Apple had sold nearly 55 million iPads by the end of that year. By March 2012 the company was sitting on $100 billion in cash reserves.1 Some analysts have predicted an eighteenfold growth in wireless data from 2011 to 2016, as young people who want next-generation entertainment and information services come into their own.2 The Comcast-NBCU deal is wholly compatible with the way things are done in the wireless world and fits neatly with Apple's aspirations as well.
All the big carriers—Comcast, Time Warner Cable, AT&T, and Verizon—are happy with the existing regulatory environment, which amounts to no supervision at all, and they are all doing well as scale businesses with no serious competition. But the two groups, wired and wireless, also do n0t compete with each other. The cable industry and AT&T/Verizon seem to have divided up the world much as Comcast and Time Warner did; but instead of “you take Philadelphia, I'll take Minneapolis,” it's “you take wired, I'll take wireless.” At the end of 2011, the market-allocation relationship between Comcast and Verizon became explicit when the two giant companies agreed to market each other's services jointly.3 Comcast, as well as Time Warner Cable, will promote Verizon Wireless services as part of its bundles, and by 2015 the cable companies will have the option of selling mobile services under their own brands. “We do not believe it is feasible to enter the wireless market as a freestanding new entrant,” Time Warner Cable CEO Glenn Britt wrote in a blog post about the Verizon deal.4 Comcast, Time Warner, and Verizon Wireless will work together to shape the future as well, forming a joint venture to develop advanced wireless/wireline integration technologies. The deal came about because, with Time Warner, Comcast owned a substantial amount of spectrum that the company had bought during an auction held by the FCC in 2006; Verizon Wireless gets that spectrum for $3.6 billion in exchange for intertwining its business with that of Comcast and Time Warner. As Comcast CFO Michael Angelakis put it to analysts in September 2011, “We have no desire to own a wireless network. We have no desire to write large checks, but we would like to find a way where we can offer that kind of mobility for our products in a strategic way that makes sense.”5
This cooperation indeed made eminent sense. In most areas served by Comcast and Time Warner, Verizon's FiOS—the only real competition the two face for wired Internet access—is not present. (Comcast and FiOS overlap in just 15 percent of Comcast's physical market; Time Warner and FiOS overlap in 11 percent of Time Warner's.) By cooperating, Verizon Wireless is implicitly promising that the FiOS service will spread no farther; Comcast and Time Warner, for their part, are implicitly promising that they will not go into the wireless business. At the same time, much-smaller Cablevision is in for a rough ride: it overlaps with Verizon FiOS installations in at least 40 percent of its market and will have to keep competing.6
But the most important thing about the cooperation between Comcast and Verizon is that it sheds light on the fact that the wired truly high-speed access sold by Comcast and the wireless services sold by Verizon are not direct substitutes for each other. They are, instead, complements. Competitors would not agree to market one another's services.
Before we get into the differences between these two access networks—cable and wireless—let's consider their similarities. Both are highly concentrated and highly profitable realms. On the wireless side, AT&T and Verizon Wireless together control two-thirds of the marketplace and generate 80 percent of its revenues, while enjoying (like Comcast) margins of roughly 40 percent. Sprint and T-Mobile, the third and fourth national players, trail far behind, lacking access to key infrastructure inputs—making their operating costs much higher.7 The barriers to entry for any new national player are insurmountable.
The major wireless carriers, like the major cable distributors, have market power that allows them to raise prices at will: AT&T and Verizon often raise fees in concert, as they did in early 2010 by requiring all of their customers using feature phones to adopt data plans.8 In 2011–12, first AT&T and then Verizon Wireless, looking to boost their average revenue per user, ended unlimited data plans for new users and instituted overage penalties. As a result, AT&T and Verizon subscribers buying new Apple iPad tablets found that they were using up their monthly data allotme
nts within hours and paying hefty additional fees.9
Devices are also central to this story. Smartphones (handsets used to process data and access the Internet as well as make phone calls) and tablets have different DNA from the personal computer and the World Wide Web. To most consumers, a smartphone's computing power makes it feel like a personal computing device, and about half of American mobile subscribers had one by 2012.10 But the whole idea behind the classical model of Internet access was that any device could “speak Internet” and contribute to the network of creativity and invention that is the Internet as long as it followed a few simple rules. When Michael Bloomberg switched his proprietary news business network from devices hooked up to private telephone lines to terminals connected to the Internet, he did not have to ask anyone's permission to launch a new “service,” or check whether his terminals complied with anyone's idiosyncratic technical specifications. The owners of the telephone lines that Bloomberg's terminals first connected to in the 1980s were required to let his new business go over their wires without “editing”—interference of any kind. He could innovate while assuming that the network—the common-carriage telephone network—would not interfere with his plans.
The personal-computer model of communications comes from a tradition of nondiscriminatory commodity transport of information, in which the network provider is not in charge. As discussed in Chapter 2, in the 1970s and 1980s, the FCC, worried that phone companies might control nascent data-processing services, drew a line between transport—conduit—and content, and instructed the phone companies to stay in the transport box.11 The network providers’ job was to make the tubes available and get out of the way; they were tasked with providing information-transport service to all comers without unreasonable discrimination and at reasonable rates, terms, and conditions. The FCC also required that any devices meeting published technical standards be allowed to attach to the communications network without asking permission from the network-service provider.12 This model made the Internet and World Wide Web possible.
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