U.S. broadcasting: what ESPN v. Verizon litigation may mean for viewers, leagues and sponsors

Published 10 July 2015 By: John Wolohan

ESPN and Verizon Logos

In a case that could have major implications for sports and television broadcasters, both in the United States and internationally, ESPN on April 27, 2015 filed a breach of contract lawsuit against Verizon,1a telecommunications company providing TV services. In particular, ESPN claims that Verizon by offering consumers a “Custom TV” plan instead of the typical 100-plus channel package is in violation of its contact with ESPN.

This article examines the complaint and its wider implications; however, first it is essential to understands how the broadcasting industry in the United States works and why ESPN and other networks are so worried about their current profits and business model.

 

TV Industry in the United States

In the mid-1970s, there were only three major national television networks in the United States, ABC, CBS, and NBC. Combined, the three major networks were only broadcasting around 780 hours of sports per year. Since the three networks were broadcast over the airwaves for free, and are still broadcast that way today, to pay for the sports programs the networks were required to sell commercial advertising during the event. For example, during the 2015 Super Bowl, which was seen by over 120 million people in the United States, NBC charged companies $4.5 million for a 30-second advertisement.2

Beginning in the late 1970s, however, the television industry was changed forever with the birth of cable and satellite TV. Instead of just receiving the three major national networks and a handful of local networks for free on over the air television, American homes began subscribing for a fee to cable networks where they were able to receive hundreds of new channels. One of these new channels was ESPN, the first national 24 hour sports network. Unlike traditional networks, ESPN and the other new cable networks were able to take advantage of a new revenue stream: subscription fees. Under the new cable model, cable networks like ESPN, were not only able to make money from traditional advertising rates, but also were now able to collect a fee from the cable company for carrying their channel based on the number of subscribers. For example, in 2014, ESPN received an addition $51 million per month, based on a fee of $5.40 per month from every cable subscriber in the United States (96,173,000 as of July 2014).3 ESPN’s contract also includes an annual escalator of 6.5%, which would put the current subscriber fee for ESPN at $5.75 per month.4 Therefore, with two revenue streams, ESPN and other cable networks were able to bid up the price of sporting events like the Olympics, the FIFA World Cup and domestic sports leagues. It should be noted that the United States, was not alone in developing pay television. However, unlike many countries that use satellite, most US homes are wired for cable TV.

To pay for the ever-increasing sports property rights, ESPN increasingly sought and received a bigger monthly fee from the cable networks. To pay the increase fee to ESPN, the cable networks passed the increased costs to their cable subscribers. As a result, it is not unusual in 2015 for individual cable subscribers’ monthly bills to exceed $150. However, while American get an average of 189 channels for the flat fee, on average American TV viewers only watch 17.5 of the channels they receive.5 The high price of cable television, and the fact that most viewers only watch a limited number of channels has caused a minor revolt in the last four years as cable subscribers are “cutting the cord” and moving to different means of watching television. For example, even if a person does not like sports and is only interested in movies, that person would still have to pay that part of the cable bill that goes directly to ESPN for their programing. Since it seems pointless that an individual has to pay for ESPN and the other networks, such as the food network, the History Channel or the Home Shopping Network, when they do not watch them, millions of individuals in the United States are migrating to watch television via “on demand” services such as Sling TV, PlayStation Vue, HBO Now, Hulu and Netflix. Due to this migration of television viewers, ESPN has seen its subscriber totals drop from over 100 million in 2011, to a little over 96 million subscribers in 2014.6

ESPN v. Verizon

To meet the changing consumer demands, internet providers, TV networks and others are exploring new ways to broadcast their networks directly to the consumer.  One such plan rolled out by Verizon, one of the big telecommunications companies, in April 2015, was to offer a custom TV plan that trims down the typical 100-plus channel package to just more than 35 channels for $55 a month. While Verizon's new Custom TV package includes many popular cable channels, it does not include sports channels such as ESPN. To get ESPN, ESPN2 and ESPNU, subscribers would have to choose an additional sports package as one of the two genre-specific channel packs they get at no extra cost. Beyond the two channel packages that you get as part of the deal, you can also add more for $10 each. However, there is the opportunity for sports fans to purchase a separate sports plus package which would include ESPNews and various regional sports networks for only an additional $4.99 fee. It should be noted that what Verizon is trying to do is common practice in subscribing to pay TV services for many years in the United Kingdom – i.e. you build a custom bundle of the channels that you want.

ESPN and other sports networks, however, are worried that many subscribers would opt to sidestep the sports packages and choose from other program packs including kids (Disney Channel, Nickelodeon) and entertainment (TBS, TNT). This in turn would mean less money to pay for sports programming. In an attempt to stop Verizon from changing the current model, ESPN is suing Verizon in New York State Court for breach of contract and declaratory judgment arising from Verizon’s breach of its obligations to ESPN under their license agreements. ESPN seeks specifically to enforce Verizon’s contractual obligations to ESPN, to enjoin Verizon from unfairly depriving ESPN of the benefit it bargained for.

 

Comment

With the case in the early procedural stages, it is likely to be awhile before any settlement is reached or we get a decision from the court in the case. However, the case is worth noting because it brings the issue of rising television fees and consumer dissatisfaction out into the public. This in turn could potentially force the politicians and the Federal Communications Commission (FCC) to get involved.

The bad news for fans and sports leagues is that as this power struggle between the service providers, the programmers and consumers plays out, ESPN and other broadcasters, if they are unable to pass the cost along to all consumers, may be forced to charge those consumers who watch sports on TV higher fees. Therefore, the end result may be that consumers are paying more money for fewer channels. This, however, would just accelerate the number of consumers “cutting the cord” and thereby requiring a downward cycle of ever higher fees to make up for the lost income.  

In the alternative, if they are unable to pass the higher cost to consumers, ESPN and other broadcasters will be forced to either pay less for sports programming, which has not happened yet, or pass the costs to sponsors and advertisers. Since the sponsors and advertisers would just roll the cost into their product, the end result would be the same, higher prices to the consumers. However, if the number of viewers to ESPN continues to decline, the value to sponsors and advertisers will also decrease. In that case, there is only one other options, reduce the fees the network pay to leagues and teams for their events.

 

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Author

John Wolohan

John Wolohan

John Wolohan is an Attorney and Professor of Sports Law in the Syracuse University Sport Management program and an Adjunct Professor in the Syracuse University College of Law. In addition to being one of the lead editors of the book "Law for Recreation and Sport Managers" by Cotten and Wolohan, John has been teaching and working in the fields of doping, antitrust, gaming law, and sports media rights for over 25 years.

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