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

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