first article:
http://www.lightreading.com/spc/document.asp?doc_id=3D31766
second article (included below):
http://www.lightreading.com/spc/document.asp?doc_id=3D32021
APR 28, 2003
Can Murdoch Slam-Dunk Cable Operators?
Now that Rupert Murdoch has become a force in the delivery of entertainment and sports programming via satellite
in the U.S., what can we expect? One thing we should expect, for sure, is that Mr. Murdoch is a bare-knuckle
player whose continual quest for power runs parallel to his continual quest for wealth. In the U.S. he already
identified a weak set of competitors in broadcast TV: the three major networks, each run by conglomerates of a
sort: NBC (GE), ABC (Disney), and CBS (Viacom). ABC and CBS are part of entertainment empires, while NBC is
part of a mainstream manufacturing and financial colossus. What the three major networks have in common is that
while they continually swap rating positions with one another, their combined share of the viewing audience is
dwindling and has been ever since cable TV appeared on the scene.
Murdoch scooped up the Fox Network and has made it into a credible network operation. His initial attack in
the U.S. market was against the other broadcast networks, and in that regard he has made Fox into a major network.
Fox recently passed ABC in prime-time rankings and is considered the third network after NBC and CBS.
His secondary line of attack until recently was to establish a cable networking presence. His primary tool was
Fox Sports, reasoning correctly that the sports fan is far more fanatical than the fan for movies.
Sports Programming: A Crazy Business...At Best!
Sports is likely to be the venue for Mr. Murdoch in his confrontation with the U.S. cable industry. Sports
programming now occupies on broadcast and cable channels over 11,000 hours of programming annually, reaching
practical saturation of the TV market. Just about every sport is televised, including, for U.S. fans, oddball sports like
rugby, curling, strongest man competitions, as well as the rise in popularity in "extreme" sports. Cricket, we think,
may never make it on TV in the U.S.1
Professional sports, rather than college, is the most important aspect of sports programming, as pro teams cater
to large metro area audiences, whereas most college teams have limited appeal. Nebraska, while huge in the central
states, does not command much of a following on the East and West coasts. Rutgers, a woebegone team in New
Jersey, does not command a following anywhere, including New Jersey. College championships do command
national attention (bowl games, NCAA championships), but the regular season appeal is in local markets.
Professional sports have the potential of generating the largest revenue streams for cable operators and broadcast
networks.
There are 7 mainstream sports professional leagues in the U.S., with 155 teams:
Major League Baseball (MLB --30 teams with 2 of them in Canada)
National Football League (NFL --32 teams; separate Canadian league)
National Basketball Association (NBA --29 teams, 1 in Canada)
National Hockey League (NHL --30 teams, 6 in Canada)
Major League Soccer (MLS --10 teams)
Women's NBA (WNBA --16 teams)
Women's Soccer (WUSA --8 teams)
In turn, professional sports franchises are heavily dependent on TV revenues, one of four primary income streams
for a franchise (TV contracts, ticket sales, stadium concession income, and licensing.) This has led, of course, to
the logical concentration of pro teams in the primary TV markets as shown in the table below. Some 44% of TV
HHs have local access to 104 of 146 U.S. pro teams, over 71%. Five markets have 26.7% of all pro teams (39).
[table not shown in this email - see the web version]
All Is not Well in Pro Sports
The professional sports teams are still, relatively speaking, watched by a significant portion of the viewing
public, but even so, many are hurting financially. Canadian NHL teams are all heading into disarray. Players are paid in
U.S. dollars but revenues are collected in Canadian dollars. Ottawa, Montreal, Calgary, and Edmonton all face
serious financial problems. Toronto and Vancouver are not in the best of shape. Even within the U.S., the L.A.
Kings claim financial hardship, and other NHL teams are not doing well: the Buffalo Sabers, part of the extended
and bankrupt Adelphia Communications Corp. (Nasdaq: ADLAC) mess, and the Pittsburgh Penguins are two teams
in serious trouble. Many NHL games do not make it to the broadcast networks due to the heavy prevalence of
fighting, hence the TV ad revenue upside to pro hockey is limited to the ad revenues derivable from cable networks
like Fox, MSG, Comcast's SportsNet, ESPN (Disney) and local outlets.
MLB has consistently proven that the major-market teams are the most likely to make it to the World Series,
with the New York Yankees the most famous example. The NBA has seen sharp declines in viewer interest, as the
sport has become, in the opinion of a number of commentators, "unwatchable." In 2002, the NHL playoffs on cable
outdrew many of the NBA games on broadcast. The NFL, the home of the highest concentration of near-Sumo
wrestler size athletes outside of Japan, has become a less exciting sport, although two NFL TV events are still
crucial for the sport: the Super Bowl and, for reasons completely unknowable from first principles, the NFL Draft.
We suppose that the NFL Draft is a "must-see" event due to the rise of fantasy sports games. The NFL, by the
way, is the one pro league with the potential for "parity," i.e., it is not the case that major-market teams dominate.
There is some form of revenue sharing in the NFL that mitigates the disparities.
Of course, owners of sports teams can cook the books and, on occasion, have been found to do so. But some are
starting to close their wallets, as the value of sports franchises have not grown and the financial markets have been
dreadful. Of more than 100 MLB free agents this past year, 76 saw pay cuts averaging $1.7M (that's the pay cut). In
previous seasons, even the sick, the lame, and the halt would have gotten a pay increase. Only the New York
Yankees can keep on rolling. MLB wants to shut down a couple of franchises; the NHL is worried that "Canada's
sport" may not be able to support any pro teams.
The key to the survival of pro sports is access to national sports venues, which will be difficult for some
of the franchises in each sport. The "minor" professional sports in the U.S. -- soccer, women's soccer, women's
basketball -- face a serious struggle as debt and market losses hit financial backers.
A Messy Situation
We note that a number of cable operators are invested in pro sports, directly or through the families that control
the operator: Cablevision Systems Corp. (NYSE: CVC) in N.Y. (N.Y. Rangers and N.Y. Knicks), Adelphia, indirectly
(Buffalo Sabres) and Paul Allen's interests in Portland teams (Charter Communications [Nasdaq: CHTR]). Then
there are cable channels like the YES Network (N.Y. Yankees, N.J. Nets and N.J. Devils), MSG (Cablevision),
ESPN (Disney), SportsNet (Comcast Corp. [Nasdaq: CMCSA, CMCSK], for Philadelphia teams), and Fox Sports
(Murdoch). The conflicting business interests do make for strange bedfellows. For example, the N.J. Devils, owned
by the Yankee-Nets organization, have a contract with MSG and with Fox, rivals to the YES Network operation. We
have heard of the battle between Cablevision (MSG) and the YES Network, where Cablevision would not carry YES
on basic cable. This led to many DirecTV sales in the N.Y. area. Fox, Murdoch's channel, has local TV contracts
with the Minnesota Timberwolves (NBA) and the Orlando Magic (NBA). Time Warner Telecom Inc. wouldn't pay the
fees that Fox wanted, so Fox didn't air the games.
Furthermore, embroiled inside of the TV contract/distribution/ownership snarls, there looms the issue of stadiums
and arenas. Stadiums and arenas provide one of the income streams to pro sports franchises, and multi-purpose
arenas offer higher income potential. In the New York area, the Yankee-Nets organization seeks to build a
combined basketball/hockey arena in downtown Newark, N.J. Both teams currently play in the Meadowlands, a
public facility further north. The current proposal is for the City of Newark, which has about two nickels left in its
treasury, to fund $355M for the arena and the Yankee-Nets would pay back one third over 30 years. The arena
would be built, though, to cater much more to corporate sponsorships, luxury boxes, and high ticket prices,
essentially excluding most of the taxpayers in Newark, a city not known for having many wealthy residents.
Sports teams, as opposed to back office operations, can't up and leave an area, especially a vast TV viewing
area. The Yankees can't move to another baseball market without permission of MLB, and that won't be forthcoming. So
they have to stay there. The back office operations or help-desk functions can move to India or South Dakota,
whichever is cheaper. There are some markets that do not have a particular sport franchise; e.g., Los Angeles does
not have an NFL team.2
The appeal of DirecTV is that many have the suspicion that the primary set of viewers are sports viewers and
not those addicted to home shopping, movies, or re-runs from the 1950s and 1960s. Without sports, the satellite
business collapses. Hence, satellite operators have to do everything they can to promote sports and wrest control
away from cable operators.
Murdoch, News Corp. Fox and DirecTV
Murdoch has several assets in place:
News Corp., which controls:
Fox News
FX
Fox Movies
Fox Sports and Entertainment
DirecTV
DirecTV is a national challenger to the entire cable industry. DirecTV can beam any team into any market. Murdoch
has a growing sports channel, Fox Sports, which can take on ESPN, MSG, YES, and SportsNet. Through Fox
Sports, Murdoch has rights to the World Series and to Nascar auto racing events. Fox won a four-year deal from
the NFL and raised rates by 25%. Fox controls the following:
MLB national broadcast rights (not local or regional)
Regional rights to 67 of 80 NHL, NBA, and MLB teams!
NASCAR racing season -- 50% of the events
Exclusive rights to Sunday NFL games (through DirecTV)
Clearly Murdoch is pursuing a two-tiered strategy:
National programming: via DirecTV and Fox Sports, provides access to all of the professional sports teams. Clearly
some will outdraw others, just as when top teams are on the road they can fill the stadium or arena. National
followings become important for the expensive teams.
Regional programming: via regional Fox Sports networks, on local cable channels. Not only will the major
professional leagues benefit here, so will the minors like soccer and women's pro sports, as well as the plethora of
college sports. College sports, at least the big ones of football and basketball, are essentially "minor-league
professional" franchises for the NFL and NBA. They are money centers at most Division I schools and these
programs are allowed to, more or less, let the athletes learn nothing as long as the money comes in.
Why would sports teams side with Murdoch? Murdoch pays more than cable does -- in some cases 25% more. For
franchises that are desperate for income, and if they can draw viewers, Murdoch may extend a "lifeline." It won't be
a benevolent lifeline, but they will become allies. The players who continue to hope for mega-million dollar salaries
will see Murdoch as the means for generating franchise income.
This also spells trouble for ESPN and other networks that compete with Fox. They will have to agree to his terms
on what fees he will pay them for carriage on DirecTV, or block them entirely. This will be especially difficult for
Disney, which has competing economic interests (Anaheim Mighty Ducks NHL team and ESPN and ABC), and
Cablevision (MSG and ownership of the N.Y. Rangers and N.Y. Knicks).
An anecdote that explains Murdoch is useful to contemplate. This author, in 1977, was a researcher for the Koch
for Mayor campaign in New York. At the time, Murdoch had just purchased the New York Post, a tabloid on the
skids. He immediately endorsed Mr. Cuomo, a New York State official and candidate for Mayor. Murdoch did this
very early in the campaign, months before the primary. He did this because he wanted "his man" in Gracie
Mansion. Well, Cuomo was not the ideal candidate; he spent a lot of time dithering over issues. Murdoch lost
patience, dumped Cuomo and went with Koch, one of the very few times that anyone could remember a newspaper
reversing its endorsement. The paper became an adjunct of the Koch campaign. Murdoch made it clear that he
wanted power, not just a profitable newspaper. And, by the way, Koch won and was Mayor for 12 years.
Murdoch will pursue this same strategy at DirecTV and Fox. The U.S. cable industry had better study this man
and his history very carefully. He is not some dufus out of Cloudersport.
1. Can any US reader figure out what this story about a Cricket match is saying?: "Spinner Paul Adams exploited
some substandard Bangladesh batting on Thursday to take five wickets on his comeback and put South Africa
firmly in control of the first test. Adams, once described as having a 'frog in a blender' bowling action and who had
not played a test for a year, took three wickets for one run in an 11-ball spell either side of tea as the home team
collapsed from 97 for one to 173 all out. South Africa, in reply, closed on 84 for two, with Herschelle Gibbs (17) and
skipper Graeme Smith (16) the men out. Adams, who claimed his second five-wicket haul in 37 tests, struck just
before lunch when Akram Khan was caught at silly point for 13. All rounder Alok Kapali followed for a duck, getting
a bottom edge as he cut at a long hop. Mohammad Ashraful then departed for 12 first ball after the resumption,
pulling an Adams delivery straight to Boeta Dippenaar at short midwicket. Left-armer Adams, who looks at his
boots rather than the batsman as he releases the ball, completed figures of five for 37 off 12.3 overs by bowling
Enamul Haque and having last man Mashrafe Mortaza stumped." (www.cricketnext.com) A cup of coffee to the first
lucid explanation.
2. Which is why we never understood why CLECs said they were pursuing an "NFL city" strategy. Didn't
any of those guys ever go to games?
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