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TV Distribs Caught in Sports Vise

Live sports accounts for about 20% of viewing by subscribers, but about 50% of all program costs

While griping continues over the spiraling cost of sports networks — largely from the multichannel operators who pay the carriage fees — consumers appear to be willing to pick up the tab. Yet a fresh effort to introduce lower-priced, sports-free options is causing some to sit up and take notice, and a split among old allies that fought against government intervention may one day change the playing field.

A market comparison between nationwide satellite TV platforms DirecTV and Dish Network shows that consumers haven’t lost their appetite for sports. Over the past two years, Dish has taken a strong stand against escalating costs, choosing not to carry eight pricey regional sports networks. Those RSNs include four in New York and the Time Warner SportsNet in Los Angeles, which carries Lakers games, the latter at an estimated monthly per-subscriber cost to distributors of $2.50. DirecTV, meanwhile, offers subscribers all premium sports channels and more, including an exclusive deal with the NFL for its Sunday Ticket (a premium add-on).

DirecTV subscribers paid 26% more last year (nearly $97 per month on average) than Dish subs (just over $77 per month), according to full-year figures released in late February. Those numbers represent an increase of 8% for DirecTV since 2010, compared with a rise of 5% for Dish.

DirecTV averaged more than 20 million U.S. subscribers last year, up roughly 4.5% from two years earlier, while Dish’s sub base stands at just over 14 million, down about 0.5% over the same period. DirecTV also has the lower monthly churn rate, though Dish’s improvement in churn has been marginally better than its competitor.

Yet while adding sports channels and fattening monthly subscription fees has generally proved the more lucrative business model vs. holding down prices — and many of the top multichannel video program distributors, like Time Warner Cable and Comcast, have been Wall Street darlings over the past year — there are signs the MVPDs believe a growing untapped subscriber base exists that would rather save money than pay for sports. Verizon’s FiOS, for instance, introduced Select HD in January, a $49.99 basic TV package that includes a broad array of channels that excludes ESPN. The new package is priced $15 below the same package with sports channels.

According to investment house Sanford C. Bernstein & Co., live sports accounts for about 20% of viewing by subscribers, but about 50% of all program costs. And with college teams and conferences rolling out their own RSNs, and News Corp. on the verge of adding a big national general sports network that will compete for content, prices only stand to rise further. Coupled with industry estimates that the price of cable programming is climbing around 8% a year, while revenue from subscribers is rising just 4%, there’s no doubt system operators are caught in vise.

It’s gotten to the point where MVPDs, which for years stood shoulder-to-shoulder with sports channel owners to resist calls from regulators and subscribers to offer TV service a la carte, are now supporting the idea of selling channels individually as a way to enlist government help in uncoupling nets that market clout has turned into must-carries.

For instance, most distribs have little choice but to offer the single most expensive channel on basic, the flagship ESPN (at about $5 per sub), because of the negotiating power of its 80% owner Walt Disney if the channel were to fall to a lesser tier.

“Operators who once fought against cries for a la carte are now arguing for it,” wrote an analyst at Sanford Bernstein & Co. in a recent report.

Still, according to Matthew M. Polka, president and CEO of the American Cable Assn., any legislative effort on a la carte pricing would take two to four years. “It’s not something that will (happen overnight),” he says.

Which means sports channels and systems operators figure to be watching Verizon’s experiment closely.

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