It would be only a slight stretch to say that sports owes its unprecedented prosperity—breathtaking salaries, record viewership, stratospheric rights fees—to Star Trek: The Next Generation. Or more precisely to one particular Star Trek fan, a British-born, Houston-raised, suspenders-wearing, Texas A&M electrical engineering graduate named Anthony Wood. Nearly two decades ago Wood wanted to enjoy Star Trek episodes at his convenience, not when networks chose to air them. So he developed the time-shifting, ad-busting machine that came to be known as the digital video recorder, and in 1999 he founded ReplayTV to sell tens of thousands of units.
As a result of the DVR revolution, advertisers steadily migrated to live sports, where viewers who craved a common, suspenseful experience would still sit through commercials to partake in it. Networks responded by paying ever-higher fees for the rights to NFL, NBA, MLB, NHL, and college football and basketball games. And the times, they have been good—so good that the NFL grossed an estimated $13 billion in 2015; two dozen Division I college athletic departments annually collect at least $100 million each; the average NBA player makes $5 million; and Diamondbacks pitcher Zach Greinke signed a six-year, $206 million contract before last season that will extend until he's 38, well past his prime. Today sports in the U.S. is a $70 billion industry, roughly the GDP of Luxembourg.
But in a time-warp plot twist characteristic of a Star Trek episode, the same man who touched off the sports bull market late in the last century now presides over the technology that threatens to end it. Anthony Wood is the founder and CEO of Roku, one of the leading Web streaming platforms—and the convenience, choice and affordability of streaming is leading millions of customers (25% of Millennials who live on their own, and by some estimates 60,000 people each month) to cut the cord to their cable packages. That's flattening out the revenue that cable operators collect from bundling channels, the long-standing practice that forces customers to pay for things they don't want. And that in turn is squeezing networks like ESPN, which has used the fees it charges those cable companies to pay, handsomely, for the rights fueling the boom: $1.9 billion a year for the NFL, $1.4 billion for the NBA and $600 million for the College Football Playoff.
This season marked the beginning of the NBA's nine-year contract with ESPN and TNT, a deal worth $24 billion—a threefold increase over the previous terms. But as much as ESPN pays to hoard all these rights, the network can't seem to keep subscribers, Steph and LeBron notwithstanding. Cord-cutting over 2016 has cost ESPN two million households and TNT, a rights-holder in three sports, similar numbers last year, figures that more or less mirror the ratings decline. And, perhaps most troubling, the NFL's declining viewership has been one of the main story lines of the season and should be sounding alarms in the executive suites of other sports. Sports programming still "won the night" 152 times last year, proving that the public's appetite remains healthy. But rights-holders are hedging their bets, experimenting with ways to stream content, heighten viewer participation, raise revenue and meet demand on the consumer's preferred à la carte terms.
December 12, 2016
From Roku's headquarters in a hacienda-style office park in Silicon Valley, Wood watches all the disruption knowing that 60% of the televisions sold in the U.S. featured Internet connectivity and that more and more consumers pull programming on-demand from the cloud. "Eventually," he says, "all TV will be streaming TV."
Until that day comes, leagues and teams and their telecast partners might be in for a rough ride. "Sports has gotten fat and happy," says former NFL executive Frank Hawkins, whose firm Scalar Media Partners consults on rights deals. "Only about a third of people consider sports channels in the big bundle to be must-haves. Two-thirds either won't pay or will pay only for what they really want. If you're suddenly trying to make your livelihood on a third of your prior base, and you increase your price point to make the numbers work, how many fans are you going to price out of the market?"
The trajectory of sports hangs on the answer.
to lash itself tightly to sports in 1959, when golfer Arnold Palmer permitted a Cleveland lawyer named Mark McCormack to negotiate deals for him. McCormack's genius lay in conceiving a vision of professionalization and then evangelizing for it. He and his agency, International Management Group, created a virtuous circle: Greater income let athletes focus and train year-round, which led to better performance, which heightened interest, which in turn stoked demand—for media deals, events, sponsorships and marketing partnerships. McCormack eventually built for sports the equivalent of Lew Wasserman's old Hollywood studio model: Whenever it could, IMG put itself or its clients on both sides of every deal.
"McCormack was the first to put it all together, to use corporate jargon like 'unlock the value' and force the industry to grow up," says Matthew Futterman, author of Players: The Story of Sports and Money, and the Visionaries Who Fought to Create a Revolution, which describes how McCormack set sports on a path that led to free agency. "Leagues and teams say free agency is the enemy and try to limit it, but free agency turned baseball into a 12-months-a-year sport. And when you increase wages, you get rid of the swath of owners who aren't ready to live in this new world."
As Futterman points out, if you're in the oil business and can't own the oil, the next best thing is to own the pipeline—and sports is laying new pipe by replacing TV with the Web. "As with any big change, the graph looks like a hockey stick," says former network and studio executive Nancy Tellem, executive chairman of Eko, which is developing technology with implications for sports, including the integration of interactivity into live content. "Everyone says it's not happening until you hit an inflection point, and then it's exponential. We've definitely hit that point. In 15 years we won't even recognize our lives, when you think how much has happened in the last year alone."
There's a piece of contractual boilerplate, folded into rights deals as a hedge against unforeseen technological change, that reads "in any media, whether now known or hereafter devised." It's not a bad mantra to incant as we hurtle toward whatever comes next. That legalism is the executive's security blanket amid the chaos. And its forward-spinning spirit holds out the promise of new and in some cases almost fantastical sources of revenue.
None is more lucrative than sports betting, including its fantasy-sports cousins and illegal iterations, which does as much as $1 trillion in business worldwide every year. The NBA has an equity stake in FanDuel, MLB is an investor in DraftKings and the two leading daily fantasy sites have sponsored 28 NFL teams. Despite legal challenges to the industry in several states, leagues are standing by their partnerships, if only because of daily fantasy's ability to drive greater engagement: Research shows that a fan who watched four games a week before enrolling in FanDuel soon begins consuming seven games a week.
Tennis can claim to be shocked that gambling, to say nothing of match-fixing, is going on in its decorous establishment, but the International Tennis Federation is happy to be pocketing $70 million over five years from the sale of rights to real-time, point-by-point data, transmitted directly from umpires' chairs to people's phones. The ITF can command those terms—four times the value of MLB's current real-time data deal—because people all over the world place bets on granular moments in tennis matches. As NBA commissioner Adam Silver calls for sports betting to be legalized, three of his owners—the Wizards' Ted Leonsis, the Mavericks' Mark Cuban and the Hornets' Michael Jordan—sit on a board of Sportradar, the company that bought the ITF rights. This fall, the NBA sealed a six-year, $250 million deal with Sportradar and the data analytics firm Second Spectrum. "Gambling and fantasy are the only things that might generate enough money to make up revenue losses if any of the systemic risks out there come to pass," says Hawkins, the media consultant. "Daily fantasy also has the effect of developing fans. TV used to do that for you. Now you have to be a little more active."
is even more critical because each touch point between consumer and content offers an opportunity to sell an ad. That's the basis for what the NBA hopes will be the next virtuous circle. The league has made the decision to give people what they want on their terms—offering not just single games on its League Pass platform for $6.99 a pop but also highlight clips that are free for fans to share on social media. "We want people to snack, as long as they buy the meals," Silver says. "We'll get more engagement from fans, who'll watch more games more intensely. That's what's driving my interest in these and other opportunities."
And consider some of those opportunities. A fan who doesn't want to deal with the hassle and expense of a trip to the arena might soon buy a ticket to a so-called "third venue"—a league-licensed, souped-up sports bar with augmented reality in the form of life-sized 3-D holographic replays. Facebook could add to an NFL live-stream a function that allows users to interact with friends, folding the text-and-tweet "second-screen experience" into one super screen. It's easy to imagine spectators participating in a parallel competitive-gaming version of some spectator event. And any tech-savvy rights-holder could turn Monday-morning quarterbacking into a real-time activity. Or let viewers make microbets during a game. Or, thanks to virtual reality, moot the fact that most NBA fans in the U.S. and Canada, much less the rest of the world, will never set foot in an arena. "The Jack Nicholson seat is the best in sports, only it doesn't scale," Silver says. "But with virtual reality it does. Anyone anywhere can have the same view the referee has."
The question will be how much these bell-and-whistle extras—VR season tickets, anyone?—appeal to fans and hence to advertisers. Media analysts divide the universe of people who sit in front of screens into two categories: those who "lean forward" and those who "lean back." People lean forward into computers, tablets and phones. When enjoying a telecast, by contrast, they're used to leaning back (except when reaching for a beer). For new technologies to take, fans will have to normalize that second-screen experience and fold more forward lean into their viewing. There's evidence that they're beginning to: More than six of every 10 viewers now engage a second screen during a typical NFL telecast, and viewers already consume enhanced in-game content on platforms such as NHL.tv and MLB At Bat.
But as the sports business tries to sell more things to a cohort of hard-core fans, will those fans eventually reach a limit and rebel? Two trends might eliminate the issue. The participation explosion in the wake of Title IX, and the power of social media to flesh out athletes as multidimensional people, are creating more interest among women. Meanwhile, U.S. sports are poised to grow internationally. The NBA is two seasons into a five-year, $700 million deal with the Chinese firm Tencent to stream content in that country. During last season, 802 million viewers watched live NBA action through Tencent. For years Silver assumed that the league would have to place franchises overseas to realize its international ambitions. "Now I'm not sure we'd have to bring a team to Paris to grow the French market," Silver says. "A relatively small number of people actually step into our arenas, yet our teams have increasingly global followings."
Some three billion new smartphone users—more than 40% of the earth's population—could emerge in the developing world alone in the next five years. If even a small fraction become fans, the sports industry won't have to extract as much per person to improve its bottom lines. "There are always bumps in the road as new technologies sort themselves out," says Arn Tellem, Nancy's husband, a former players' agent who now serves on the NBA's board of governors as vice chairman of Palace Sports and Entertainment, owner of the Pistons. "But there'll be new players in the game we never expected, and players now in the game will find ways to stay in. At the end of the day it's content that's valuable. As the world gets smaller, content gets more valuable."
And the most sought-after content, especially in an era marked by a glut of televised sports, takes on premium value. There's only one NFL, and only 17 weeks to its season, plus the playoffs. The TV numbers may be down, but they are far from cratering—in fact, they were up in recent weeks, supporting the theory that they would rise after the presidential election. As Roger Goodell told SI in October, "There are still the same number of folks—maybe even slightly more—actually watching. We're reaching them [in ways other than through broadcast television], and they're engaging with football."
Says Hawkins, "Pro football isn't high-value just because it appeals to something visceral in the American soul. It's high-value because with so few games, every one becomes an event."
The potential for new revenues is so great that players and owners alike seem to appreciate the value of labor peace. Last month MLB and the players' union struck a deal that will run through 2021. And at current negotiating sessions for the next NBA collective bargaining agreement, it would be hard not to recognize the blurring of the old labor-management divide: Michael Jordan sits across the table from Players Association president Chris Paul and executive committee members Carmelo Anthony and LeBron James, all of whom know that such recent stars as Shaquille O'Neal, David Robinson, Grant Hill and Penny Hardaway also own stakes in NBA teams. "Players today see themselves as powerhouse industrialists and think more like owners," Silver says. "They want to be 'Like Mike' in a new way."
If all else fails to keep owners flush, there's always the old taxpayer hustle. Public financing of stadiums and arenas won't disappear. In fact, more than two dozen pro sports teams own development rights adjacent to venues they already or will soon occupy, where they're creating mixed-use "entertainment districts" studded with government incentives, from Patriot Place in Foxborough to LA Live. The way the system is set up, moneymaking opportunities seem to flow almost ineluctably into sports.
To be sure
, some leagues will be more vulnerable than others as the cable bundle unravels. Baseball's revenues have tripled since 2000 largely because of regional cable networks that many of its teams own or partner with. The Dodgers collect $200 million a year from Time Warner Cable, and the Diamondbacks signed Greinke shortly after reaching a 20-year deal with Fox Sports Arizona worth $1.5 billion—more than twice the value of the previous contract. Baseball offers a huge inventory of content, but the regional sports network is one of the most fragile components in the cable bundle, because few who pay for it actually watch it. Just over 200,000 people tuned into the average Yankees game on the YES Network in 2016. Yet some six million subscribers pay $6 a month for YES in their cable bills, generating $432 million a year. If the big bundle were to collapse, YES would need those 200,000 people to pay $180 a month to make up that revenue.
Major college sports, too, rely heavily on cable TV, and that ties the fate of athletic department budgets to the fortunes of conferencewide networks, as well as to ESPN, holder of rights to the ACC (at $3.6 billion), the SEC ($2.25 billion) and the Pac-12 ($1.5 billion). Pac-12 commissioner Larry Scott makes $4.1 million a year in part because of a windfall from the Pac-12 Network and in part because colleges don't pay their players. Whether the college sports status quo persists will depend on several pending court cases, including Jenkins v. NCAA, which seeks to eliminate limits on compensation for college athletes and is being brought by Jeffrey Kessler, the lawyer who won free agency for NFL players. A resolution to that case, and the continued fallout from O'Bannon v. NCAA, which allowed all schools to offer scholarships up to the cost of attendance, could at least bring some clarity to a distorted marketplace.
ESPN president John Skipper told SI late last year that the gloomy view of his network's health is "extraordinarily overwrought and fundamentally inaccurate. We just had our best year ever." About 90 million households pay ESPN's monthly fee of roughly $7, which accounts for some $8 billion a year in revenue before the network sells a single ad. But if ESPN were forced to unbundle its networks, how many people would buy how many channels, and at what price? A recent Civic Science survey found only 6% of respondents willing to pay as much as $20 a month for a combination of ESPN and ESPN2.
ESPN has the advantage of holding rights across all platforms, and it has begun to experiment with new products. (Cue the mantra: In any media, whether now known or hereafter devised.) The network can now go to potential advertisers on an NBA telecast and offer a base audience of several million viewers on cable or satellite TV, to be sure, plus half as many again on digital screens through WatchESPN and the ESPN app; the simulated Gamecast; and in-game highlight clips and alerts. ESPN can leverage every one of those additional impressions.
But sports finds itself navigating the same choppy seas as two other industries in transition: the media business, from print to digital; and the music business, from CDs to Spotify. "To paraphrase Mark Twain, reports of TV's death have been greatly exaggerated," says Brian Rolapp, the NFL's executive vice president of media. "It's still the best way to distribute and consume our games. At the same time, no, TV won't be as big in five or six years. Media dollars have always flowed to where the consumption is, and consumption always goes first. A billion people are on Facebook. The consumption is there. People are just going to have to do business in a different way."
As networks balk
at abandoning a model that has been so good to them, teams and leagues are already thinking like tech companies, coming up with ways to respond nimbly to innovation. This season Clippers owner and Microsoft executive Steve Ballmer chose to hold on to the team's digital rights in order to offer games over the Web. Earlier this year, the NFL signed a deal with Twitter to live-stream 10 of its Thursday Night Football games.
Hawkins hopes that some forward-thinking partners—a league and a network now locked into a long contract—will jointly decide to embrace the future. Through some combination of rights adjustments and bullet-biting renegotiation, perhaps they could reach a deal that permits streaming on new platforms while protecting the legacy networks from the worst of the transition. "I hope the parties will agree to give themselves a runway," Hawkins says. "Maybe extend the deal for five years, change the payment pattern, add clauses that are triggered when the big bundle is, say, 80% in decline." If leagues merrily cash huge checks while their cable partners languish, that could poison future rights negotiations.
"The good news is we have a bit of time to figure it out," says Catie Griggs, a general manager of Futures Sport & Entertainment U.S., a media and marketing rights consultancy. "And it will be really exciting if change is driven by how fans want to engage with the content. The more fans are attracted, the greater the value. But it will involve getting that engagement component right. And the technology, it's changing every three months."
Anthony Wood, the Trekkie techie who began to inflate the sports bubble years ago, outfitted that original DVR with a feature that allowed viewers to pause live TV. "People would go out and fix sandwiches," says Steve Shannon, a GM of content and services at Roku who worked with Wood in the old ReplayTV days. "We even had a 'frame advance' feature long before the NFL introduced official reviews."
But you can't put technological change on pause, even if it's human nature to want to. Executives on both sides of any sports media deal have no way of knowing whether things like this season's anemic NFL ratings are ominous harbingers, or the birth pangs of a new age of even more extravagant prosperity. Perhaps so many current rights deals extend for such long terms because the major players panic at the thought of having to figure out the transition—and they may simply want to be playing 18 in Boca when the ultimate reckoning comes.
Change In Time Spent Watching Traditional TV By Age Group
[LIVE + VOD + DVR; Q2s OF U.S. ONLY; 2010 TO '16]
Ages 2 to 11: -22%
Ages 12 to 17: -40%
Ages 18 to 24: -42%
Ages 25 to 34: -30%
Ages 35 to 49: -13%
Ages 50 to 64: +1%
Ages 65-plus: +8%
U.S. population: -11%
CHART INFO FROM: MEDIAREDEF/NIELSEN