Carriage fees central issue to Fox Sports 1 holdouts
August 14, 2013
With its launch date Saturday, Fox Sports 1 replaces the Speed Channel and Fox Sports 2 replaces Fuel TV. But, DirecTV, Dish Network (Dish) and Time Warner Cable (TWC) do not have agreements to run FS1 and subscribers wonder if a deal will be done by Saturday.
DirecTV, Dish and TWC represent a total of about 46 million subscribers. Fox has promised investors that FS1 would reach 90 million households. But, if carriage deals are not brokered by Saturday, the FS1 launch will not reach its proposed audience. The problem has to do with carriage fees, the amount that distributors will need to pay to air the network.
Despite the fact that Wall Street thinks highly of the new channel, the issue is the rise in carriage fees. SNL Kagan indicates that cable and satellite operators pay 31 cents a month per subscriber (per Bloomberg story although SBJ story indicates 23 cents) for the Speed channel. Kagan estimates that FS1 will garner 80 cents per month in 2014 and could go as high as $1.50 per subscriber based on fee increases during the life of the deal. Its far from the $5.54 cents demanded for ESPN, but there is backlash from many non-sports subscribers about the rising cable/satellite costs that are passed along to all subscribers.
There have been dueling theories on whether the rights fee bubble will burst. Some argue that the rising fees passed along to subscribers will mean more cord-cutters and/or consumers looking to downsize its cable/satellite packages. The other school of thought is that in a time with DVRs and “Hoppers” live sporting events is the last space for advertisers on television. Citing sports as “DVR proof,” many television executives have looked to beefing up its inventory of network programs to include sports.
DirecTV, a satellite company forged on sports with the NFL Sunday Direct Ticket and Red Zone Channel is now one of the holdouts for Fox Sports 1. This could be due in part to its assessment of the ever-increasing rights fees it must pay (and pass along to subscribers).
Via Sports Business Journal (subscription required) from this past January:
With more networks now seeking more money, DirecTV is becoming more comfortable with not carrying specific channels that they consider too expensive. The result has been the type of public battles that, historically, had never included DirecTV.
Despite its sports lineage, DirecTV let Versus go dark for from August 2009 to March 2010 during the NHL Hockey season (Versus carried NHL games) before making amends with the network. Would it do the same with Fox Sports 1?
More recently, DirecTV and Fox squabbled over fees for the satellite company to carry 26 Fox channels. Luckily, the parties resolved its issues a day before a widespread blackout of Fox programming which would have included Fuel TV, FX and other Fox-owned cable channels.
It currently is in a nasty battle with the Pac 12 Network. Neither side is flinching in this impasse entering its second year. In fact, entering the 2013 College Football season, it has been announced that a deal between the two should not be expected. The Pac 12 Network has turned to an ad campaign urging DirecTV customers to switch providers if they would like its network.
Time Warner Cable is in a current battle with CBS over carriage fees which has not only turned the lights out on CBS but Showtime, a CBS property, to over 3 million subscribers of TWC. This could, if the impasse continues, indirectly affect Showtime boxing and shoulder programming leading up to the September 14th showdown between Floyd Mayweather, Jr. and Canelo Alvarez. TWC claims CBS is asking a 600 percent increase in fees which CBS scoffs at the accusation.
Dish Network has had its own issues with retransmission rights. It lost 78,000 subscribers in its second quarter of the year due to programming costs. It carries Fuel TV on a sports tier so those not subscribing to the sports tier will not even get Fox Sports 2. Then there is the rumor of a potential merger with DirecTV.
DirecTV, Dish and TWC represent 46 million subscribers that would be without FS1 if something does not change. The three companies currently pay 31 cents per month for Speed. What FS1 is proposing is a jump in fees to 80 cents per month for FS1. This represents a 258% increase from the start. At stake is approximately $22.5 million between the three companies. This is based on the number of combined subscribers and the difference between the current fee versus the proposed fee (46M x .31 = 14.26M versus 46M x .80 = $36.80; $36.80M – $14.26M = $22.5M) (H/t: Adam Swift)
All three distributors indicate that they are still in negotiations with Fox on a deal that could have the channel launch on time. Even if a deal is not struck by August 17th, there is the possibility that deals occur shortly after FS1’s start date. From Fox’s perspective, it wants to make sure that it maximizes its rights fees while ensuring that all major distributors have availability to FS1. However, the distributors are feeling the pinch of the rising costs to carry these networks and it must decide how much more it can pass along to its subscribers without further backlash.