Threat of Fox Sports Helped Push NBA Rights Costs Up for ESPN

Ryan Glasspiegel

ESPN layoffs made a seismic impact in the sports world last week — it sounds like more big names, especially among NFL commentators, will be announced as out this week — and the reasons are relatively well documented. On the margins, politics might be hurting them. The company also generally wants to get younger, more diverse, and more dynamic with its talent. The biggest two reasons? Rights fees and subscriber losses.

Rights fees have been going up big. For example, the new NFL deal kicked in after the 2013 season, the college football playoffs deal started in 2014. So did MLB’s. NBA costs nearly tripled this season.

At the same time, subscriber losses have accelerated, costing ESPN about $100 per subscriber per year once ESPN2 is also considered. ESPN has lost about 8 million subscribers since the NBA deal was signed in 2014. (According to Sports Business Daily, they had about 95 millions subscribers in October 2014, and Sports TV Ratings noted 87 million were estimated last month.) That adds up to about $800 million dollars over the last year in money they’re not getting, compared to the subscriber numbers at the start of the NBA deal. Some of this is offset by raising cable fees.

As far as the NBA goes, there is an easy cause and effect. In 2014, Turner and ESPN signed a new deal, which kicked in for this season, paying 2.8 times more for the broadcasting rights than the previous deal. Now, ESPN is paying $1.4 billion for those games. Last year, they paid about $500 million. Why did their costs nearly triple, spiking almost a billion dollars per year?

Two reasons: First, the sports-as-DVR-proof axiom that has advertisers clamoring to spend big for access to the platform. Secondly, Comcast/NBC and Fox Sports, with their fledgling cable networks, were bourgeoning threats to start eating around ESPN’s outer edges of longstanding dominance. Adam Silver said, via Sports Business Daily, that the NBA “had discussions, but not negotiations,” with Comcast and Fox. The commissioner added: “I don’t think we left any money on the table.”

The Big Lead has learned some of the parameters of what the “discussions” with Fox entailed. Because the NBA’s broadcasting rights never formally made it out of an exclusive negotiating window, there is not necessarily one prevailing bid that can be pointed to about what the deal would have looked like had Fox become a third league partner, or somehow replaced ESPN or Turner.

However, two industry sources with knowledge of the talks say that a package would have involved putting games on both Fox and FS1. The games on big Fox would’ve been national feature matchups intended to rein in big viewership and advertising money, while games on FS1 would have been aired with the hope of growing the network’s subscriber fees. The sources requested anonymity due to the sensitivity of the information.

There are a few ways it could have gone with FS1. They could have simulcasted games that were on NBATV, or possibly aired games that were replacements to those. Another possibility entailed having a night or two of the week where two teams that were already scheduled to play on Fox Sports RSN’s (Regional Sports Networks, where Fox has about half of the league’s local broadcasting rights), get bundled up into a national game on FS1. In these possibilities, ESPN and TNT wouldn’t have lost any of their inventory of games to their cable rival, though big Fox could have been a different story. Furthermore, everyone would have had to figure out what to do with the playoffs, where the biggest incremental viewership lies. Again, there was never a formal bid submitted by Fox.

In 2014, our site reported that Fox was eyeing the Saturday night package. This season, that package had multiple occasions of teams resting superstars. Not coincidentally, ESPN’s NBA commentators had a big bone to pick with those games involving the absence of so many stars. ESPN lost the World Cup bidding to Fox in 2011, and the U.S. Open bidding to Fox in 2013.

“We are thrilled with this deal and it continues ESPN’s long‑stated strategy to invest in a portfolio of live rights,” ESPN President John Skipper said when the deal was signed. “And this is a key property for us given the ascendant nature of the league and allows us, along with the other rights that we hold, many of which we hold into the next century, to make sure that ESPN maintains its position in the sports media landscape.”

Right now, it sure looks like ESPN overpaid for the NBA deal. The network clearly did not envision that subscriber losses would accelerate this fast, at a time when fixed costs were set to skyrocket. However, it’s not entirely out of the question that the deal could look favorable for ESPN on the back end, given that we have no idea what the streaming market will look like by 2025. This optimistic outlook would require the sport’s young stars to develop into household names and win very soon, in order to stop the bleeding at the time in a few years when LeBron James is no longer a superstar draw and/or the Warriors peter out.

NBA ratings in the regular season were reportedly down 5% on average per game on ABC and ESPN this year, but they aired eight more games combined this season, so aggregate viewership was essentially stable. With playoff numbers so far so good, you can make an argument that ESPN is doing better with the NBA now than other sports (especially if they can figure out a way to make sure superstars don’t rest on national TV).

The NFL package costs $1.9 billion per year, and the league does not give ESPN as good of games as NBC, which pays substantially less for the package. (ESPN also has around-the-clock highlights rights.) Monday Night Football ratings were down 12% last season, which was attributable not just to their quality of games but also generally diminished NFL viewership during the election. College football made the ill-advised decision to put the semifinals on New Year’s Eve, but that will be rectified in at least some future years. Sunday Night Baseball’s ratings were the lowest they’ve been in “at least a decade,” last season, according to SBD.

Still, it does seem reasonable to connect the dots between the present pinch and the NBA rights costing so much. While ESPN has seen this price increase coming since 2014, it now had to write the check.

It’s anyone’s guess whether it would have been more worthwhile for ESPN (and Turner) to let Fox or NBC into the package, perhaps pay $300-500 million less per year each, and also cede some of their real estate. Had ESPN been more conservative here, perhaps it wouldn’t have had to flex its fiscal responsibility muscles so painfully in the latest round of cuts.

Disclosure: The Big Lead’s editor-in-chief Jason McIntyre is an on-air personality for FS1.