There’s a (TV) war going on outside no man is safe from

I originally was writing a comment to the precociously intelligent papigrande's Fanpost relating to the proposed partnership between ESPN and the NFL Network as reported by  While previewing what I had written, I decided to let it stand on its own, because it was different from the other comments, and kind of long.  I don't view this as a matter of concern relating to programming.  I see this as a matter of distribution channel positioning.  I am a professional financial analyst, and I'm going to try to provide the terrific MHR community with some strong business analysis today.

The NFL is the most financially successful professional sports operation, and it isn't even close.  The main reason for this is that the teams play once per week and all games are nationally televised, currently by broadcast networks (CBS, NBC, Fox) and cable channels (ESPN, NFL Network.)  Because you can only see your team once per week, you make it a point to watch every week.  This leads to a highly reliable level of viewership, which, in turn, leads to a tremendous ability to sell advertising at high prices to those who wish to influence the buying habits of football fans.  I mean, hell, we all know that Budweiser is the King of Beers, and that Every Kiss Begins With Kay, right?

The broadcast networks and ESPN currently pay the NFL $3.735 billion per year to televise games.  They then turn around and sell advertising for a lot more than that, and make what is called gross margin.  After that, expenses get paid (salaries, production costs, Jimmy Johnson's hairdresser,) and the companies make a net profit at the end of the day.  The NFL wants this money to stay with them, which is a pretty intelligent thought.

The NFL plans to eventually insource its television production and cut its current TV providers out of all of that revenue.  The creation of the NFL Network has worked toward the aim of allowing the NFL to self-produce its TV programming.  Instead of hiring CBS or Fox, they'll just do it themselves, in-house.  This is called disintermediation, and it's happening across the business environment, mostly due to advances in technology which reduce the need for middlemen.  When you go on vacation, do you call a travel agent, or just go online?  Me too.

Disintermediation is bad news for the broadcast networks.  It's even worse news for an undiversified sports-only content provider like ESPN, which doesn't have sitcoms or Katie Couric to fall back on.  A total loss of pro football would be devastating for them.  Interestingly, ESPN is also better-positioned to remain in the game than the broadcast networks, if anybody can remain in the game.  More on that later.

Parallel to what is going on from a programming perspective, there is a nasty war being fought over service delivery.  Comcast and Time Warner Cable (the worst cable company in the world) are currently refusing to carry the NFL Network.  You mostly hear that it relates to subscriber carriage fees, but it's a lot higher stakes than that.

Consider the case of the NFL Sunday Ticket package on Directv.  As a Broncos fan living in the Cleveland area, I can't live happily without it.  I literally plan where I am going to live around the availability of the Directv service.  The cable companies are already upset that they were cut out of this cash cow of a service, and they have to be terrified that Directv will get exclusive soup-to-nuts distribution rights once the NFL insources its TV programming.  It's picking the winning horse, as far as I am concerned, because Directv's service and pricing are vastly superior to cable.  The only reason not to do it is fear of an anti-trust suit, but the NFL is pretty wired in politically.  If the cable companies lose the ability show NFL games, they would certainly go bankrupt.  How many American households would tolerate a loss of access to the NFL?  Just think about that for a minute.  It's staggering to consider, isn't it?

At any rate, back to the story about the current cable war.  Comcast and Time Warner are trying to prevent (or realistically, delay) the full-scale ascendancy of the NFL as a capable TV content provider, because that represents impending trouble.  By refusing to carry the NFLN, they are delaying the inevitable by limiting the NFL's revenue from the Network.  The cable operators' goal has to be for the NFL to agree not to cut out the cable companies in the future.  This cable companies' assertion that they are trying to save their customers money on a cost pass-through basis is a lot of steaming malarkey (which is an Irish disambiguation of what it really is.)  Ten cents per subscriber-month is not significant enough money to have this public and drawn-out fight about.  The cable operators currently have leverage in their ability to deny the NFL some revenue.

This proposed partnership with ESPN is clearly about fighting the cable companies.  Time Warner and Comcast rely heavily upon the ESPN family of networks for their high ratings, which allows them to sell local advertising at high prices.  Sure the national ads are there, but Elway's Restaurant and Burt Chevrolet paid a pretty penny to get on the broadcast in the Greater Denver area too.  By agreeing to help pressure the cable operators, ESPN can help the NFL win this battle.  The situation reminds me of the merger between Procter & Gamble and Gillette of a few years ago.  That was 100% about strengthening their positions in battling their primary distribution channel (Wal-Mart) over pricing.  That's exactly what this partnership between ESPN and the NFL would represent also, a means to more effectively battle for short-term channel control.

So what's in it for ESPN?  How about an agreement to let them keep Monday Night Football when the broadcast networks get cut out of the deal?  As I mentioned before, they're best positioned to stay in the game, due to their sports-only format, and abundance of resources.  Failing that, even an agreement to provide some exclusive reporting access might be good enough.  Functionally, I don't see ESPN as anything more than a very junior partner, and I would be shocked if they influenced the NFLN's production in any significant way.  It's easy to imagine that ESPN could gobble up a network like the NFLN, due to the size disparity between them, but the NFLN is a strategic asset of the owner and producer of the end-product (the game itself,) so ESPN's size advantage means nothing.

This whole TV war is very fascinating, and it will bear watching in the months and years to come.  It will dramatically impact the entire football watching experience for all of us, and maybe today's CEOs of Comcast or Time Warner will have to someday get a dish to catch the Giants game.  I hope I haven't bored any of you football people to death with all of this business talk, and I guarantee that my next post will be about offensive strategy or personnel, or something else you're more used to seeing out of me.

(East Coast Hip Hop Quiz - Does anybody know the artist and name of the song I took the title of this post from?  Big points if you can answer correctly.)

Originally posted at MHR

1.  I’m not in the arguing business, I’m in the saying what I think business.
2.  I get my information from my eyes.

Follow me on Twitter  While you’re at it, Like our Facebook page

Ted's Analysis