The Economics of Sports Broadcasting

Chris Gratton,Harry Arne Solberg

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134325603
• Edition: 1
• Topic: Business
• Subtopic: Media & Communications Industry
• Index: Business

Sports now constitute one of the most valuable forms of broadcast entertainment in today's lucrative international market. This textbook explains the economics underlying the sports broadcasting phenomenon.

The specific regulatory culture governing sports broadcasting means that the financial economy of this area has many unique features. The Economics of Sports Broadcasting provides an accessible, detailed introduction to all aspects of economics in this fascinating area.

The book contains a wealth of textbook features and has been written and designed to facilitate student learning. It includes:

• 
  
  

• questions of ownership, trade and commodity in sport
• the historical context for contemporary sports broadcasting
• the key players – viewers, TV channels, sponsors, clubs, event owners and authorities
• the regulations governing televised sport
• the international context for broadcast sport
• competition and game theory in sports broadcasting
• sports broadcasting's changing landscape of ownership and supply channels.
  

This book will be useful for courses in media and broadcasting, economics, sport management and sports development.

Chapter 1

Introduction

The most significant change in the sports industry over the last 20 years has been the increasing importance of broadcast demand for sport which has led to massive escalation in the prices of broadcasting rights for professional team sports and major sports events. At the beginning of the twenty-first century for the major professional team sports in both the USA and Europe income from the sale of broadcasting rights has become more important than the amount of income generated by selling tickets to spectators at the stadia. These developments first emerged in the USA in the 1980s but Europe started to catch up in the 1990s. Although there are close similarities between the price escalation for broadcasting rights for professional team sports in both the USA and Europe, there are important differences between the two continents in the way these rights are distributed over different categories of television channel.

Although live broadcasts of professional team sport games in the USA were established in the 1960s, even by 1980 major league baseball earned only $80 million from local and network television and radio (Fort and Quirk, 1999). By 1990, this had increased by nearly 800 per cent to $612 million. Similarly, the NFL had income from broadcasting rights of $167 million in 1980 but this had increased by close to 600 per cent to $948 million by 1990. By this time revenues from broadcasting rights became the single most important source of income for professional team sports in the USA.

The early years of the relationship between sport and television, however, gave no indication that this was likely to be the case. Quirk and Fort (1999) chronicle the early years of televised professional team sports in the USA which focused on the trade-off between new income from television and lost revenues from reduced attendances. In 1950, the Los Angeles Rams signed a contract involving the televising of six home games to viewers in the Los Angeles area. The contract specified that the sponsor would make up any loss resulting from lower attendances due to the live transmissions. The two home games that were not televised generated an average revenue of $77,000. The six televised games averaged only $42,000, resulting in the sponsor having to pay $198,000 in compensation. The contract was not renewed in 1951.

In these early years of televised professional team sports in the USA, this perceived negative impact on attendances was a major constraint on the development of more television coverage. It was also the case that live attendances at professional team sports, the National Football League (NFL) in particular, were nothing like the levels of today so that any drop off in attendance was a major threat to the leagues.

By the early 1960s, however, the market for televised sport in the USA had begun to change. McChesney (1989) identified four factors responsible for this change. First, for the first time television was available in most American homes. Secondly, the technology for sports broadcasting was changing with videotape allowing slow motion and replays and the advent of colour television substantially increasing the quality of the experience of television viewing of matches. Thirdly, the Sports Broadcasting Act 1961 allowed professional sports teams to negotiate together as a cartel with broadcasters substantially increasing their market power. Fourthly, broadcasters had started to appreciate the potential of using sport to sell advertising slots during the games. In particular, the type of audiences attracted to sports broadcasts were particularly attractive to advertisers who were therefore willing to pay a premium price for these slots.

In the 1960s increased competition amongst the three major networks, CBS, NBC and ABC, led to more television coverage of the four major team sports: American football, baseball, basketball and ice-hockey. Downward and Dawson (2000) and Cashmore (1994) argue that ABC, in particular, led the way with an aggressive attempt to broaden the interest in televised sport beyond the normal male audience introducing technical innovations such as slow motion replays, close-ups, and split screens. Increasing advertising revenues generated through televised sport drove the networks to extend their coverage. ABC was also the first to televise the summer Olympics in the 1960s.

By 1970, the NFL earned $49 million a year from the sale of broadcasting rights and this had increased to $167 million by 1980 (Quirk and Fort 1997). It was in the 1980s, however, that growth in the size of deals for sports broadcasting rights accelerated dramatically. Quirk and Fort (1997) estimated that in 1991 broadcast revenue accounted for 25 per cent of National Hockey League (NHL) revenues, 30 per cent of National Basketball Association (NBA) revenues, 50 per cent of baseball’s American League (AL) and National League (NL) revenues, and 60 per cent of NFL revenues.

The escalation in the price of broadcasting rights continued during the 1990s. In early 1998, American broadcasters agreed to pay $17.6 billion for the rights for the NFL for eight years. The previous deal, for 1994–7 was for $1.1 billion. One of the reasons for the bidding up of the broadcasting rights to the NFL in 1998 was that CBS learnt its lesson in 1993 when it allowed Fox, which is owned by Rupert Murdoch’s News Corporation, to outbid it in the previous auction of broadcast rights for football. With the loss of the sport, CBS plunged from first to third in the rankings and this deal projected Fox to be one of the big four broadcasters in the United States together with NBC, CBS and ABC. In the 1998 deal, Fox and CBS shared NFL coverage with ABC and ESPN (both owned by Disney), and left NBC with no football coverage at all.

In America, the major funding for these television deals has come from free-to-air channels. Sport attracts massive audiences. American football is definitely the number one sport. Nine of the all-time top ten television programmes in terms of audience size are Super Bowl finals. The record is the 1996 Super Bowl final which attracted a TV audience of 138.5 million viewers. In recent years, MLB and NBA have competed for the number two status, while NHL is ranked as number four among the professional leagues. This picture is confirmed in Table 1.1 which shows the TV rights for the four major professional leagues. The table shows strong price increases, although one also finds periods with slower growth, for example in the early 1990s. Table 1.1 confirms NFL’s dominating position also in monetary terms. However, as the table only includes deals between national channels and the leagues, it does not convey the complete story. Over the years, MLB, NBA and NHL have received considerable amounts of money from selling TV-rights to local stations.

■ Table 1.1 North American sports rights (only including central deals)

The motive of the television companies in bidding for such games is the ability to sell advertising slots at hugely inflated prices during such games, which last two or three times longer than the equivalent in Europe, and are broken more frequently by advertising slots than is the case in Europe. However, the benefits of having televised football go beyond the advertising revenues generated during the games. In fact, in most cases, the price of broadcasting rights exceeds considerably the amount of money generated in advertising. Quirk and Fort (1999) estimated that NBC’s four-year NFL contract between 1990 and 1994 lost the network $200 million with CBS losing almost twice as much on the deal. Both networks, however, bid for the next contract and CBS lost out considerably by being outbid by Fox.

In contrast to the USA there was little or no competition in the European television market in the early post-war years. Although European countries differ substantially in the development of sport and broadcasting there are common trends and this will be illustrated by looking at the UK position in detail. In the UK, for instance, until 1955 there was only one channel, the BBC, a non-commercial public service broadcaster. Over this period the BBC developed extensive televised sports coverage in Britain, televising most of the major national sporting spectacles. Over this period, however, there was no live television coverage of the matches in the main professional team sports because of fears by these sports that live television coverage would reduce attendances at matches.

Whannel (1992) suggests that there were good economic reasons for the BBC to put so much emphasis on sport. He indicates the inequality of market power between the buyers and sellers of broadcasting rights for sports events that existed in the early part of the post-war period with one buyer, the BBC, faced by a large number of suppliers of sports events, leading to low broadcasting rights fees and cheap programming costs for the BBC’s sport coverage.

The arrival of ITV, a commercial public service broadcaster, in 1955 destroyed the BBC’s monopoly on the buying side of the market and increased the level of fees. However, the BBC continued to dominate the broadcasting of sport, with ITV only really competing to televise soccer.

Throughout the 1970s, soccer coverage was handled by negotiation between the BBC and ITV, and the Football League and the Football Association. The two TV channels cooperated to share coverage rather than compete against each other. Table 1.2 shows the history of the contracts for televised soccer from 1983, when the first televised live Football League matches were shown, until 2001. Deals for 1983–5 and 1986–8 were joint deals with both the BBC and ITV with the annual rights fee rising slightly from £2.6 million in the 1983–5 period to £3.1 million in the 1986–8 period.

■ Table 1.2 The cost of the rights to live league matches from the top division in England, 1983 to 2001

The major escalation came when ITV pushed up the annual fee to £11 million in 1988–92 for its exclusive coverage with a large increase in the number of live televised matches to 18 per year.

It was not, however, until BSkyB, a pay-service satellite broadcaster, entered the scene, most notably with its bid for soccer’s newly formed Premier League matches for the 1992–7 period, that the landscape of sports broadcasting in Britain changed dramatically. BSkyB, with its owners Rupert Murdoch’s News Corporation (owners of Fox), used to the much stronger competition for sports broadcasting rights in the USA, simply raised the price for the rights from its artificially depressed level. The 250 per cent increase in the level of fees for televised soccer in 1988 was matched again in 1992 when BSkyB won the rights for 60 live matches of the Premier League at a cost of £38 million per year. When the deal was renegotiated in 1997 there was a further 337 per cent rise in the annual rights (MMC, 1999).

The 2001–4 deal of £1.1 billion was again with BSkyB, as was the 2004–7 deal. Both these deals involved more live matches per season. The fact there was no increase in the price BSkyB paid for the 2004–7 rights to all the live games was seen by many as an indicator that the boom time for broadcasting rights was over. By 2004, for many English Premier League clubs broadcasting income was already the single most important source of income. For Chelsea, for instance, in 2003/4 39 per cent of total revenue (£143.7 million) came from the sale of broadcasting rights compared to 37 per cent from matchday income, and 24 per cent from commercial income. Manchester United, with by far the largest capacity stadium in the Premier League (at 67,500), had the same proportion of revenue (36 per cent) for both broadcasting income and commercial income. Arsenal, on the other hand, with a stadium capacity of only 38,500 had 52 per cent of its total revenue coming from broadcasting income in 2003/4 with only 29 per cent coming from matchday income (Deloitte, 2005).

During the life of the 2004–7 contract the European Commission intervened on the grounds that BSkyB was in a monopoly position in relation to the control of broadcasting rights for live Premier League games. It insisted that when the rights for the 2007–10 period were auctioned that at least one of the packages offered went to a different broadcaster. As a consequence, of the six packages offered by the Premier League for the 2007–10 period, BSkyB only secured four of them consisting in total of 92 live matches. BSkyB paid £1.3 billion for these games at a cost of £4.76 million per game compared with an average cost per game over the 2004–7 period of £2.47 million per game, a 93 per cent increase in the cost to BSkyB. The other two packages went to an Irish television station, Setanta. Their packages consisted of 46 live games per year at a total cost of £392 million, or £2.8 million per game, considerably less than the cost to BSkyB but more than BSkyB paid for each game over the 2004–7 period. The total income to the Premier League from the new deal was £1.7 billion over three years, a massive 67 per cent increase compared to 2004–7. The intervention by the European Commission resulted in a considerable escalation in the price of the broadcasting rights.

Britain has followed America in the escalation in the fees for broadcasting rights for the major professional team sports. There is a clear difference, however, between the motives of the American broadcasters competing for the rights to the NFL and the motives of BSkyB, also 40 per cent owned by Rupert Murdoch’s News Corporation, for acquiring the rights to Premiership soccer. American broadcasters bid up the rights to the NFL because of its importance in winning them market share, and also because of the ability to increase advertising revenues for advertisements during soccer games. BSkyB bids for Premiership rights to increase revenue from subscriptions to its pay-per-view channels.

For BSkyB, however, sport has become much more important economically than it ever was for the BBC. The BBC receives its revenue from the licence fee and has a responsibility to provide a breadth of programmes to satisfy ‘the national interest’. This included prominence for sport because of the historically important role of sport in British culture. However, the BBC could never dedicate the share of its income (over 50 per cent) that BSkyB dedicates to sport, as this would be regarded as unbalanced for a public service provider.

Whereas in the American scenario, there is correspondence between the objectives of clubs, broadcasters, the league, advertisers and major sponsors since they all get maximum exposure to the country’s largest television audiences, in the British case there is conflict between the objectives of the broadcaster (maximum subscriptions) and those of the league, clubs, advertisers and major sponsors (maximum exposure). To some extent, this conflict is reduced in British soccer by the fact that there is major soccer coverage on the BBC with the ‘Match of the Day’ highlights programmes and on ITV with the European Champions’ League coverage, matches which achieved the highest television audiences of any sports programmes in the 1998/9 season. Whereas audiences for BSkyB’s live Premiership matches vary between 1 million to 2 million with the odd key match getting slightly more than 2 million, ‘Match of the Day’ viewing figures often exceed 10 million although average viewing figures are around 6 million. ITV’s live coverage of Manchester United versus Bayern Munich in May 1999 attracted an audience of 15.6 million in Britain (with a peak of 18.8 million).

Although soccer has managed to avoid the negative effects of reduced exposure on BSkyB, other professional team sports in Britain, in particular rugby league and rugby union, have not fared as well. Both these sports, encouraged by the success of the Premier League, signed exclusive contracts with BSkyB in 1996. Rugby League made the biggest change to its structure with the formation of Super League, playing in summer rather than winter, to fit in with Rupert Murdoch’s Super League World Club Challenge involving Australian and New Zealand teams. However, in the case of rugby league, their normal television audience of 2.5–3.5 million that they achieved on BBC’s Grandstand dropped to 100,000–200,000 on BSkyB. This represents a serious reduction in exposure and marketing of the sport.

Similarly, rugby union internationals in the Five Nations Championship involving England used to attract 4 million on the BBC, but dropped to below 500,000 on BSkyB. England were the least watched of all the Five Nations teams over this period despite a highlights programme on ITV following the live coverage on BSkyB. This is particularly a problem for the impact these sports have through their exposure to younger generations with potentially serious implications for the future economic health of these sports. As a consequence, England went back to the BBC Six Nations coverage when its BSkyB contract ran out.

These UK developments were mirrored in other European countries. The result has been that soccer has become the dominant TV-sport in Europe, both in terms of rating figures and rights fees. In 1998, a World Cup year, a soccer match topped the television programme popularity ranking lists in 75 per cent out of 50 European countries. In Germany and France, 86 per cent and 73 per cent respectively of the top 100 programmes were soccer-related. Six of the top ten TV programmes in the UK were soccer matches from the World Cup finals.

In the rest of Europe, as in the UK, the price escalation took off during the 1990s. This growth, however, did not correspond with the rate of growth in the rest of the economy. In each of the big-five soccer nations, the UK, Spain, Italy, Germany and France, the value of sports rights increased considerably faster than the Gross Domestic Product. For example, the Italian soccer rights increased by almost 250 per cent, in a period where the activity in the overall economy decreased by 4 per cent. In Italy, soccer absorbed 64 per cent of the total amount spent on sport rights in 2000. This proportion was 51 per cent in the UK and Spain, 41 per cent in Germany and 3 per cent in France.

In the Italian and Spanish leagues the top clubs negotiate individual broadcast rights contracts. Both AC Milan and Juventus had broadcast income close to £90 million in 2003/4, the highest of any soccer club in the world. In both cases it accounts for over 60 per cent of total revenue. At the other end of the scale, Celtic and Rangers received £16.1 million and £7.5 million respectively (the difference largely stemming from Celtic’s longer run in European competitions) from broadcasting income in 2003/4 accounting for only 23 per cent and 13 per cent of their total income. These two clubs are big clubs from a small league and the collective broadcast rights deal for the Scottish Premier League disadvantages these two major clubs in income terms.

We can therefore see major differences between the European situation and the situation in the USA with regard to sports broadcasting over the post-war period. In Europe, professional team sports programmes were mainly broadcast on public service broadcasting channels until late in the 1980s. In recent years this pattern has changed. Pay channels have acquired a large slice of the most attractive soccer rights, while public service broadcasting channels and other channels with maximum penetration have been restricted to highlights programmes. As an example, live matches from the domestic premier leagues in the ‘big-five’ European soccer nations are only screened on pay channels.

The discussion...