The Nexus of Television and Sports in Transition, Part I: The Worldwide Leader in Profits

Situated on US 6 about 20 miles southwest of Hartford, the town of Bristol, Connecticut, was one of the early New England industrial towns. Incorporated in 1785, a few years after the end of the American Revolution, its economy took off as it became known as a clock-making town, eventually becoming home to the American Clock and Watch Museum, and later became known as the “Bell City” for its role as a center of doorbell production. As you approach the town from New York along quaint two-lane Route 6, the 19th-century style of architecture New England is so famous for gives way to forests and then a large reservoir, until you cross a railroad track and begin seeing rows of strip malls and small houses on your left, nothing to distract you too much from the Connecticut foliage and fields. Approaching from Hartford on Route 6 in the other direction, the four-lane highway slows down and shrinks to two, then as soon as you hit the line you’re slammed with gas stations and car dealerships as the road widens again through modern suburbia. Approaching from Providence and other southeastern points (or even Hartford) on Route 72, the expressway seemingly isolated from all civilization comes to an end just short of the town line, but the road continues as a four-lane divided parkway, avoiding the Forestville area and continuing not to engage with the surrounding, though visible, community until after it passes Malones Pond, beyond which it speeds past apartment buildings and incongruous houses.

Approaching from New Haven, which is almost due south of Bristol, Google Maps recommends taking Interstate 91 to Meriden, then turning onto I-691. As I-691 approaches its west end, a single lane splits off to form an on-ramp to eastbound I-84, leaving the other two lanes to continue west. A sign welcomes you to Bristol’s neighbor Southington before the ramp even reaches I-84, and scenic vistas speed by along the long ramp as various roads pass underneath; by the time you finally reach I-84 only the single-lane nature of the ramp tips you off that you weren’t on it already. The freeway remains fairly straight but abruptly turns left as you hit Exit 30, then swings right and remains relatively straight again, but prepares to curve to the right as you take Exit 31 to route 229. As the off-ramp rises to meet the road, a collection of signs on the left informs you what awaits in Bristol if you turn that way, none of them mentioning the most salient feature of this road into Bristol. After the initial spurt of gas stations and a turn-off to a Target near the I-84 interchange, Route 229 settles down past some relatively nondescript houses and other businesses; though initially a four-lane highway, the southbound side soon shrinks to a single lane as the highway becomes lined mostly with trees, eventually opening up to more houses and a few churches, which, punctuated with occasional spurts of businesses, remains the general character of the highway for some time.

And then, before you even get to the town line, you see it. Until recently, the first thing you saw was just a mass of brick buildings, only different in height from any other office park, stretching off into the distance; then the road turns left, widens back to four lanes, and hits a stoplight at a dead-end road. Then you see the massive parking lot, the humongous artifice (most of it all one building) of brick and glass, a satellite dish facing the roadway. More satellite dishes face the dead-end road you passed up, where you could see the full majesty of what lies before you. This is the headquarters of ESPN, the most powerful brand in American media, once a plucky underdog in the American sports landscape, now a seemingly unstoppable multi-billion dollar juggernaut that has become the profit engine of the Walt Disney Company, far more important to the House of Magic than Mickey Mouse. Here, in a random town in the middle of Connecticut, is the capital of the American sports universe, a place that now finds itself at the epicenter of an increasingly heated debate over the increasingly important role of sports to the cable TV industry, the many millions of dollars flowing into Bristol and from there to leagues and conferences across America and the world and its starting point in the pockets of cable TV consumers, and even the future of the television business itself.

No one could have imagined any of this when a man named Bill Rasmussen bought land on the site of a former dump to be the home of what was then called the “ESP Network” from the city of Bristol in 1978. Rasmussen had recently been fired by the Hartford Whalers (the hockey team that would later become the Carolina Hurricanes) and wanted to create a monthly cable show about Connecticut sports which turned into an idea for a national 24/7 cable sports network.

Until just a few years before, cable television, then known as community antenna television or CATV, was little more than a way to deliver television signals to mountainous and other areas that couldn’t receive them. As strange as this may sound now, the notion of “pay TV” was considered absolute poison at the time, and several attempts to create pay TV services had come and gone by the wayside. But cable had a big advantage over broadcast: it could simply accommodate more channels. 82 channels had been allocated for terrestrial television broadcasting, but less than half of them could be used in any given area because there had to be at least one channel’s buffer from one station and the next, and channels above 69 were rarely used for anything other than translators of larger stations and would eventually be reallocated for other services in 1983, meaning no area had more than 34 stations and most had far less.

Most of those stations were UHF stations that were still, for the most part, second-class citizens to the old-standard VHF stations; reception of UHF stations was often troublesome, the audiences miniscule, and the FCC had only opened up the UHF band in 1952 after lifting the freeze on new stations, but didn’t actually require set manufacturers to include UHF tuners until a decade later. There were only 12 of the prime VHF channels, so no market could have more than seven – 2, 4, 5 or 6, 7, 9, 11, 13 – and only New York and Los Angeles had that, though Seattle would come close, only lacking channel 2 because it was used by Vancouver, BC’s CBC affiliate. (4 and 5 are separated by about a channel’s length, and 6 and 7 are separated by the entire FM band and a few other uses; in fact, those with FM radios could pick up the audio from a station on channel 6 by tuning to 87.7.) Most areas had no more than three or four – affiliates of the Big Three television networks, CBS, NBC, and ABC, plus a public television station – and they only had that much because the FCC had rejiggered the allocation table in the sixties to keep ABC from going the way of the defunct DuMont network. The remaining UHF stations were home to an eclectic hodge-podge of programming; most grabbed whatever cheap programming they could get their hands on, but there were quite a number of eclectic operations taking up space in the band.

Cable had the use of the entire television spectrum at its disposal, and in the late 50s they attempted to import distant signals from outlying markets into their coverage area, but broadcasters protested at the increased competition and the FCC put the kibosh on the importation of distant signals. In 1972, however, they lifted the restriction, which allowed Ted Turner, four years later, to turn his station in Atlanta, then called WTCG, into America’s first “superstation” by exporting it to cable companies across the South, with Atlanta Braves games as the star attraction. Cable attracted an even more eclectic and diverse mix of people looking to get their shows on the free channels cable had available, from hippies to Nazis, even if the audiences were even more miniscule.

But something far bigger was about to transform cable and television in general, and that thing was satellite transmission, which could allow anyone to beam a signal to a satellite above the earth and deliver it to anyone in the country. In 1975 Time-Life began beaming HBO, which had been launched in a few systems in Pennsylvania and New York in 1972, across the country on satellite, starting with the famed “Thrilla in Manila” between Muhammad Ali and Joe Frazier. HBO charged a fee to subscribers but then provided them with movies and sports commercial-free. Besides Ted Turner, televangelist Pat Robertson soon joined the fray with his Christian Broadcasting Network, as did the earliest version of the modern-day MSG channel, which eventually became USA.

Most of these channels had schedules similar to the broadcast networks, with all different types of programming airing throughout the day, from movies to sports to sitcoms to dramas. ESPN was the first “narrowcast” channel, airing nothing but sports all day long. Most people said it would never work, that no one would want to watch a single type of programming all day. But Rasmussen felt he had a killer app: live coverage of the earlier rounds of the NCAA tournament for the first time, on the heels of the historic 1979 national championship game between Larry Bird’s Indiana State and Earvin “Magic” Johnson’s Michigan State. Rasmussen convinced Stuart Evey, a vice president at Getty Oil, to use his considerable clout to get the board to fund his idea; Evey’s influence and commitment to the network was probably the only reason it survived years of massive losses under Getty. Evey brought in Chet Simmons, who had helped build ABC Sports and was then running NBC Sports, as the new network’s president, bringing it instant credibility. Simmons, for his part, came up with another piece of signature programming: live coverage of the NFL Draft for the first time, an idea that prompted Commissioner Pete Rozelle to utter the immortal words, “Why would you want to do that?” Evey and Simmons would end up forcing Rasmussen out of his own creation a little over a year after ESPN went on the air.

In those days, most of ESPN’s schedule consisted of taped sporting events, with the occasional forays into whatever they could get the rights to to put on the air, including the immortal Australian Rules Football. The NCAA Tournament, and the other college basketball that went along with it, was their crown and only jewel, and ESPN essentially built March Madness into what it is today with their idea to whip around the country to wherever the action was taking place. Evey convinced ABC to buy a minority stake in the network in 1982, even though the network was still losing mountains of money, and the two of them teamed up to score the rights to the fledgling USFL, while Simmons, whose relationship with Evey was becoming increasingly heated, accepted an offer to become the new league’s commissioner. In 1984, after Getty was bought by Texaco, ABC bought 80% of the network with the remaining 20% stake going to RJR Nabisco in order to get Don Ohlmeyer, whose consulting firm was funded by RJR Nabisco’s head, to consult for them.

Another landmark in ESPN history occurred in 1984. For years, the biggest colleges had been chafing under the NCAA’s strict control of television contracts that restricted how much games could be shown and shared the wealth with smaller colleges. They banded together as the College Football Association and took the NCAA to court. The case made it all the way to the Supreme Court, which ruled 7-2 that the NCAA’s control over televised college football violated the Sherman Anti-Trust Act. The colleges were now free to sell their games however they wished – and ESPN would be able to televise live college football games for the first time. NCAA v. Board of Regents of the University of Oklahoma would mark a major turning point in the history of college football, and ESPN would play a big role in it. But the moment when ESPN finally “arrived” came when it wrangled a package of nine games from the National Football League in 1987. With the kingpin of American sports in its back pocket, ESPN could finally begin turning a profit.

But ESPN kept growing and growing, even when you thought they had reached their peak. Major League Baseball put together a package of enough games to build an instant competitor to ESPN in 1989, forcing ESPN to pay more than the bean counters were comfortable with, but once they had it in the bag they could forestall any competitor, especially after the 1993 launch of ESPN2. On the heels of the NFL deal, the company hired a former magazine editor named John Walsh and tasked him to build a legitimate news operation within their walls and turn SportsCenter into a top-notch destination for sports news; it paid off when Keith Olbermann and Dan Patrick turned the late-night SportsCenter into appointment viewing from 1992 until Olbermann’s acrimonious departure in 1997, with a four-month hiatus while Olbermann helped launch ESPN2. Olbermann and Patrick helped make the network hip as the 90s progressed, especially after the debut of the “This is SportsCenter” commercials in 1994.

And ESPN kept on acquiring rights and staving off potential competitors; it brought “extreme” sports into the mainstream, and greatly shaped them, with the 1995 advent of the X Games, and when Time Warner started making plans for its own sports news network, CNN/SI, in 1996, ESPN rushed ESPNEWS to the air. ESPN picked up a full season of NFL rights in 1998, and with the acquisition of NBA rights in 2002, ESPN would become the first entity to hold all four major professional sports simultaneously. And when ABC lost Monday Night Football in 2005, ESPN paid over a billion dollars, more than any other NFL rightsholder, to move from Sunday to Monday nights and began setting cable viewership records left and right, while ABC’s remaining sports properties were rebranded “ESPN on ABC”. ABC Sports was no more; the little network ABC had bought a minority stake in over twenty years before had now consumed their entire sports operation.

And yet, ESPN still wasn’t done. In 2008, college football’s Bowl Championship Series was midway through a four-year deal with Fox, a network whose only other college football was the Cotton Bowl, and who had, by that point, been utterly stymied in any attempt to acquire any other college football rights, resulting in a minor disaster on-air as NFL announcing teams called college bowl games and producers obsessed over marching bands. ESPN, meanwhile, was smarting over the fact ABC had lost the BCS rights four years earlier. So it presented the BCS with an offer for $125 million, more than enough to beat Fox’s $100 million offer, for four years to televise all five BCS games on ESPN. In a move that would have been unthinkable in 1979, college football’s national championship, the most popular sporting event of each year that didn’t have anything to do with the NFL or Olympics, would air on the cable channel ESPN, not on any of the four broadcast networks, as would “the granddaddy of them all”, the Rose Bowl. ESPN was no longer the plucky underdog run out of a ramshackle building in Bristol, Connecticut. It was truly “the worldwide leader in sports”, and it seemed nothing, not even the Super Bowl or World Series, was beyond its reach.

How did this happen? How on Earth was ESPN willing and able to pay more than any of the broadcast networks for an event as popular as the BCS National Championship Game? Why did ESPN want to put the game on ESPN, not ABC, to begin with, and why did they want to move the Rose Bowl from ABC, which they had a separate contract with, to ESPN? The answer lies in a combination of the increased popularity of cable television, boasting around 90% of American households by 2008, and the business model adopted by most cable networks that ESPN had played a critical role in pioneering. In 1982 or ‘83, ESPN, still bleeding money like crazy, began going around to cable operators asking for a carriage fee of a few cents per subscriber. Cable operators were outraged. Cablevision’s contract was expiring and ESPN CEO Bill Grimes and COO Roger Werner flew to Long Island in March of 1983 to get them to accept a carriage fee. Talks were extremely contentious, and Grimes and Werner got to the point of threatening to pull the plug on the whole thing, but eventually, Cablevision’s directors caved. They would pay ESPN ten cents a subscriber.

It was a watershed moment in the history of the cable business. Henceforth, rather than collect all their money from advertising as the broadcast networks did, cable networks would operate dual revenue streams, collecting money from both advertising and from subscriber fees from cable companies, and it soon became the norm in the industry. In 1992, Congress passed a law allowing broadcast stations to get in on the action by demanding “retransmission consent” from cable operators, even though they already benefitted from “must-carry” regulations forcing cable companies to show every station in a market, and while that market was slow to catch fire – ABC elected to tie carriage of ESPN2 to that of its stations rather than charge cable operators – eventually the floodgates opened.

In September, CBS and Time Warner Cable ended a contentious dispute over retransmission consent where CBS was trying to increase its retransmission fee to $2 by the end of the deal. Other station owners charge more than $3. ESPN charges around $5.54, and could pass $6 by the end of 2014 and $8 by the end of the decade, thanks to the negotiation of yearly 20% increases in its fees to pay for the full-season NFL deal in 1998. The next-most expensive cable channel is TNT at $1.33, with the Disney Channel and NFL Network the only other channels charging over a dollar. And that $5.54 pays only for the main channel, not for ESPN’s numerous auxillary networks.

Bill Rasmussen had stumbled onto the absolute best field for him to build a cable network around given the future course of the television business. Thanks to the Internet and the general fracturing of the media audience, young people, especially those in the 18-49 money demo and especially especially men in that demo, are getting harder and harder to reach, and sports are the one place guaranteed to attract eyeballs in that money demo. Sports are also one of the few types of programming that are DVR-proof, that you can’t just record and watch later or watch online; you have to watch live sports as it happens. That makes sports rights some of the most valuable programming on television, programming everyone running a television outfit is falling over themselves to get as much of as possible. ESPN collected a projected $8.2 billion in revenue in 2012, more than all but the biggest media conglomerates, making it the most profitable division of the Walt Disney Company and in turn making Disney the most profitable company in American media, even though Disney only owns 80% of the Worldwide Leader in Sports, with Hearst owning the 20% that ABC sold to RJR Nabisco in 1984.

Disney’s ESPN-fueled profits are the envy of the television industry, and seemingly everyone is falling over themselves trying to get a piece of the lucrative sports pie. All three of the other major broadcast networks are now associated with branded sports cable channels, and they’re not alone. Time Warner’s Turner division considered turning truTV into an all-sports network after putting NCAA Tournament games on the channel, and even Discovery Networks reportedly kicked the tires on putting English Premier League games on its Velocity network. After years of trying and failing to penetrate the American market, Al Jazeera finally succeeded not with its news channel, but by buying the rights to the Spanish, French, and Italian soccer leagues and putting them on its beIN Sport channel.

With so many sports channels out there, leagues and conferences are raking in the dough as all the various channels fight it out for the mass of inventory out there, as well as getting in on the action themselves; all four major professional leagues have their own networks, as do two college conferences with a third on the way, to say nothing of the numerous sport-specific networks owned by independent entities. But with the rights fees networks pay to leagues skyrocketing, and the carriage fees those networks charge cable operators following in kind, many see a bubble in sports rights inflating, a bubble that’s bound to pop once consumers who couldn’t care less about sports decide they’re mad as hell and they’re not going to take it anymore.

For the moment, however, none of these competitors can compete with the reach of ESPN, which has enjoyed over a decade with a veritable monopoly over the sports landscape, one that gives it unbelievable power. To a large extent, ESPN is sports, or at least defines what sports is, thanks not merely to its array of sports rights but all the shows it schedules around it – shows like SportsCenter or Pardon the Interruption.

Ask NHL fans about ESPN’s power to set the conversation. The league and ESPN had had a long and fruitful relationship together, and hockey effectively built ESPN2 into a network with a presence nearly on par with ESPN, but by the middle of the 2000s hockey was being increasingly shunted aside, making way for the likes of poker. In the midst of a contentious lockout that would end up cancelling the entire season, ESPN effectively lowballed the league and the two sides ended up parting ways. With nowhere else to turn to at the time, the NHL would end up confined to a channel then known as the Outdoor Life Network. The move attracted ridicule – what’s an indoor sport like hockey doing on the Outdoor Life Network? – and had practical consequences as well, as the network had very little distribution outside systems run by its owner, Comcast. But Comcast had a method to its madness – OLN’s profile had already been raised when its rights to the Tour de France allowed it to luck into Lance Armstrong’s incredible post-cancer (and ultimately, too good to be true) run of seven straight Tour de France titles, and the NHL deal wound up being the first stone that allowed Comcast to eventually rebrand the network to Versus, and later, after Comcast acquired NBC Universal, to the NBC Sports Network.

But in the short term, it meant the NHL would no longer be partners with ESPN, and to hear hockey fans tell it, that meant ESPN would treat the league as a complete nonentity. Hockey highlights disappeared from SportsCenter and its storylines were completely invisible to the masses of sports fans for whom ESPN set the conversation.

Not only does ESPN set which sports get to be part of the narrative, it sets the narrative within each sport. Texas A&M started playing in the SEC in 2012 after being a charter member of the Big 12. Both conferences had contracts with ESPN, yet as soon as Texas A&M jumped to the SEC it started getting a lot more exposure, with “College GameDay”, ESPN’s multi-hour Saturday pregame extravaganza, coming to College Station for a game with Florida. For the rest of the season, ESPN focused attention on the school’s star quarterback, Johnny Manziel. Later, after Manziel won college football’s highest individual honor, the Heisman Trophy, the school’s athletic director said it never would have happened if Texas A&M had remained in the Big 12. As we’ll see in Part II, this might be the least of the many ways ESPN has shaped college sports.

One way ESPN maintains its dominance is having its fingers in as many different pies as possible. Name something that can be linked to sports – restaurants, amusement parks, you name it – and ESPN probably has its name on at least one of them. Beyond subscriber fees, one way ESPN makes so much money is by finding as many different ways to squeeze money out of its contracts as it can. A typical contract will not only give ESPN the rights to show something on television, but also on the radio, on digital platforms, in international markets, and so on, plus as much rights to show highlights on all its platforms as it can. Not everything has worked out – an ESPN-branded phone crashed and burned, and Americans weren’t flocking to buy 3D TVs to watch ESPN3D – but all in all, it’s very difficult for potential competitors to compete with all ESPN has at its disposal.

Digital platforms have been especially important. ESPN has been a pioneer in entering as many new fields in the digital landscape as they can, to the point that many of its contracts give ESPN the rights to games on platforms that don’t exist yet. In 2007, ESPN announced that it would begin placing a plethora of live sports events on the ESPN360 streaming website. ESPN would fund ESPN360 and all its events the same way it has always funded everything it has gotten its hands on: charging cable providers, or in this case, asking ISPs to pony up for access to ESPN360 and making it free to subscribers of participating ISPs (or to users of networks on college campuses and military bases).

The plethora of live sports on ESPN360 originally included many sports events that were available on ESPN’s more traditional cable television platforms. Then in 2010 and 2011, ESPN began making agreements with cable providers to offer live streams of its channels to customers who authenticated with their cable provider – the “TV Everywhere” model propounded by cable companies – and eventually renamed ESPN360 to ESPN3, presenting it as another “network” in the growing family, and incorporated it into the WatchESPN site and app. Before long, ESPN pulled all its live events airing on those regular cable channels streamed by WatchESPN off of ESPN3, forcing people to authenticate with WatchESPN to watch them. It was a move intended to keep ESPN3 from being so attractive an offering it might tempt people to drop their cable subscriptions and rely on it entirely. It also allows ESPN to squeeze more money out of cable and satellite providers: according to court documents, providers that offer WatchESPN are charged 19 cents more than those that don’t.

The digital streaming space is not very mature and can be a confusing landscape, as it is only slowly being recognized as a natural extension of traditional television. Part of the reason ESPN buys digital rights so comprehensively these days is that until recently digital rights to each different platform were sold separately, with the result that ESPN could acquire rights to show Monday Night Football to desktop computers, laptop computers, and tablets – but not smartphones, where the NFL has an exclusive deal with Verizon. Ad breaks on WatchESPN are often filled with repeated ads and filler material. Nor has it exactly caught on yet: 26 million people watched the BCS championship game earlier this year, but only 773,000 watched it on WatchESPN. But all parties are bullish on streaming as the wave of the future: ESPN recently signed a new contract with Major League Baseball worth double what it was paying before, despite very little new inventory. Rather, according to reports, a big chunk of the increase could be chalked up to streaming rights.

ESPN has had to stave off or bring down competition throughout its existence, other sports channels that could leach off viewers and inventory, and such has motivated a good number of the moves it has made, from overpaying for baseball rights to the launch of multiple auxiliary channels and on and on. But WatchESPN is a response to a threat of an entirely different kind: people going without ESPN, or any other sports channel, entirely. WatchESPN and the similar services offered by would-be competitors are intended to ensure that people can’t watch the numerous sports events offered on ESPN without a cable subscription that includes ESPN. In this, ESPN, its competitors, and the cable operators are all of one mind on this: the Internet must be made to work for the cable TV industry, not against it, lest it pose a serious existential threat to its entire existence.

Tomorrow: How ESPN has turned college sports upside down over the past thirty years.

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