Sports Could Save the TV Business—or Destroy It

Cable TV isn't a "sports tax." Or an AMC tax. Or a History Channel tax. It's an entertainment flat tax.
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Reuters

Here's the week's news in TV economics in one sentence: Without live sports, the TV business could fall apart; and because of live sports, the TV business could fall apart.

Confused? Ha, well, blame the bundle, perhaps the most successful and most misunderstood business model in entertainment.

If the $70 billion television industry is on the verge of imploding, as viewer attention flees to DVR'd shows and Netflix accounts, live sports is the keystone keeping the roof from collapsing. And live is the key word. The bulging of the bundle and the rise of on-demand video have thinned out ratings and partially severed the tendon between live-viewing and lucrative advertising. But in a time-delayed video world, the biggest games still drive dependable live audiences, making sports rights the most valuable resource in the whole TV ecosystem.

... so, that's why cable needs sports.

Here's why sports could destroy cable ...

Networks have recognized that sports has unique social currency in live viewing, and they've stormed the marketplace in the last few years, throwing egregious sums of money in exchange for exclusive deals. Those costs are trickling up. As Patrick Hruby explained, "big time sports are taking a minimum of $84.90" out of each family's budget even if they don't care about sports. This amounts to a "sport tax" on families forced to pay for something they don't watch. Cable companies sensing this backlash are starting to resist new sports networks. There is even chatter about what would happen if sports existed on a separate "tier" that untied the Gordian Knot of TV.

Households will decide for themselves if the cost of their cable package is worth the price ($73 a month, on average). But before we cheer the death of the cable bundle and the end of the sport tax, consider what might die along with it.

"The AMC Tax"

Let's talk about a channel that many non-sports fans might consider utterly critical to the bundle: AMC.

You might think that AMC makes money from all the people who watch "Mad Men" or "The Walking Dead." The opposite is true. AMC makes money from all the people who don't watch "Mad Men" or "The Walking Dead."

Here's what I mean. Only 2.5 million people watch the typical "Mad Men" episode. Eleven million watch the zombies. The other 80+ million households who have, but don't watch, AMC still have to pay between $3 and $3.50 each year to the network out of their cable bill. They don't have a choice.

Much more than advertising, it is these mandatory fees that explain exactly how AMC makes money. Reading from the company's 10-K annual report: "Affiliation fees [i.e.: a little more than $3 from each pay-TV household each year] represents the largest component" of AMC's revenue.

"Mad Men" and "The Walking Dead" might still be produced in an a la carte world. But maybe not. We only know that today, these sensational shows exist because the vast majority of the country that doesn't care who Don Draper is still pays for his suits.

That's the AMC Tax.

A National Non-Mandatory Tax

You can think of TV as "I pay for what I want, plus a sport tax," or " ... plus an AMC tax," or "... plus a History Channel tax." But when you line up 100 million pay-TV households, a bigger picture emerges. We are all paying each other's TV taxes.

The cable bundle is perhaps the closest thing to a non-mandatory flat tax in America. The idea is that if 100+ million households all pay $70ish a month for television, the breadth of the customer base will support a diverse and thriving entertainment business without asking any group to pay too much for what they want. Readers -- and, more certainly, network executives -- might bristle at the idea of TV being compared to taxes. But what is the government if not the biggest of bundles? Every year, 150+ million tax-paying families across the country pay into a common system with each household consuming varying amounts of different goods and services (interstates around D.C., defense spending in San Antonio, NIH in Bethesda). The point isn't that everybody in America consumes every good and service provided by the federal government. The point is that public financing makes a diverse and quality array of goods and services possible for those who want and need them.

The subscription fees in your bundle are, in a way, like a national entertainment treasury divided between a handful of media companies. One hundred million subscribing households pay a collective $7 billion a month into the entertainment super-coffers, with each family consuming varying amounts of different programming, all of it made affordable by scale. The TV business is so rich in part because its popularity allows it to achieve the scale of something like public financing.

I don't know if this is an entirely good thing, or an entirely unchangeable thing. But it is the thing that's created the current golden age of TV.

Sports is the final bastion of must-see-live-TV. It's both saving the bundle and threatening to make the entire enterprise unaffordable and unworkable. If the latter happens, we'll all know, because pay-TV households will do something to their entertainment tax bill that they simply can't do to their federal tax bill. They'll tear it up and move on.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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