(Bloomberg Opinion) -- The foundation of Rupert Murdoch’s empire — at least the television part of it — was professional sports. In 1992, three years after launching his European satellite TV company, Sky Television, Murdoch bought the broadcast rights to a newly formed soccer conference, England’s Premier League. He paid 304 million pounds ($398 million), which was considered an outrageous sum at the time, but was ultimately a bargain. The Premier League became the most glamorous soccer league in the world, causing sports fans to sign up for Sky by the millions.
Two years later, Murdoch shocked the American sports world by outbidding CBS for the broadcast rights to the National Football League. The Fox network was eight years old, but still seeking credibility among viewers. The $1.58 billion it paid for the four-year deal gave it that credibility. Once again, the cognoscenti gasped at the price Murdoch paid. Once again, it turned out to be a bargain.
Fast forward to June 2018 when Murdoch agreed to sell most of his Fox television and movie assets to the Walt Disney Co. for $71 billion. As a condition of government approval, Disney promised to sell off Fox’s 22 regional sports networks, or RSNs. Analysts predicted that they would fetch between $20 billion and $22 billion, according to Bloomberg News.
Instead, Sinclair Broadcast Group Inc. agreed last week to buy them for $10.6 billion. True, the YES Network that broadcasts the New York Yankees — by far the most valuable of the RSNs — was not part of the deal, as the Yankees bought it back for $3.47 billion. Even so, that means that the Fox networks garnered between $6 billion and $8 billion less than Disney had hoped.
If Murdoch’s original deal with the NFL stands as an important early marker in the explosion of sports rights in the U.S. — and it does — I’m wondering if we’ll someday look back on the sale of Fox’s RSNs as the moment when the sports rights bubble began to burst. I think it might.
My thesis is based on two interrelated factors. The first is that cord-cutting is inevitably going to impinge on the ability of the TV networks to pay ever-higher prices for professional and big-time college sports. I don’t deny that sports, especially football, has become more important than ever to the legacy networks. There are many people who continue to subscribe to cable TV solely because they would otherwise miss MLB or NBA playoff games or the NCAA’s March Madness tournament. Without sports, they would likely cancel their cable subscription.
But ESPN, Disney’s all-sports network, has lost about 15 million subscribers over the past half-dozen years. That represents more than $1.2 billion in lost revenue. CBS Corp.’s revenue has been mostly flat since 2012. Disney’s chief executive Robert Iger has warned that as the company pushes aggressively into streaming services, its profits will take a short-term hit. According to Richard Greenfield, an analyst with BTIG, 1.1 million viewers cut the cord in the first quarter of 2019, the biggest quarterly decline ever. You have to wonder how the legacy networks will be able to keep paying ever higher rights fees — as they have for decades — if they keep losing viewers.
Regional sports networks are particularly vulnerable. For one thing, they are very expensive — Fox Sports Detroit charges cable companies a monthly fee of $6.69 per subscriber, while Fox Sports Arizona charges $5.48, according to Forbes. (ESPN, the most expensive network on cable, charges over $7 per subscriber.) They are a good part of the reason cable bills are so high.
To cut down on those bills, many people are moving to so-called skinny bundles. These bundles often have ESPN and the major networks, but avoid the RSNs to keep costs down. Even dedicated sports fans seem willing to live without them.
The hope among sports executives is that the big streaming services, like Alphabet Inc.’s YouTube or Facebook Inc., which have more money than they know what to do with, would be eager to land pro and college games — and they would keep the rights prices sky high. But to judge from the sale of the Fox RSNs, this appears to be unlikely. Neither YouTube nor Facebook made a bid for the regional sports networks, and Amazon.com Inc. dropped out early in the process. Amazon is currently airing the NFL’s Thursday night package, but it’s paying only $50 million a season. Fox is paying around 10 times that to broadcast those same games.
Next year, both the NFL and the National Hockey League will have rights packages up for grabs. It’s not out of the question that Facebook or another big technology company will bid for the rights, but I don’t think that will happen. These companies were never built around sports, and they simply don’t need pro football to be successful. Assuming they don’t bid — and assuming cord-cutting continues at its current pace — the legacy networks will probably offer less than they have in the past.
The modern economics of sports has been built on the notion that rights packages can only go in one direction: up. That’s why Steve Ballmer was willing to pay $2 billion to buy the Los Angeles Clippers, and why the New York Yankees are worth $4 billion, according to Forbes. It’s also why the Philadelphia Phillies were able to sign Bryce Harper to a 13-year, $330 million contract, while even a middling professional basketball player like the Indiana Pacers’ Wesley Matthews makes over $16 million a year.
How will owners react when their TV money starts to fall? How will general managers react when their payroll is reduced? How will players react when their contracts are smaller? I don’t know the answer, except for this: It won’t be pretty.
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Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”
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