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Lakers-Time Warner Cable Deal Is More Bad News For Pay-TV's Non-Sports Fans

|Includes:Charter Communications, Inc. (CHTR)

If you live in the Los Angeles area and are not a sports fan, or you are a casual one, Time Warner Cable's new 20-year deal with the LA Lakers is more bad news. That's because, as I explained last week in "Not a Sports Fan? Then You're Getting Sacked For At Least $2 Billion Per Year," virtually all digital pay-TV subscribers in the LA area - sports fans or not - are going to be footing the bill for this massive deal.

The TWC-Lakers deal is just the latest example of how ever-higher monthly fees pay-TV distributors must fork over to carry sports networks help drive up subscription rates. In this case, TWC, the 2nd largest pay-TV operator, is positioning itself to also be a major sports network owner, just as Comcast has with Comcast SportsNet. TWC's deal will help create an even bigger inequity for non-sports fans and casual fans than already existed. For this group of subscribers, who are primarily entertainment-oriented, and likely more on-demand focused in their viewership than ever, higher subscription rates - tied to a small cluster of very expensive sports networks - are inevitably going to drive them to drop their pay-TV service.

In this new deal, TWC plans to build two regional sports networks (RSNs), one in English and one in Spanish, around the marquee Lakers, beginning with the 2012-2013 season. All of the Lakers' preseason, regular season and playoff games will be on the new RSNs, unless they're being nationally telecast. The deal actually wrests the Lakers from another RSN, Fox Sports West, and from the local CBS affiliate, KCAL-TV, which broadcast 41 games. TWC reportedly paid $3 billion for the rights, which would mean $150 million/year in fees to the Lakers. While it's unknown exactly what the figure is, for TWC to have outbid Fox Sports, which itself is no shrinking violet when it comes to paying up for sports rights fees, says quite a lot. In fact, TWC seems to have fully drunk the sports rights Kool-Aid, with the company's programming head, Melinda Witmer telling the LA Times the company would be "looking at all available sports in the marketplace."

The key to making the Lakers deal work is TWC getting other pay-TV operators in the LA market to carry the new channels. But that's where things are going to get dicey. Since TWC accounts for about 2 million subscribers in the LA market, for about a 40% share, it still needs to get the other operators on board. But TWC will demand top dollar for the two RSNs, which would in turn put pressure on these other operators to raise their rates to cover their increased costs. And that's where the cord-cutting risk presents itself. Though other operators are hard-pressed competitively not to carry the Lakers' RSNs, they'll be balancing the perceived impact of higher rates to their churn levels. As LA-area pay-TV rates continue up, and the TWC deal gets more visibility as a key culprit, some subscribers will say enough is enough. Not that the champion Lakers aren't well-loved, but the risk is even higher in LA, which of course is very entertainment-minded to begin with, and also happens to have a plethora of free broadcast channels.

Aside from the non-fan and casual fan subsidy, the other lamentable aspect of the TWC deal is that no Lakers basketball will be available for free over-the-air. That's a milestone that's already happened in many other TV markets, where RSNs have swooped in, and is virtually inevitable to happen everywhere given the rich rights fees teams stand to gain.

The problem here is that people aren't stupid, all the more so in the Internet era. And they'll only stay inert for so long when their monthly bill for pay-TV is $70, $80 or $90 per month even for the lowest digital tier (which of course includes expensive sports networks). Paying for anything not used or valued is fast becoming a vestige of another age for tech-savvy consumers. Sports will not be an exception to this. For hard-core fans willing to pay any price to see their favorite teams in action, these rate increases likely won't matter. But for the other group of consumers, who are already shifting their viewership to inexpensive over-the-top entertainment services like Netflix and Hulu Plus, deals like this will only further prompt them to align their TV spending with what they actually watch and care about. That's going to fuel interest in dropping their pay-TV service.

Sports programming has huge value for sports fans, but expecting endlessly higher subsidies from non-fans and casual fans is no slam-dunk.

Stocks: CHTR