Sports TV monopolies put networks in the penalty box

For the CBC, conflict is a winning business. The public broadcaster's biggest cash cow, Hockey Night in Canada, is based on conflict: war on the ice, fury during the first intermission, the epic two-month struggle of the Stanley Cup playoffs.

But when the battle moves from the rink to the boardroom, the People's Network becomes the biggest loser. Rich, private media companies are paying big prices for sports television rights, and Ceeb officials are getting annoyed. Five years ago, the CBC held rights to the Olympic Games, the Grey Cup, Toronto Blue Jays baseball, Toronto Raptors basketball and soccer's MLS Cup. Now it has none of those. But the biggest hit may be yet to come, when the Hockey Night deal expires in 2014. Many expect the CBC will lose its signature program to one of the twin giants of Canadian sports television, Bell Media or Rogers Media—the same companies that just snatched control of Maple Leaf Sports & Entertainment Ltd., owner of the Raptors and the Toronto Maple Leafs, in a $1.3-billion deal.

"Have we reached the point of irration-al exuberance?" asked Jeffrey Orridge, the CBC's executive director of sports properties, not long after the network was outbid by Bell on rights to the 2018 and 2022 World Cups. His words were deliberately chosen. "Irrational exuberance" was the phrase coined by Alan Greenspan in 1996 to raise alarm about overvalued stock markets. Orridge, too, likes to suggest "bubble" when he describes the prices being paid to broadcast top events. "You can make a case why sports rights command such a premium. But at what point is that beachfront real estate overpriced?" he told The Globe and Mail. The not-so-subtle implication: Bell and Rogers are just like the suckers who bought condos in Miami.

But are they really? The market for TV sports might be exuberant—witness the NFL's eye-popping nine-year, $28-billion (all currency in U.S. dollars) deal with CBS, NBC and Fox—yet to call it a bubble is to misunderstand both the nature of the sports business and the nature of bubbles.

In a weak economy, few expenses are easier to cut back than hockey or basketball tickets. Yet the Great Recession barely scratched the sports business. Globally, the market was worth about $119 billion in revenue in 2011, up from $112 billion in 2007, according to new estimates by PricewaterhouseCoopers. Combined ticket and merchandise revenues are down a bit—the unemployed don't get out to many Yankees games—but people are still watching sports on TV, so media rights and sponsorships are strong. Nine of the Top 10 most-watched shows in the United States last year were football, according to Nielsen.

Meanwhile, team values keep rising. The average NHL team is now worth $240 million, up 47% since the start of the lockout that killed the 2004-'05 season, according to Forbes magazine. Manchester United, the world's most valuable soccer club, is said to be worth 28% more than in 2007, the year before the financial crisis that wiped out big British banks and the U.K. economy. Baseball teams have never been worth more, even though attendance is down from pre-recession days. Ted Rogers was criticized for wasting money when he paid about $112 million for an 80% stake in the Toronto Blue Jays in 2000. Forbes valued the team at almost $340 million last year.

But doesn't all that scream bubble? Not quite. Asset bubbles occur when the price of something rises too high, given the available supply. When tech stocks rose to absurd levels in the late '90s, established technology companies took advantage by selling new shares, increasing the supply. During the real estate boom, U.S. home builders launched more projects until there were too many houses.

But the new model of professional sports isn't to increase supply. It's to limit it. The NFL hasn't added a new team since 2002, Major League Baseball since 1998. Neither league has increased the number of games. Ambitious entrepreneurs who try to increase the supply of sports by starting rival leagues inevitably fail. The last serious attempt to create an alternative football league was in the 1980s. It lasted three seasons. Fans want to see the best players competing against each other; that means the best players must congregate in one league.

The fans demand monopolies, and monopolies are what they get. Professional sports leagues are permitted to negotiate TV deals on behalf of all teams—de facto collusion. Within the league monopolies, there are local monopolies, since it's impossible to start a franchise without consent. Why isn't there a second NHL team in Toronto? Why can't Jim Balsillie buy the failing Phoenix Coyotes and move them to Hamilton? Because the league says so, that's why.

Competition watchdogs don't get too upset about sports monopolies—because, really, what does it matter? These aren't gas stations or grocery stores. Nobody's forcing you to watch Monday Night Football or buy tickets. It's the broadcasters who feel the pinch. No wonder the suits at the CBC are so upset.