Did the Speed Channel Have to Die? We Examine the Economics

Did Speed have to die? Let’s jump back a few weeks, when freshly minted public company Twenty-First Century Fox, Inc.—a $28 billion global media behemoth spun off from Rupert Murdoch’s media holdings—hosted a session for Wall Street analysts.

Company president and COO Chase Carey, discussing the changing media landscape, said, “Weaker channels will, and should, get squeezed. Consumers have more than enough choice. The priority has shifted to quality not quantity. We want every one of our channels to strive to stand on its own two feet. We would rather have a bouquet of great channels than acres of mediocre ones making the same profit.”

That means looking for billions, rather than millions, of dollars from the same basic assets. And the easiest way to find those megabucks is through sports. Sports programming, says Carey, “is the content that drives new technologies, defies manipulation, and advertisers crave. It is the content that binds a community, that people talk about during the day. In an increasingly fragmented world, sports are the one strand that ties us together.”

And Fox has placed a huge bet on sports content. More than half of its $80 billion in long-term financial obligations are devoted to rights fees for the NFL, MLB, NASCAR, and a host of other sports.

The driving force to create Fox Sports 1 (FS1) from the ashes of Speed was “subscriber revenue.” Sports channels like FS1 can be big moneymakers. In 2012, Speed was reportedly collected $0.22 per month per subscriber, while ESPN was commanding $5.04 per month, according to SNL Kagan. FS1 is projected to charge $0.80 per month against 90 million subscribers (ESPN has 100 million). Forecasting out several years, this is the difference between Speed garnering $350 million from subscribers to FS1 amassing $1 billion from the same people, through rebranding and simply mixing up the programming. (For a more in-depth look at the numbers, check out the charts at the bottom of this story.)

And don’t forget the advertising revenue. Even though it accounted for only 23 percent of ESPN’s total take last year, that still meant $1.8 billion came from Madison Avenue. This was much to the dismay of one viewer we spoke to, who observed, “After I pay five bucks [per month], I still have to watch commercials?” To add insult to injury, using the low end of industry margins, it means that every subscriber, even the tens of millions who don’t watch ESPN, pours a minimum of $2.65 every month directly into the hands of the Worldwide Leader’s shareholders.

It would seem that inevitable that Speed would die, right? “No. I don’t think it was inevitable,” says Speedvision founder Roger Werner, who started the Outdoor Life Network (which has since morphed into the NBC Sports Network) at the same time.

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“We could still be running those channels as independent channels. They were both very commercially viable. They were profitable at the time we sold them (in 2001), and their profitability was only going to grow from there.

Still, Werner concedes that Fox’s strategy is “understandable. I can’t honestly say I would look at it differently, if I were sitting in their shoes. I’m disappointed obviously that my baby is disappearing, [and] being subsumed by a different kind of editorial agenda, but I guess I can’t tell you that what they’re doing is crazy. It makes a lot of sense to them.”

If you’re the Fox executive making the decision on whether Speed lives or dies, you look at the numbers.

You start with primetime ratings, and discover that your three sports networks for 2012 combined generated just 12 percent of the audience of ESPN:

= Households

Source: Nielsen Media Research

Then you look at what is being charged per subscriber per month at the end of 2012, and discover that your three sports networks only charge 11 percent of what ESPN commands:

= Price Per Month

Source: SNL Kagan

And that translates into the top line for 2012, where your three sports networks are produced only six percent of the revenues of ESPN:

Source: SNL Kagan and Car and Driver

So, you ask yourself: With Speed in 90 percent of the homes of ESPN, and Speed’s demographics being decidedly gray-haired, what happens if Speed is changed to a multisport format, and you more than triple the subscriber rate? Because you’re appealing to a much broader audience, what could the numbers say for 2014?

Source: SNL Kagan and Car and Driver

So by adding football, baseball, UFC, soccer, and Regis Philbin to Speed’s NASCAR programming, and rebranding the network as Fox Sports 1, you’ve doubled revenue to 12 percent of ESPN’s. Yes, there are additional programming costs and your staff has tripled, but even if you’ve insured Erin Andrews’s legs for $10 million, there’s plenty of room to make a boatload of money. Decision made.

Source: CarAndDriver