SBD/October 7, 2014/Media

Over-The-Top Service Seen As Key Ingredient In NBA's New Media Rights Deal

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Levy said the new media-rights deal will benefit all parties
The NBA's new media-rights deals with ESPN and Turner Sports "provide the two media giants with the sort of sweeteners that are common" in sports TV contracts, but ESPN "got something else with a spin to sports viewing of the future: the right to stream games to fans" via a new over-the-top service as a way to reach customers who have cut the cord, according to Richard Sandomir of the N.Y. TIMES. But  NBA Commissioner Adam Silver yesterday at a press conference "acknowledged that the arrangement was intended to cover new terrain." He said that there is a "millennial consumer out there who has a different approach to the traditional cable or satellite package.” Forrester Research analyst Jim Nail said that the streaming provision "could augur further efforts to adapt to consumers' evolving viewing habits." Nail: "It sets the stage for more cord-cutting because, up to this point, sports fans couldn’t really get their fix without pay TV.” Sandomir notes ESPN "knows that its future needs to include both traditional and innovative programming." So if fans are "fleeing to other viewing platforms because of the rising cost of their cable bills, then ESPN wants to follow them onto their mobile phones and tablets" (N.Y. TIMES, 10/7). CNET's Joan Solsman noted the deal is the "latest example of how businesses holding some [of] the most valuable video content in their hands are loosening the reins for more digital offerings" (CNET.com, 10/6). Turner Broadcasting President David Levy said that the agreement "would benefit consumers, television operators and advertisers." Levy: "Each year the playoffs help TNT win nights of television during the all-important May sweeps. We look forward to that tradition continuing" (BLOOMBERG NEWS, 10/6).

MY GENERATION: The WALL STREET JOURNAL's Cohen & Ramachandran cite sources as saying that the OTT service "will be open to people who aren't cable or satellite TV customers." The OTT offering also "includes an equity stake for the NBA." ESPN President John Skipper said that planning is "still in its early stages ... but it figures to include coverage of other sports to which ESPN has rights." He said that it also is "possible that the network unveils the service" before the '16-17 season. ESPN in the past has been "cautious about letting its most valuable content ... outside the walls of pay television." For ESPN, the OTT service is "also important because that package of games otherwise could have been sold to a third party." It "isn’t clear whether the online service will be a subscription offering or a 'transactional' one in which people will pay for individual games." A source said that the parties are "considering licensing the package to wireless carriers such as Verizon that are building online video services" (WALL STREET JOURNAL, 10/7). THE STREET's Brian Shactman noted Turner currently "handles the streaming package of out-of-market games through 'NBA League Pass.'" Although it "remains unknown whether ESPN will compete with 'League Pass,' the possibilities and implications are fascinating, especially if you assume the network will offer a streaming service to people who don't have cable." ESPN "clearly has its sights set on younger people" (THESTREET.com, 10/6). SI.com's Richard Deitsch noted ESPN will "add 750 hours of NBA-focused programming on linear and digital platforms as part of the deal," meaning the net "will be giving the NBA similar treatment to the NFL" (SI.com, 10/6).

Leonsis believes OTT coverage will generate revenues 
from a worldwide audience
COMPARE & CONTRAST: ESPN.com's Darren Rovell wrote while it is "tough to make a pure 'apples to apples' comparison," analysis shows the agreement marks the "largest increase for a TV deal for any of the four major leagues" at 186%, "besting the recent U.S. and Canadian deals" negotiated by the NHL (+167%), MLB (+105%) and the NFL (+28%). Even though the deal "covers American television only, part of the increase in rights fees is because it is truly the only major American sport with worldwide appeal." Wizards Owner and NBA Media Committee Chair Ted Leonsis said that the OTT offering "he envisions being attempted is aiming more at the worldwide mobile audience." Leonsis: "There are hundreds of millions of people that pay for pay television. There are billions of people paying for the mobile experience." Rovell wrote it is a "tribute to sports television as a product" that the Turner/ESPN deals, "at the price ... [are] not being questioned" (ESPN.com, 10/6). FORBES' Tom Van Riper wrote the deal is the "latest sign that television money continues to roll into sports, as a plethora of local and national networks pay big dollars to fill programming hours with live events." As more games "become available on TV, complete with high definition quality and ever-increasing doses of bells and whistles around the telecast, luring a fan out of his living room and into the stadium or arena becomes more challenging" (FORBES.com, 10/6). The WALL STREET JOURNAL's Flint & Cohen write the "growing cost of carrying sports will likely lead to more calls to overhaul the current pay-TV model." ESPN and TNT are "already two of the most expensive networks for pay-TV distributors." Data from SNL Kagan shows that ESPN "costs distributors a monthly fee of $5.93 per subscriber" in '14, while TNT "charges $1.40" (WALL STREET JOURNAL, 10/7).

Skipper said Commissioner Silver was tough but fair
during the negotiations for the new deal
HOW THE DEAL WENT DOWN
: Skipper said of where this deal ranked in importance for ESPN, "If you sort of look at our strategy to aggregate a portfolio of rights and our belief that in a world with a lot of competition, our advantage is the rights we hold and that -- and that preeminent portfolio, then this was at the top of the list because it's the largest deal to be done for a number of years." He added of negotiations, "We've been going at it from February 2 to now. ... We were anxious to be able to do a deal and not have it go to market." Skipper said of negotiations with Silver, "I think Adam and I match up pretty well. One thing that wastes time in a negotiation of course is posturing, and we didn't posture. ... With Adam you kind of go from A to B to C to D to E to F. You are moving always in a linear line. He's fair. He represents his constituency, which are the owners, very well. So he's very tough, but he's not tough in a yelling and screaming way." Skipper said of the deal's most important facet, "Digital is huge for us. Mobile platforms are growing. So the chance to get more in-progress highlights and highlights we can use more often. ... We understand that people want to get content on other devices and they want to get content when they’re mobile, literally" ("In The Loop," Bloomberg TV, 10/7). ESPN VP/League Sports Programming & Acquisitions Julie Sobieski said of her specific role in the negotiations, "I served as the company’s pivot throughout the negotiations with the NBA and straight up through the papering of the deal. But again, fantastic team effort across the whole company." Sobieski, on the benefit of partnering with the NBA, said, "They have ascendant stars. They have a very young and diverse fan base. ... The ratings continue to be on an upward swing. This sport has really become a 365-day-a-year sport" ("Front & Center, ESPN.com, 10/6).

TURNER CUTTING BACK
: The WALL STREET JOURNAL's Keach Hagey notes Turner Broadcasting yesterday said that it "plans to shed 1,475 jobs, or 10% of its workforce, part of a cost-cutting plan aimed at freeing up funds to invest in programming and technology." Turner said the layoffs would come "at all levels" (WALL STREET JOURNAL, 10/7). In N.Y., Emily Steel notes employees at 18 Turner locations across the world, including Atlanta, N.Y. and L.A., "will lose their jobs" (N.Y. TIMES, 10/7). In Atlanta, Christopher Seward notes the cuts are "being made through a combination of voluntary buyouts, layoffs and other measures." Turner said that employees whose positions are "directly impacted will be advised over the next two weeks and will be offered severance pay for transition" (ATLANTA JOURNAL-CONSTITUTION, 10/7).

MARKET WATCH: Morgan Stanley called ESPN and Turner's nine-year $24B rights renewal "a medium-term positive" for parent companies Disney and Time Warner, because it gives the two companies "cost certainty and leverage in future affiliate renewals, and prevented others from carving up these rights." Morgan Stanley said the deals have a Compound Annual Growth Rate (CAGR) of 13%, up from the current deal's CAGR of 9%.  Long-term questions remain, however, on ultimate impact of rising sports costs on the affordability of the pay-TV bundle" (John Ourand, Staff Writer). Meanwhile, Stifel Nicolaus estimates the stock of MSG "will benefit" with an extra $25-35M in earnings for the media conglomerate (WSJ.com, 10/6).
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Media, NBA, Turner Sports, ESPN

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