SBJ/June 6-12, 2011/In Depth

How high can rights fees go?

More bidders, solid ratings, attractive demos and ‘TV Everywhere’ fuel a red hot market, but could the bubble burst?

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In early April when leaders of the Big East were discussing broad outlines of a seven-year extension of the conference’s media deal with ESPN, there was sharp, internal disagreement. Most saw the number — an average of $130 million a year — as a healthy increase that would boost their coffers. A vocal minority, however, saw a TV marketplace ripe for a larger increase.

Presidents from Georgetown, Notre Dame, Rutgers and Seton Hall voted against the deal, sources said. Others, including Pittsburgh and West Virginia, also were vocal skeptics of the deal, preferring to wait and see what the open market would bring once ESPN’s deals ended, following the 2013-14 football season. Still, the presidents voted 12-4 to accept its broad outlines.

Four weeks later, just a week after a record-breaking deal for the Pac-10’s media rights was announced, theBig East’s presidents met again. Not surprisingly, they needed only 15 minutes to reach a unanimous decision to reject ESPN’s offer.

GETTY IMAGES
Pac-10 Commissioner Larry Scott looks on as Fox’s Randy Freer outlines the network’s deal to pay the conference $250 million a year.

The reason: The Pac-10’s $250 million-a-year deal has caused all other sports properties — college and pro — to take another look at their rights.

In the recent run of massive sports rights deals, more properties are looking to revisit their agreements. Each new deal makes all other ones seem more outdated. The Big East presidents realized that the Pac-10’s deal turned an offer that would have nearly quadrupled the Big East’s media fees into one that was well below market value.

The Atlantic Coast Conference’s TV deal with ESPN provides another example. In May 2010, the conference signed a deal worth $155 million annually. At the time, the deal was hailed as a windfall for the conference, more than doubling its annual media revenue.

But ensuing deals with the Big 12 and Pac-10 (which becomes the Pac-12 on July 1 with the addition of Colorado and Utah) made the ACC’s windfall look a lot less gaudy. Now its $155 million payout looks like a paltry sum compared to the Pac-10’s annual average.

More than four months before their groundbreaking media deal is due to take effect, sources said, ACC officials have looked to see if their ESPN contract contains any language that would allow them to reopen the deal. An ESPN source said the conference has not reached out — either formally or informally — and it’s unlikely ESPN, or any network, would renegotiate any deal that has not taken effect yet.

It’s not just college sports that are seeing these wild increases in media rights. Wimbledon’s rights with NBC and Tennis Channel end after this year’s tournament and, already, at least four suitors have explored those rights. ESPN’s Wimbledon rights run for another two years. NBC is ending a deal that pays the All England Club $13 million per year. The new deal should be worth much more.

The NHL got into the act in April, signing a deal with NBC and Versus for an average of $187 million a year, dwarfing the $76 million average annual payout that it had been getting.

It’s not just national deals that are seeing these increases, either. NBA and MLB teams took note of the local deal between the Houston Astros, Houston Rockets and Comcast that gave the teams an equity piece of Comcast’s regional sports network. And as soon as word leaked out that Time Warner Cable’s deal with the Los Angeles Lakers averages to $200 million over 25 years, NBA franchises in several markets tried to open talks with their RSNs. Rumors of the San Diego Padres’ pending $30 million-a-year deal with Fox has created the same situation with MLB teams.

Veteran sports media executives said they’ve never seen a media rights market as sizzling as the current one, with annual payouts doubling, tripling and even quadrupling previous rights deals.

“The market is very, very robust,” said CBS Sports Chairman Sean McManus. “Each of the parties that’s spending this money must be figuring out a way to justify the rights that they are paying.”

The huge increases may have the feel of a market bubble, having grown so much in such a short amount of time. But veteran sports media executives believe the prices accurately reflect the value of the rights and have room to grow.

“Have sports rights peaked? I don’t think they have,” said NHL Chief Operating Officer John Collins. “What you’re seeing is that sports are becoming more relevant to more people.”

Bill Koenig, the NBA’s executive vice president of business affairs and general counsel, agreed, “I don’t think it’s a bubble. It reflects the value of the programming.”

GETTY IMAGES
The Big East killed an early offer from ESPN and decided to play the waiting game in hopes of landing a bigger deal.

Still, properties such as the Big East are taking a risk by passing up a guaranteed increase today for the potential of more money down the road. The conference’s basketball deal with ESPN ends after the 2012-13 season, and its football deal with ESPN ends after the 2013-14 season. There’s no guarantee that the market will stay as robust at that time.

“If you look at most professional teams, by the time they’re at the end of the contract, they all think they’ve made a bad deal,” said Fox Sports co-President Randy Freer. “When the paper is signed and for those first couple of years, everybody is usually pretty happy. But in the economic reality for a decade or longer, things change.”

Freer pointed out that those long-term deals have taken some rights off the market deep into the decade.

No ceiling in sight?

A sampling of network media rights deals with sports properties

Network Property Length Estimated Avg. Annual Value Final Season of Contract
NBC Wimbledon 4 years $13 million 2011
CBS USTA U.S. Open 4 years $36.25 million 2011
CBS and NBC PGA Tour 6 years $491.7 million 2012
ESPN IndyCar 4 years $12 million-$16.25 million 2012
CBS NFL 8 years $619.8 million 2013
Fox NFL 8 years $720.3 million 2013
NBC NFL 8 years $603 million 2013
ESPN NFL 8 years $1.1 billion 2013
Fox MLB 7 years $257.1 million 2013
TBS MLB 8 years $148.6 million 2013
ESPN MLB 9 years $296 million 2013
ESPN Bowl Championship Series* 4 years $123.75 million 2014
ESPN Rose Bowl 8 years $37.5 million 2014
ESPN MLS 8 years $8 million 2014
Univision MLS 8 years $9.9 million 2014
ESPN NASCAR 8 years $270 million 2014
Fox NASCAR 8 years $220 million 2014
TNT NASCAR 8 years $80 million-$85 million 2014
ABC/ESPN and TNT NBA 8 years $930 million 2016
NBC Kentucky Derby 5 years $5 million 2016
NBC NHL 10 years $187.5 million 2021
Turner/CBS NCAA Men's Basketball Tournament
14 years $771.4 million 2024

Note: ESPN contracts may share rights with ABC
* Excluding Rose Bowl
Source: SportsBusiness Journal research

“The competition in college is virtually over,” Freer said. “It’s going to be five or six years before another collegiate conference of significance comes to the open market with rights for football.”

Still, the deals that are getting done today reflect big increases. Sports media executives cite several reasons why leagues and networks could expect these wild increases to continue.

More deep-pocketed TV networks are getting into the mix for media rights these days. The more bidders there are, the higher the rights fee.

The market to acquire sports rights will get only more crowded, networks say, since live sports generally bring the highest ratings on TV and reach the young men that advertisers crave better than any other form of TV programming.

And the cable industry’s push to the “TV Everywhere” concept — where cable subscribers can stream channels to computers and mobile devices — has created a new bucket of rights for sports properties to sell.

Any one of these reasons would create a robust market for sports rights. Having all three coalesce at one time has turned the market red hot.

“The playing field there is a lot more crowded and a lot more competitive,” said Derek Chang, executive vice president of content strategy and development for DirecTV. “The headline product probably isn’t changing that much. Any time you have an environment where demand starts to exceed supply, pricing goes up.”

Competition: The More The Merrier

Cable TV channels view sports programming as the easiest way to increase ratings and the license fees that distributors pay. Today, several cable networks actively are trying to add sports to their schedules, which, sports media executives say, is the main reason why media rights fees are rising so quickly.

Comcast wants more sports on Versus. Fox is putting more sports on FX. Turner is trying to build up truTV’s sports assets. And, of course, ESPN needs reams of sports content for its multiple TV channels, broadband platforms and mobile applications.

For the past year, the glut of TV channels vying for sports rights has ensured multiple bidders during each negotiation.

“You have the dynamic of a number of companies trying to build their cable assets, who are competing against each other for a limited number of content deals,” CBS’s McManus said. “Obviously the dynamic of Comcast now owning NBC and trying to maximize the value of both their cable assets and their network sports division has presented a competition for ESPN that they haven’t seen in a while.”

The threat of Comcast and its deep pockets helped push the Pac-10’s media rights fee far higher than anyone would have expected. Traditional rivals ESPN and Fox decided to join forces to outbid NBC and keep the Comcast-owned network out of the college sports market.

College conferences cash in

Once each respective deal kicks in, these are the estimated average annual values of the most lucrative media rights deals with college conferences:

Conference Avg.
Annual Value
Contract Years Network(s)
ACC  $155 million  2011 through 2022-23  ESPN/ABC 
Big 12  $90 million 
$60 million 
2012 through 2024-25 
2008 through 2015-16 
Fox
ESPN/ABC 
Big East  $36 million  2007 through 2013  ESPN/ABC 
Big Ten  $232 million 
$20 million 
2007 through 2031-32 
2006 through 2015-16 
The Big Ten Network* 
CBS
Conference USA  $15.6-16.1 million  2011 through 2015-16  CBS College Sports 
Mountain West  $11.7 million  2007 through 2013-14  CBS College Sports 
Pac-12**  $250 million  2011 through 2022-23  ESPN and Fox 
SEC  $150 million 
$55 million 
2009 through 2023-24 
2009 through 2023-24 
ESPN/ABC
CBS College Sports

* The conference owns 51 percent of the network and supplies the content. News Corp. owns 49 percent and operates the network. The two entities share expenses.
** The conference becomes the Pac-12 on July 1 when Colorado and Utah formally join.
Source: SportsBusiness Journal research

The same dynamic is in play with Wimbledon rights. NBC, ESPN, Fox and Tennis Channel have been nosing around for the NBC and Tennis Channel rights that are available. The presence of multiple bidders is certain to increase the four-year, $52 million deal NBC currently pays for Wimbledon’s media rights.

The presence of multiple bidders also worked for the NHL (where ESPN and NBC competed) and the ACC (ESPN and Fox went toe-to-toe).

“If you talk to any of these guys, none of them like the fact that sports costs are going up quickly. No buyer likes that,” said DirecTV’s Chang. “At the same time, nobody wants to tell their boss that they lost a product because they got outbid. That’s what they’re all dealing with. For the most part, they are basically saying that they don’t like it, but they have to stay in it because this is the business that they’re in.”

The problem for a distributor like Chang is that his business is at the end of the line for these increases. When networks pay more for sports programming, they charge distributors more to carry their channels. In turn, distributors pass those increased costs on to their subscribers.

So far, there hasn’t been a lot of pushback. But Chang, and others, worry that costs will get too high for cable and satellite subscribers.

“I think that there’s cord cutting because of the economic factor, where rates continue to rise for people and they can’t stomach the whole cost,” Chang said. “Going back to whether or not customers will ultimately bear the freight is something that everyone is cognizant of and trying to assess what the tolerance level there is.”

Ratings: The Way to Reach Young Men

The reason so many TV channels are clamoring for sports content is because live sports have become the most valuable programming on television.

In the face of media fragmentation and declining prime-time network ratings, live sports ratings continue to grow virtually across the board.

Most sports media executives point to the NFL as evidence of this trend. Last year, “Sunday Night Football” was the highest-rated series on broadcast television through the end of the regular season, and “Monday Night Football” was the highest-rated series on cable television.

But the trend is even more pronounced in other sports perceived to be on a downswing, like NASCAR and horse racing. Up until this season, NASCAR has seen its TV ratings drop four years in a row. That’s a ratings disaster, right? But when TV ratings bottomed out last year, the NASCAR Sprint Cup Series still averaged almost 6 million viewers over 34 races (not including two Monday rain-delayed broadcasts) across ABC, ESPN, Fox and Turner.

Horse racing gives another example. Take last month’s unremarkable Preakness Stakes on NBC, which drew nearly 9 million viewers to NBC for the race portion of the event.

“Go try and find entertainment programming or other things that do those kinds of numbers on a regular basis,” Fox Sports’ Freer said. “You really have some predictability with sports.”

Live events have become programming gold for TV networks. Last year, 99 of the 100 highest-rated TV telecasts in the 18- to 49-year-old demographic were live, including sports and event shows such as “American Idol” and the Oscars, according to ESPN research.

“We know that sports is appointment viewing,” said David Levy, president of sales, distribution and sports for Turner Broadcasting System. “We know that five, 10 years from now, this might be the only and final appointment-viewing product in the market, other than news. Nobody’s watching the Super Bowl on Monday morning.”

TV networks are not just attracted to the numbers of people who are watching. They like the kind of people who are watching — the young men advertisers are clamoring to reach. They also embrace the passion that these audiences bring to the telecasts.

“You’re getting a built-in fan base each time you buy these sports properties,” Levy said. “If I buy the Pac-12 or NHL or NFL or NCAA basketball — any of these sports properties have automatically built-in fan bases and pretty much a track record of a ratings process you could almost guarantee will be there day in and day out.”

For the past several years, television network executives have fretted about declining ratings among young men. Sports is among the few genres on TV that they watch.

“The value of the sports content is increasing as it becomes more and more difficult to get people in front of a set — and a specific demographic in front of a set,” McManus said. “Sports is still able to attract that demographic, and it’s pretty consistent in terms of the people it brings to the set. That isn’t true of a lot of other programming on television.”

TV Everywhere: Sports on the Go

The drive to reach young men is occurring beyond just television. The push into broadband and mobile applications also is cited as a cause for the rapid increase in sports rights fees, according to several sports media executives.

The cable industry has been pushing a concept called TV Everywhere, which would allow its subscribers to stream traditional TV channels to computers and mobile devices.

The development of these kinds of digital applications — built on the back of sports content — has created a new revenue stream for sports properties and helped push rights fees even higher.

“The TV Everywhere revolution that we see happening is part of the driver in this increase in sports rights,” said Tim Brosnan, Major League Baseball’s executive vice president of business operations. “There is value added when content providers can go on a multiplatform basis.”

The NBA’s Koenig agreed, saying the concept has a lot of potential, even if it hasn’t been fully realized yet.

“Given some of the struggles of authentication, TV Everywhere hasn’t hit full stride yet,” Koenig said. “Increasingly, you’re going to get your content wherever you are through whatever device you happen to have in your hand or on the table or in the living room.”

Turnkey Sports Poll

The following are results of the Turnkey Sports Poll taken in May. The survey covered more than 1,100 senior-level sports industry executives spanning professional and college sports.

In how many years will online/device streaming of sports surpass traditional cable viewership?

1-2 years 2%
3-5 years 22%
6-10 years 31%
11+ years 16%
It will never surpass traditional cable 25%
Not sure / no response 4%

Who holds more power in the relationship between networks and cable carriers?

The networks 47%
The carriers 41%
Not sure / no response 12%

Source: Turnkey Sports & Entertainment in conjunction with SportsBusiness Journal. Turnkey Intelligence specializes in research, measurement and lead generation for brands and properties. Visit www.turnkeyse.com.

ESPN, in particular, has bought into the TV Everywhere concept, making it an essential part of its carriage deal with Time Warner Cable last year. It released an app that lets Time Warner Cable and Bright House subscribers stream ESPN, ESPN2, ESPNU and ESPN3 to mobile devices and tablets.

ESPN executives say they will not consider any rights deal unless it includes the broadband and mobile rights to support TV Everywhere. Sean Bratches, ESPN’s executive vice president of sales and marketing, asked when was the last time ESPN did a linear, TV-only rights deal, said, “It was well before the current management regime was in place. Our ability to enter the authentication marketplace has really been the byproduct of a strategy that was born probably eight years ago in terms of our investment in rights for multiple platforms.”

All sports networks are pursuing the TV Everywhere concept, viewing it as a way to address viewers who aren’t watching television.

“Anything that comes out next? I don’t know what it will be,” said Turner’s Levy. “What I do know is this. The early adopters for all this new technology are men, 18-34. Those are the ones that also watch sports, as well.”

It’s not just the national channels. Some RSNs see the TV Everywhere concept as a way to expand their business.

“The multiplatform approach that is so much a part of TV Everywhere? Of course I buy into that,” said SportsNet New York President Steve Raab. “But there is a lot of content that various segments are passively interested in. Sports may be the only content that a meaningful segment is passionately interested in.”

Bratches agreed, adding that ESPN’s experience has been that ESPN’s mobile and broadband applications effectively push viewers to watch more ESPN on television.

“The value of sports has extended well beyond the linear television platform,” he said. “The aggregation of all of the nonlinear components is meaningful but also driving incredible value back to the core. We talk about the best available screen a lot at ESPN. We’re buying rights for what the best available screen is.”

As networks build out their digital and mobile businesses, sports properties see a new batch of rights that will continue
pushing media rights fees higher.

TV Everywhere is a reality. We buy into it,” said the NHL’s Collins. “Our fans are tech savvy. They want the games. We see that they consume the games in many different ways.”

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