Shrinking Pay-TV Universe, Economy Can’t Stop Sports Rights From Climbing

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Major League Soccer and Formula One both signed new media rights contracts over the last 90 days that are worth significantly more than their expiring pacts. The Big Ten Conference closed on a record deal that follows the trend, and Champions League is expecting the value of its rights to rise, too. The increases come at a time when the pay-TV universe is shrinking, inflation is stretching consumer wallets, and the threat of an economic recession that would temper advertising spends hangs overhead.

Considering the headwinds, it’s reasonable to wonder when the so-called sports rights bubble will burst—or at least show signs of leaking air. But neither John Skipper (co-founder, Meadowlark Media), nor David Levy (chairman, Genius Sports), see that happening.

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Skipper, the former ESPN president, said as long as the broadcast and cable networks continue to pursue premium live rights, which are necessary for them to collect the lucrative retransmission consent and carriage fees they receive today, there will be more buyers than rights packages, and the value of those rights packages will continue to climb.

Levy agreed, and the former Turner Inc. president said even if some of the traditional broadcasters were to pull back on live rights, history has shown that new platforms capable of expanding the pie will emerge.

JWS’ Take: While broadcast and cable networks, and even some of the streaming providers, have begun to pare back on their programming budgets, sports rights continue to command meaningful increases seemingly across the board. But neither former network head classifies the current rights environment as a bubble. “This is not easy to pop,” Skipper said.

The bull market for live sports rights exists because the genre provides the last commanding appointment viewership. The games are generally the highest-rated programs on TV.

Live sports rights are also considered the safest bet in television. “You pretty much know what the NBA is going to do on TNT,” Levy said. The league has a “built-in” fan base. “You know what is not built in? When [a network] launches a new scripted series. Either it is a hit or it is not and there are more shows that fail than succeed. The hit rate is under 10%.”

Live sports are equally predictable—and productive—in terms of generating advertising revenue. Remember, games include a given number of ad breaks, and the inventory, which draws the highest cost-per-thousand viewers on television, typically sells out.

As a result, media companies across broadcast, cable, digital and streaming all have interest in carrying live sports events. “And if they all have interest, that causes a supply and demand [imbalance],” Levy said. “If there’s a lot of demand and not a big supply, prices go up.”

The competition from streamers has placed additional pressure on the broadcast and cable networks to hold on to the high-end rights buoying their businesses. As a result, both former network heads believe traditional broadcasters will increasingly focus on the top of the pyramid.

Streamers in need of both live content and variety on their platforms are more likely to “play at both the high-end and make low-end bets,” Skipper said.

To be clear, just because live sports programming is more predictable than its scripted counterpart does not mean the rights holder is guaranteed a positive financial return on its investment. A streaming provider could reasonably expect to gain 2 million subscribers with the addition of NFL Sunday Ticket and still lose money on the rights package depending on how much it pays and what the LTV is for each subscriber.

Sports’ predictable advertising model may become less predictable. “If we’re going into a recession, the advertising [business] is clearly going to be weaker,” Harry Melandri (advisor, Macro Intelligence 2 Partners) said.

Inflation could muddy the equation for potential rights owners, too. “Who is the big watcher?” Julian Brigden (co-founder and president, Macro Intelligence 2 Partners) asked. “It is all these millennial kids who have gotten destroyed in crypto, who are getting chewed up with inflation because their wages have not gone up yet. Are they going to spend the extra $100 to subscribe to all these channels?”

Levy acknowledged that both concerns are valid and said macro conditions are likely being accounted for in short-term budgets. But as a network head, “If you have a 10-year deal, you have to believe there are going to be cycles of good and bad,” he said. “I would consider the challenges with the economy, but assuming it’s a top-tier sports property, it wouldn’t stop me from bidding on the package.”

While broadcast and cable providers are expected to increasingly focus on the most predictable assets, Levy expects the value of most upstart and niche properties will continue to grow, too. “What happens is, when you’re a new platform, in order to get the rights, you have to spend more,” he said, referring to streaming.

There will be exceptions. Properties that do not move the needle enough to spark a bidding war may be forced to take what is offered, and there may be others that choose to take lesser deals to gain the reach of linear television.

Skipper sees the current bull market for sports rights continuing, “certainly in the short and medium term.” However, he said rights fees could eventually flatten if some of the more traditional broadcasters consolidated, or gave up on carrying live sports, and the number of prospective bidders declined.

But even if the broadcast and cable networks were not aggressively pursuing rights, Levy said, it is hard to imagine demand waning. “What always seems to happen is new distribution platforms get launched.” In the 1980s it was cable. Then it was telco, digital and streaming. “Each time a new platform gets launched, that either increases the pie or expands the pie in different places,” Levy said. “It is a known fact that early adopters of new technology and new platforms are young males. So, when new distribution platforms launch, sports content is always sought after because of the young male demographics, its built-in fan bases, and the engagement it brings in its [other] content.”

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