TV Rights Fees Draining Profit Margins as Live Sports Keep Industry Afloat

·6 min read

While live sports programming is the only thing keeping the lights on at the Big Four broadcast networks and is the glue that holds the rickety cable bundle together, the soaring cost of acquiring and maintaining the rights to the most desirable leagues is starting to eat into TV’s profit margins.

According to a new report from Kagan, a media research group within S&P Global Market Intelligence, sports rights fee hikes are piling up faster than the rate of inflation, with top-shelf leagues like the NFL, NBA and Major League Baseball bringing in just shy of $15.5 billion per year under their current contracts.

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And as new deals come up, the expense continues to grow, like mushrooms after a soaking rain. Per the terms of its new rights package, the NFL in 2023 will begin collecting a stately fee of $9.46 billion per season from CBS, Fox, NBC, ESPN/ABC and Amazon. That’s up from the $5.67 billion in annual fees the league collects under its legacy package, which works out to a combined annual growth rate (CAGR) of 5.9%.

Among the most significant renewals due to get underway within the next year or so is the NBA’s two-partner pact with Disney and Turner Sports. Kagan values the current package, which runs through the 2024-25 season, at $2.61 billion per year, and given the league’s outsized deliveries of younger viewers, it’s a safe bet that the next contract will come in along the lines of $5.5 billion per year. (While a number of outlets have engaged in various degrees of breathless speculation that the league will look to triple its annual rate, there’s no need to legitimize what amounts to a whisper campaign.)

While inflated ad rates and high retransmission consent/carriage fees keep the money rolling in at the top sports networks, Kagan concludes that the incoming revenue isn’t growing fast enough to offset the cost of the media rights. Take ESPN, for example. The cable outlet generates a dizzying amount of distribution revenue; given a subscriber base of 78.7 million households and an estimated license fee of $8.15 per customer per month, Bristol in 2022 stands to rake in $7.7 billion before so much as a dime of ad spend is factored into the equation. (According to Kagan’s estimates, the sale of commercial inventory adds another $2.2 billion to the mix.)

At the same time, ESPN is scooping up all those dollars, it’s also sending a bunch of cash in the other direction. As Kagan notes, ESPN spends more on programming than any other cable network, forking over an estimated $6.98 billion in 2021, which amounts to $89.94 per subscriber, a total that is 22 times higher than the industry average of $4.08 per sub.

“Declining subscribers and rising programming expenses have not only resulted in a higher program expense per average subscriber at ESPN but have also placed a squeeze on profit margins,” Kagan researcher Scott Robson wrote in the report. “We estimate that ESPN’s cash flow margin peaked in 2011 at 41.5% and has since declined to an estimated 25.1% in 2021. ESPN is projected to see margins dip into the single digits as soon as 2023.”

The cord-cutting epidemic has been particularly rough on ESPN, which has lost 11.3 million subscribers since 2016. At its peak in 2010, the network boasted more than 100 million subs, which works out to a loss of some 21.3 million subs in the last dozen years. Similar declines have been posted by TNT, TBS and USA Network. ESPN has been able to claw back a good deal of those lost connections by way of its ESPN+ service, which has signed on 22.3 million subscribers as of Disney’s most recent quarterly earnings report, but with a monthly fee of $6.99, the streaming product doesn’t entirely make up for the loss of linear TV subs.

The erosion of the traditional cable bundle is showing no signs of slowing down, and that presents a nightmare scenario for any network that has dragged its feet on OTT. At present, only 56% of U.S. TV homes subscribe to a bundled pay-TV package. Four years ago, the penetration figure was 78%.

The national sports networks aren’t the only outlets that are feeling the squeeze, as RSNs have been losing ground with many of the consumers who have actually stuck with the bundle. The Bally Sports RSNs have been blacked out in 7.99 million DISH Network homes since before Sinclair Broadcasting acquired the networks for $9.6 billion in 2019, and last fall the leading U.S. cable provider, Comcast, dropped the MSG Networks.

Per Kagan, RSN subscriptions have plummeted 45% from a high-water mark of 192 million connections in 2014. Now estimated to reach 108 million homes, the sub count is expected to drop another 21% by 2025, when RSN subs could fall to 85 million. As a means of subverting the trend, Sinclair next month will launch Bally Sports+, a new streaming service that’s being introduced under a relatively steep monthly rate of $19.99.

Other than ESPN, no networks charge operators a higher fee for carrying their signal than do the RSNs. The average monthly affiliate fee for the sector is $5.01 per sub, with three RSNs (YES Network, Bally Sports Detroit, Bally Sports Wisconsin) pulling in more than $7 for each paying customer. Those costs are reflected in the monthly cable/satellite/telco-TV bill; as of April 2022, Comcast customers could expect to pay a monthly “regional sports fee” surcharge of $19.15, while DirecTV passes along a $11.57 charge to its 14.6 million video subs.

As much as the cost of delivering high-end sports is well into nosebleed territory, the networks that want to continue piling on the priciest distribution fees and ad rates have little option but to pay up. At the risk of trafficking hyperbole, sports is the last vestige of the old appointment-TV model, and the fact that 99% of the action is consumed in real-time translates to an unusually high ratio of ad impressions.

The proof is in the Nielsen data. NBC’s Sunday Night Football closed out its 11th consecutive season as TV’s top-rated primetime program, averaging 18.5 million linear-TV viewers, of whom 6.67 million were members of the key 18-49 demo. By comparison, everything else in broadcast prime was an afterthought, as the average nightly entertainment series on the Big Four nets this season eked out an audience of 3.78 million viewers, of whom 652,996, or just 17%, were in the target demo.

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