NBA passes over to Disney and AOL

Jan 28, 2002  •  Post A Comment

When a majority of national basketball games follow a chunk of the national football games from broadcast to cable TV and Fox can’t even make a profit on the Super Bowl, it is time to redraft television sports economics.
That is exactly what’s happening.
The National Basketball Association’s $4.6 billion six-year deal with Walt Disney Co. and AOL Time Warner-which shifts 90 percent of NBA games to basic cable and relies as heavily on subscriber fees and other media platforms as advertising for economic support-is a new business model that pushes yet another major sports franchise away from free TV. It is the first time cable networks will control the TV rights for a major sport.
Wall Street analysts said it is inevitable, since broadcast and even cable networks no longer singularly can command the hefty advertising premiums needed to offset record high multiyear license fees, particularly in the wake of declining viewer ratings.
The only way to make money is to amortize those costs over a broader range of media outlets, including cable, broadcast TV and radio, print and the Internet.
NBC mustered a low-ball bid of $1.3 billion, compared with the $2.4 billion it has been paying over four years, since the network’s NBA ratings have fallen 40 percent. NBC could have used its NBC network and cable-news-oriented CNBC and MSNBC as NBA outlets.
Although the NBA is getting the smallest increase in TV rights since 1983, the Disney-AOL pact is worth about $766 million annually in rights fees, or $150 million more than NBC paid, even while it was losing $300 million on the games the past two years.
Disney (now the only media company to televise four major sports leagues) will pay $2.4 billion to air 100 regular and postseason games, including the finals on its ESPN, ESPN2 and ABC networks. There also will be some NBA content coverage on ABC Family Channel, ESPN Classic, ESPN Radio, ESPN.com and in ESPN The Magazine. In fact, the NBA rights will be completely allocated to ESPN and not charged to ABC. Still, UBS Warburg analyst Chris Dixon said the NBA deal couldn’t come at a better time for beleaguered ABC, since “it could help jump-start ratings.”
Analysts say ESPN, which has angered cable operators with a 20 percent annual rate increase the past several years, is not expected to seek affiliate rate hikes to cover the cost of the NBA deal. But there are limits to what it can charge advertisers, given the unrelieved glut of sports ad inventory.
AOL Time Warner is swapping equity for $2.2 billion of sports programming rights over six years in an interactive and marketing deal that brings NBA games and content to Turner Broadcasting’s TNT and TBS cable networks and America Online. AOL and the NBA also are continuing to work on plans to launch a national 24-hour cable sports network called All Sports Network, which will be built on the recently folded CNN/SI.
NBA Commissioner David Stern clearly wants half the same economic success ESPN has enjoyed. While it is still the most profitable television network-garnering more than $600 million in annual earnings-ESPN recently has lost ratings and earnings ground.
Although NBC Sports Chairman Dick Ebersol boasted his network will now save rather than lose hundreds of millions of dollars, industry observers wonder whether the NBA fiasco further underscores the need for NBC to become part of a larger, multiplatform media concern that will give it more potent negotiating leverage.
Others wonder, with the NBA as a hook, just how deeply AOL Time Warner will use its free cash flow to bore into broadcast and cable program platform ownership.
Although cross-media platforms that include cable, broadcast, print and the Internet-such as Disney and AOL-make it possible to cover the high cost of live sports, ABN-AMRO analyst Spencer Wang said, “Broadcast network economics are increasingly untenable.” Almost no TV sports, short of an occasional Olympics, make money anymore, although they remain effective platforms for promoting unrelated TV programs.
Fox is expected to lose $20 million on its Feb. 3 Super Bowl telecast and write down part of its $2.5 billion multiyear NFL pact. Even ABC’s acclaimed “Monday Night Football” has declined 30 percent in ratings since 1996.
Each of the Big 4 broadcast networks spends more than $1 billion annually on sports rights, compared with an estimated $750 million on series and entertainment programs and $400 million on news.
Having lost more than an estimated $1 billion on sports telecasts last year, the major broadcast networks are turning more routinely to “time buy” sales of advertiser-sponsored soccer, motorcycling and other obscure sports.
Fox Sports, the new kid on the block, has had to overhaul its model by canceling its nightly “National Sports Report” and some editions of its regional sports reports.
“The NBA deal is the first sign of a sea change in sports programming economics,” Mr. Wang said. “This highlights the benefit of owning multiple networks to share programming costs and aggregating audience to garner advertising dollars,” he said.
Increasingly, teams and leagues will seek equity interest in the sports channels and other platforms on which their games are telecast. George Steinbrenner recently leveraged his ownership of the New York Yankees and New Jersey Nets to create YankeeNets, a regional sports channel co-owned and managed by former AT&T cable chief Leo Hindery.