Time running out for TV sports

Feb 25, 2002  •  Post A Comment

Fox Broadcasting’s announced $909 million sports write-down is evidence the company grossly miscalculated the value of its sports fare to advertisers and viewers in the face of a dramatic sea change in TV sports economics.
No one forecasted the magnitude of the current advertising slump, but Fox and its corporate parent News Corp. have said they initially banked on writing $909 million more in advertising on their long-term, big-time sports contracts than they now believe is possible, even in a recovering economy. The write-down suggests Fox cut its revenue expectations for Major League Baseball and professional football by 30 percent.
That ad spending is not expected to return to historic levels in any program category or on any media platform means that Fox and others in the same tight spot can no longer offset their sports losses with revenue gains in other areas.
“Selling off a smaller advertising base due to inventory glut, fragmentation and increased competition has a huge compounding effect the next five years,” ABN-AMRO analyst Spencer Wang told me.
Overpriced licensing fees
Given television’s new ground rules and ad climate, News Corp. Chief Operating Officer Peter Chernin recently conceded, “We overpaid.” With four to six years remaining on their major sports contracts, Fox estimates its unrealized ad revenues will be $387 million for the National Football League, $225 million for Major League Baseball and $297 million for NASCAR.
But Fox is hardly alone. The Big 4 broadcast networks each spend more than $1 billion on sports licensing fees annually, compared with an average of $750 million spent on series and movies and $400 million spent on news.
Morgan Stanley Dean Witter analyst Richard Bilotti has warned for more than a year that advertisers would not and could not support high-priced sports licensing fees and that something would have to change.
That change, already well under way, is the migration of big-time sporting events to cable and other subscription-based platforms.
Shifting 90 percent of all NBA games to cable under a new $4.6 billion, six-year contract with The Walt Disney Co. and AOL Time Warner is one example of this dual-revenue model, which gives beleaguered Disney the option to air 100 regular and postseason games, including the finals on ESPN, ESPN2 and the ABC TV Network. In the deal, AOL Time Warner is swapping equity and interactive marketing to bring $2.2 billion in NBA games and other sports content to its cable networks TBS and TNT and to AOL online.
The kicker is the creation of the new 24-hour cable All Sports Network, the details of which AOL Time Warner and NBA officials decline to discuss. Industry experts estimate initial sports rights and start-up costs for the venture will exceed $500 million, some of which the principals would hope to offset with ad revenues and subscription fees.
It’s a perplexing proposition considering that advertisers and consumers have set firm boundaries about what they will pay for sports-and where.
ESPN-the mother of sports networks and one of the most profitable of all TV networks-would have long ago launched a companion subscription sports service if it thought there was sufficient viewer support reaching beyond occasional pay-TV boxing and wrestling events. ESPN has been dogged for years by cable operators threatening to offer ESPN on an a la carte basis rather than continue to raise basic cable rates to subsidize its escalating costs.
Dual-revenue platforms
If nothing else, Fox’s write-down underscores Madison Avenue’s unwillingness to subsidize high-priced, high-profile professional sports. Someone should tell AOL Time Warner and the NBA.
CBS is insisting it will break even or make money but have no write-downs on existing sports rights pacts, because it is selling its sports advertising at high enough prices, bringing enough dual-revenue media platforms into the mix. It will also bring in more cable partners (such as its own TNN and TNT) to share the load. And, oh yes, CBS affiliates contribute $40 million annually to subsidize the network’s NFL telecasts.
However, the attempt to spread rising sports costs over a broader, more diverse media base doesn’t always work out. CBS now spends about $265 million annually on NCAA basketball, which will more than double to $545 million annually under a new pact beginning in 2003. That pact adds cable, digital broadcasting, radio and Internet rights, marketing, corporate sponsorship, home video, merchandising and licensing-things that CBS and its corporate parent Viacom have dabbled in to create more advertiser support and audience enthusiasm.
Some industry experts say they don’t see how CBS and ABC each can avoid at least $500 million in sports rights write-downs in light of massive losses on the NFL and other major events.
“Time buy” sales of advertiser-sponsored niche sports events and other new approaches barely shave the edge off more than $1 billion in sports-telecast-related losses sustained annually by the broadcast network companies. The only remotely lucrative new concept is regional sports networks-from Fox Sports to the new YES Network-which have little to do with the broadcast networks’ big league rights fees, except to create more, if not different, sports advertising inventory in a marketplace already vexed by glut.

Double-edged sword
Big-time sports is a double-edged sword for Fox and other major broadcasters. Fox’s recent Super Bowl broadcast will help boost the company’s overall fiscal year revenues by at least 4 percent. Without the Super Bowl, Mr. Bilotti said, Fox’s fiscal year 2002 revenues would have declined more than 5 percent, although higher sports fees and weak advertising revenues will triple Fox’s fiscal 2002 net loss to more than $140 million.
NBC executives, who say they should make about $85 million in profits by televising the Olympics across the NBC TV Network, CNBC and MSNBC, insist they are the real winners. “How can snagging the bid for what is a losing proposition be winning?” a top NBC executive asked me.
In a buyer’s market like the one we’re in, NBC may wind up being the last broadcast network able to decide whether major sports stays or goes from free over-the-air television.
“My guess is that by the time the current contracts are about to run out, it won’t even be an issue,” Mr. Wang said. “This will be one less form of programming the broadcast networks will have to think about, unless they are joined at the hip with a cable partner.
“Over time, there is a more of a possibility that television sports in general will be offered on an a la carte, pay-for-play basis,” he said. “In a broadband world, it may be the only way to win the game.”