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Should the Networks Abandon Sports?

Morgan Stanley's Richard Bilotti analyzes profitability to broadcasters 4/06/2003 08:00:00 PM Eastern

Think of it as a weak defense spoiling the efforts of a brilliant prime time offense. The cost of sports rights is so high—all sports, including the college level—that it overpowers the benefit of promoting a broadcast network's schedule, concludes a new report by Morgan Stanley media analyst Richard Bilotti.

Prime Time Scorecard
2002-03 Season
Network Revenue (million) Profit (million) Margin
Source: Morgan Stanley analyst Richard Bilotti: Primetime Programming Cost Analysis
ABC $1,492 -$58 -4%
CBS $1,739 $421 24%
Fox $950 $41 4%
NBC $2,187 $742 34%
UPN $170 -$123 -72%
The WB $423 $14 3%
Total $6,961 $1,037 15%

He contends the networks are wasting hundreds of millions of dollars each year licensing professional- and college-sports rights and that network claims that sports pays hidden benefits by improving a network's overall demographics, or as a promotions carrier for prime time, don't change the bottom line.

Losses from sports overwhelm the games' potential value for promotion, the report finds, eating up 40% to 50% of the profits that networks generate from their prime time schedules and losing $500 million to $600 million a year.

Sports "are no longer acceptable as a promotional platform for the rest of the schedule," Bilotti said in an interview. "When you put the two together"—prime time programming profits and sports losses—"you have a virtually unprofitable industry."

He did not, however, address in detail the significant financial benefits of sports to networks' local stations.

The networks having big sports problems are ABC and Fox. One-time powerful Monday Night Football
accounted for about 40% of ABC's losses for the fiscal year ended September 2002. Bilotti sees a total of $1 billion in losses for the length of the ABC/ESPN football package. Likewise, a year ago, Fox took a $909 million write-off against its Major League Baseball package.

Bilotti lauds NBC for bailing out of the arms race for sports rights and sticking primarily with winter and summer Olympics, plus the risk-free and viewer-lite Arena Football League.

NBC Entertainment President Jeff Zucker, unsurprisingly, agrees with Bilotti's assessment. "There is no question that professional sports are not worth the price tag for what they give you in prime time television," he said.

It's not that he sees zero value. "I believe one of the reasons Joe Millionaire
was a success for ABC was the promotion [of the reality show] on pro football," which helped bring in the volume of male viewers required to make it such a hit.

But that said, Zucker adds, "I still wouldn't want that pro football contract around my neck."

CBS Television President Les Moonves disagrees. Given the effects on O&O stations in markets that also have football teams, "the NFL does not lose money," Moonves said. "We wouldn't be doing this if it didn't make money."

As for sports' promotional value, Moonves contends that football dramatically helped boost male viewership to the network's entertainment product. Looking at where CBS was in 1995—before CBS re-acquired rights to football—"we went from last place to first place. Survivor, CSI, Everybody Love Raymond, of course, had a lot to do with that. But the promotional value of those [sports] spots are tremendous."

Bilotti's ambitious 100-page report Primetime Programming Cost Analysis
significantly addresses sports but also tries to calculate the profits and losses of each part of the Big Four networks' prime time schedules, program by program. Some of the conclusions are eye-popping.

Bilotti calculates that, on a combined basis, the prime time profits from NBC, CBS, ABC and Fox dropped a dramatic 65% in recent years, from $1.7 billion in the 1999-2000 season to just $611 million last season.

Much of that, of course, stems from the absence of advertising from free-spending Internet companies. But Bilotti also blames volatile programming costs and cable's erosion of broadcast audiences.

So even if the economy recovers, he doesn't see the networks' regaining that lost ground between now and 2007.

His report also gauges the profitability of individual shows on the networks' schedules. Working from the 2001-02 season, he sees Will & Grace
(before a subsequent pay boost for actors and show producers) as the most profitable entertainment series, carrying an 85% profit margin, supplying $124 million in revenues but costing just $22 million for that season.

Even Friends—with its $1 million-an-episode stars—remained profitable for NBC, generating a 25% gross profit margin, generating $171.7 million in revenues but costing $128.7 million.

Among Bilotti's conclusions is that, while a steady diet of short-lived reality programming is potentially hazardous, it's not a bad substitute for Hollywood movies, which are moderately rated money losers for broadcasters.

The hazard of reality shows is that they do nothing to build a syndication library because viewers reject repeats. That, in turn, could leave a broadcaster's stations and cable networks starved for strong product down the road. Some experts predict a dearth of off-network sitcoms ready for syndication by the 2007 season.

Bilotti believes that prime time is getting difficult enough that some networks should either give time back to their station affiliates or simply make Friday or Saturday "repeat" nights, simply load up reruns of stronger programming.

"Are there enough aggregate profits for all six networks to program all seven nights of the week?" Bilotti asks. And he answers: He doubts that the Big Three can continue to program 22 hours a week and all stay profitable.

Prime Time Profits
Low ratings don't always mean low profits. ABC's profit margin on Whose Line Is It Anyway? beat Fox's on The Simpsons. But Frasier shows how high salaries and other costs can hurt.
Show Network Net revs (million) Series costs (million) Gross profit (million) Margin Price per ad spot
Source: Morgan Stanley analyst Richard Bilotti: Primetime Programming Cost Analysis
Will & Grace NBC $146.3 $22.0 $124.3 85% $230,015
That '70s Show Fox $94.5 $14.6 $79.9 85% $130,231
The King of Queens CBS $85.9 $14.3 $71.6 83% $162,334
Whose Line Is It Anyway? ABC $61.5 $10.3 $51.2 83% $65,247
Malcolm in the Middle Fox $81.9 $13.9 $68.0 83% $183,291
CSI CBS $288.6 $55.0 $233.6 81% $256,733
Survivor CBS $206.3 $44.4 $161.9 78% $315,648
Everybody Loves Raymond CBS $177.3 $61.6 $115.7 65% $282,701
The Simpsons Fox $108.2 $66.0 $42.2 39% $185,335
Frasier NBC $116.9 $140.8 -$23.9 -20% $177,058
The X-Files Fox $68.8 $96.8 -$28.0 -41% $133,885
What About Joan ABC $2.1 $14.3 -$12.2 -581% $93,162
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