Teams Face Low-Scoring TV Deals

Networks are finally tiring of stiff sports losses

You've never seen bruising hockey guys as conciliatory as you're about to see as National Hockey League officials renegotiate their just expired ESPN/ABC deal. The booming economy during the previous round, in 2000, allowed the league to quadruple its take to $600 million, or $150 million for each of four years. But this year's negotiations follow a 19% drop in the Nielsen ratings for the most recent Stanley Cup Final, arrive in the middle of a recession, and catch networks in a sea of red ink on their deals for more-popular sports.

Revenue vs. Payments
Spiraling rights prices and a recession mean that ad sales are falling well below cost. Cable networks, though, offset the shortfall with license fees from operators.
($ million)*
1997-98 1998-99 1999-2000 2000-01 2001-02
*Excludes license fees from cable operators
Source: Morgan Stanley analyst Richard Bilotti
Total ad revenues$3,255$3,511$3,949$4,094$4,048
Total cash payments$2,459$3,882$3,960$4,511$4,374
Profit (loss)$796($371)($11)($417)($326)

Other broadcast and cable outlets don't seem very interested, so ginning up a bidding war will be tough. The NHL is looking like a victim of very, very bad timing. "If you listen to [Commissioner] Gary Bettman, he's going to be thrilled to get a flat deal," said the president of one network sports division, who said he will not be bidding.

NHL officials are, well, conciliatory. COO Jon Litner said he's looking forward to talks with ESPN, which has an exclusive negotiating period during which league officials can't talk with other networks. "We have not been in the marketplace. I cannot predict what early fall will bring."

ESPN/ABC Sports President George Bodenheimer won't say how he plans to approach the NHL negotiations but notes that, despite soft ratings, "it performs well from an ad-sales standpoint."

More broadly, though, as the most financially powerful player in national sports, he noted that "part of the beauty of being a sports network" is that "there is no single sport ESPN has to have going forward."

Sagging market

The once roaring sports-rights market has taken a pause. Network executives characterize the current $4.6 billion National Basketball Association deal as "essentially flat" because ESPN and TNT got so many more games than in the previous deal and half of the average $100 million increase will come from the NBA's own startup NBA Channel. U.S. Among smaller events, rights for the Wimbledon tennis tourney dropped from $6 million to $5 million a year, and the French Open fell from $3.5 million to $1 million.

Still, NBC, though tight-fisted when it comes to pro sports, just bid $2.2 billion for the 2012 Olympics, about $1 billion more than its nearest rival. CBS had even announced it wouldn't bid.

But that's considered an anomaly. Broadcasters can't cover rights costs on ad revenues alone, and cable networks face cable and DBS affiliates that are screaming—to Congress, no less—about surging license fees that cover ad shortfalls.

"The problem really is that, in sport, the model that has succeeded for many years is broken," said Fox Sports President David Hill.

"I do think that the drastically escalating prices for the major sports are not going to be evident in the future," said CBS Sports President Sean McManus. "We haven't seen the moderation evidence itself other than the NBA deal, but that does send a message that fiscal responsibility is a mandate at all of the networks right now."

Now, buyers always want to talk the price down. But Morgan Stanley media analyst Richard Bilotti believes they're tired of taking losses. In an ongoing project studying TV sports, he estimates that, despite generating $4.2 billion in game-related ad sales this TV season, rights fees are so huge that national cable and broadcast networks will lose $1.1 billion.

Sports was last profitable for the networks in 1997, he says.

ESPN, TNT, FX and other cable networks more than make up for their losses with license fees paid by cable and DBS operators carrying their channels. But, for broadcast networks, sports eats up 40%-50% of the gross profits they generate from prime time programming.

"Even if you include the allocated revenue that the companies make from their TV-station groups, sports is still a massively unprofitable business," Bilotti said. "You could own stations covering 100% of the country, and the local profits still wouldn't be enough."

For years, networks have countered that high ratings make sports a great platform for promoting other shows. But, even after balking at escalating prices for big-time sports, NBC is still top-rated and—more important—is by far the most profitable broadcast network.

But sports is more than just a straight ad-vs.-rights equation. Weaker networks use sports to boost distribution. NHL's Litner points out that networks package advertising in young-male–skewing sports with less desirable programming.

Boosting distribution

Then there's distribution. Fox dramatically strengthened its station lineup after securing the NFL in 1994. NASCAR Vice President of Broadcasting Paul Brooks notes that FX's distribution improved after the cable net snagged half the circuit's TV package two years ago. "There are multiple factors that media companies take into account," he said.

The NFL and NBA are starting their own channels. NBA TV had its first season this year, carrying 96 games, but is distributed only on DirecTV. AOL Time Warner valued it at $450 million when buying an 11% stake two years ago, but NBA Commissioner David Stern said he wants the channel for more than any eventual financial payoff. "It's not just for its economic value but for the value of interaction with our fans. It's a game we wanted to play."

But a lot of TV executives scratch their heads over the league-controlled channels, trying to imagine what the NFL Channel's schedule is going to be, say, from April through July.

"I think they will be difficult standalone businesses," said ESPN's Bodenheimer, adding, "I think they can serve as promotional vehicles for the leagues."

Taking the Hit
Most sports generate big losses for TV networks
2001-02 2002-03 2003-04
*Excludes license fees from cable operators
Source: Morgan Stanley analyst Richard Bilotti
College basketball$7($54)($55)
College football$24$31$43