Leagues major, but not profits - Broadcasting & Cable

Leagues major, but not profits

Fox nets big bucks from regional sports group
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With the acquisition of Major League Baseball for the next six years, FOX Sports may have achieved what chief David Hill calls its "grand plan." FOX has been in the big-time sports business since 1994, when it wrestled the National Football Conference package away from CBS.

But, for the most part, Fox's network sports coverage has been a cost center. The big profits come from the regional sports networks, which as a group generated $872 million in revenue and $181 million in pretax earnings for the fiscal year ended June 30.

Sports programming put the FOX broadcast network on the map-in the same league, so to speak, as big boys ABC, CBS and NBC. The NFL contract has given the network a piece of America's most popular sport and, on a rotating basis, rights to the highest-rated network show year in and year out: the Super Bowl. It has also given FOX a huge promotional platform for its other shows.

What those big network sports contracts haven't given FOX is profits. In its most recent annual report, FOX said it lost money on both baseball and hockey in 1999. It took a huge write-off on its first NFL contract-more than $300 million-and no one expects it to make any money on its current NFL pact, which will cost another $3.8 billion over the next six years.

But the network has made money with its FOX Sports Networks (FSN) group. The wholly owned subsidiary of FOX Entertainment Group comprises 12 regional sports networks; a national wrap-around network, FOX Sports Net; the FX cable channel; and a collection of 12 other regional networks in which FOX has a financial interest. Among the last is a 40% stake in the Cablevision-controlled Rainbow Sports properties (including FOX Sports Net New York and the MSG Network).

FSN was born out of the Fox/Liberty Sports joint venture of regional networks. FOX bought out Liberty's stake for $1.4 billion in stock.

Collectively, the regional networks have locked up the local TV and/or cable sports rights to 73 of the 79 teams in Major League Baseball, the National Hockey League and the National Basketball Association.

According to documents filed recently with the Securities & Exchange Commission, over the past two years, revenues for FSN have climbed 48%, and earnings before interest, taxes, depreciation and amortization (EBITDA) have soared from $23.5 million to $181.9 million. FSN files with the SEC because it has public debt in the form of bonds that mature in 2007.

FOX Cable Networks Group President and CEO Jeff Shell calls FSN a "tremendous business model" because the networks have locked up long-term rights deals with most of the teams. The average term is eight years, he says. "So our costs are pretty much locked in as we ramp up the revenues."

Shell won't say what the outlook is, but company sources say FSN could reach pretax profits of $500 million by 2003. He had no comment on that number.

Currently, the single biggest piece of revenue is from cable affiliate fees, which totaled $424 million last year, up 31% from the prior year. Advertising revenue was up 40% to $241 million in fiscal 2000.

"The fastest-growing line will be advertising as we figure out ways to generate more revenue in the [non-game] dayparts," says Shell. The networks are doing that with the development of sports news and talk shows.

At the same time, infomercials, once a staple on the network, will be largely phased out. Infomercial dollars totaled just $68.5 million across the networks last year, down 9% from fiscal 1999. After advertising, the highest-growth segment may be fees from DBS operators, says Shell.

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The Big Bucks Behind The Big Leagues

TV networks will pay out about $5.8 billion on sports rights next year. The Big Four broadcasters will spend almost as much on sports as they do on sitcoms and dramas for their prime time schedule. Here is a look at the finer points of who's got what and how much they're paying for it. It was compiled from the leagues, networks, Street & Smith's Sports Business Daily and Morgan Stanley's Sports Programming Update.