NFL Goes Long - Broadcasting & Cable

NFL Goes Long

League's new network ignites a turf war with cable operators
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Like a rookie at the Super Bowl, the new NFL Network is center stage in a high-stakes match against the game's most fearsome competitors.

The league is betting that it can parlay a lineup of eight regular-season games carved out of its TV packages, 54 pre-season games and highlight reels into critical mass and higher fees for its three-year-old network, currently in 41 million of the nation's 85 million homes receiving cable or satellite.

Already, the network has ignited a war with cable operators, which are content with the supply of games and balk at the prospect of raising cable rates yet again to pay for the price increases (25¢ per subscriber to 90¢) NFL network is pushing.

Taking the offensive, the NFL's ad campaigns exhort fans in print, “Don't let Time Warner ruin your football season.” Cable operators have swung back with Websites and a campaign blasting the NFL's financial demands as unfair and “unnecessary roughness.” The FCC has stepped in to referee.

The fledgling network's marketing plan is audacious even by the NFL's big-spending standards. For the first time since the league's inception in 1966, it will not only sell games to broadcast and cable networks but also air them itself. The league says it will spend as much as $100 million on the campaign, which will span TV, print and radio as well as NFL resources, including in-stadium giant screens.

Considering the $400 million a year that the new six-year package of Thursday and Saturday games would have brought in from an outside network, the NFL's investment totals close to $2.5 billion in its own network—making it the most expensive startup for a cable channel ever.

“The full weight of the NFL marketing machine will be used,” vows NFL Network spokesman Seth Palansky in an oft repeated line.

For the league, the network isn't so much about immediate profitability as about building a winning franchise that could one day compete with its biggest clients. The league is preparing itself for a broadband future, when games—or versions of them—are played over the Internet. The network is also a defense, a hedge against the future when the broadcast and cable networks may not be as desperate or willing to pay hundreds of millions of dollars for TV telecasts.

“There is no more powerful content on television,” says John Rash, senior VP for media-buying agency Campbell Mithun. “The NFL is well beyond sports: It is a national phenomenon, and it can drive distribution.”

“Long-term strategic, it's very smart on their part,” says Dick Ebersol, chairman of sports and Olympics for NBC Universal, which this year begins spending $600 million annually for a Sunday-night football package it hopes will revitalize its slumping primetime. “Who knows where our world will be in six years? Will there be four aggressive network bidders, and if not, why not find out what kind of business you can develop on your own as a potential home for more than just those eight games.”

Critics point to a slim slate of filler programs wrapped around a new package of eight NFL games. However, it might be enough to bring in rabid football fans. NFL football has helped build major networks before, including ESPN in the late 1980s and Fox in the 1990s. “That's the big question: Can you build a network based on eight nights?” says the president of a large cable network, who negotiates sports packages. “But if I was out there building one and I had eight things to pick, it would be eight NFL games.”

To avoid criticism that broadcasts will be PR outlets for the league, it recently acquired four post-season college games and hired big-name talent like Bryant Gumbel and Cris Collinsworth, two announcers with a history of candor. It also will re-air four weekend games every week. Network programming chief Charles Coplin says NFL Network is not only looking at additional post-season college contests but is also interested in adding regular-season college games.

The NFL is flush from recent TV deals, having just cut some for $23.9 billion ($3.73 billion annually) in rights fees from CBS, NBC, ABC, Fox, ESPN and DirecTV beginning this season. That almost equals the combined yearly fees of NASCAR, Major League Baseball, the NBA, NHL, NCAA basketball, golf and the Olympics. “This is about equity,” Ebersol says. “If you ever want to make a good bet on equity, you do it when all your other sources are turning out record amounts of money.”

While many big cable operators have agreed to carry the NFL, others—notably Time Warner, Cablevision and Charter—refuse to pay the rate hike. Time Warner and others would prefer to house the network on digital tiers that cost extra to subscribers who want it. Says Time Warner Cable COO Landel Hobbs, “The NFL Network is demanding that we pay $100 million for eight out-of-market games that will be available on local broadcast stations in the team's hometown. That price-value ratio is simply out of whack.”

On its Website, nflgetreal.com, Time Warner Cable reminds customers that they will see 130-200 NFL games on Time Warner Cable this season from ESPN, Fox, CBS and NBC. It also points out that, as with ESPN games, the home and away markets for each NFL Network game will be able to see the contest on an over-the-air station. Therefore, fans will not miss any of their team's games even if they don't get NFL Network.

“Their big risk is that cable operators just say no,” says a media investment banker who does business with sports networks. “Then you've given up $400 million a year and have a network that's just not big enough.”

The hottest battle is with Time Warner. Fred Dressler, the No. 2 cable operator's programming chief, deplores rising sports costs and has been trying to force new networks onto sports tiers with few subscribers. That way, the burden of the high-cost networks is borne only by fans, not by every single subscriber.

NFL Cried foul

The friction heated to a boiling point when Time Warner completed its July 31 acquisition of systems from Adelphia Communications and Comcast. Since Time Warner doesn't have an affiliation deal, it took the opportunity to dump NFL Network from the recently acquired properties. The NFL cried foul, contending that the move violated FCC rules requiring operators to give subscribers 30 days' notice of changes to channel lineups. Acting far more quickly than usual, the FCC ordered Time Warner to immediately restore the football channel.

“With NFL training camps now under way and the NFL's pre-season schedule commencing on Aug. 11, 2006,” the FCC's media bureau said, “now is a time when many football fans have a particular desire to view the NFL Network's programming.” The agency found that “each day that Time Warner customers go without the NFL Network significantly and irreparably harms many of them, particularly those in Buffalo, Cleveland, and Dallas, each of which is home to an NFL team.”

Unless Time Warner is able to successfully appeal the FCC decision, NFL Network remains on the new systems at least until the first of September. On Aug. 4, the cable operator started running a crawl telling viewers that the network could get dropped again if a carriage deal is not struck. If the FCC has not ruled on the NFL's complaint within 30 days of Aug. 4, Time Warner can pull the network again.

Although sports leagues are often the target of political grandstanding, Congress and federal regulators seem to support the NFL's efforts. The FCC has signaled that sports networks—specifically, regional ones—are must-have programming for which there is no substitute. That notion is seconded by legislators, many of whom have to face sports-fan constituents in November elections.

“The political side, frankly, is the hardest,” says one cable operator.

The network was conceived in March 2003, when NFL team owners unanimously approved approximately $100 million in funding for the launch of a league-run network under the guidance of President/CEO Steve Bornstein. The 22-year veteran of ESPN and ABC was pivotal in the growth of the cable sports network into a financial giant.

NFL Network launched in 11.5 million homes with a mix of original programming and NFL Films library content.

By its second anniversary last November, NFL Network followed TNT as just the second cable network to reach 35 million homes within two years. But ancillary programming, pre-season games and the NFL summer league based in Europe were not going to be enough to push the network much further.

In 2005, the NFL was shopping a new package of eight regular-season games to be played on Thursdays and Saturdays late in the season. Comcast, Fox and ESPN were interested, and the price tag was around $400 million a year.

Early that year, NFL Network distribution chief Adam Shaw gave a presentation to the owners outlining how that package could benefit the league's network. As the year went on, many owners began to seriously consider the idea of passing on the short-term cash to build out the cable network and expand the league's media empire. The owners were initially divided, Shaw says. “Up until the day it was decided, I thought it was a coin-toss.”

In early January, the NFL made the landmark decision to put the eight games on its own network and instantly turn it into a major cable player. ESPN—which could potentially suffer most if NFL Network becomes a dominant factor—says it isn't worried for now.

Few networks can appreciate the league's power more than ESPN. The cable sports powerhouse was in only 43 million homes before it began carrying NFL football in 1987. Now reaching more than 85 million homes, ESPN can afford to pay $1.1 billion a year for Monday Night Football. “So far, the competition hasn't hurt us any,” says ESPN VP of Programming and Acquisitions Leah LaPlaca, noting ESPN's established football programming from the NFL draft to the abundant analysis-based shows. “NFL fans are used to tuning into the ESPN networks for that coverage.”

Quick profits will be nearly impossible. For the investment to be worthwhile at the end of six years, NFL Network would have to be generating around $300 million in operating cash flow and around $1 billion in revenue. If the league can ram its license-fee hike through its current distribution of 41 million subscribers, NFL Network will generate around $350 million a year in license fees. At 60 million subscribers, that figure grows to $500 million; at 80 million, $675 million. Near-term goal is 80% national coverage, says Shaw, adding, “We know it might take a year or two to get there.”

NFL Network's ratings will be fairly negligible except during the live games; mighty ESPN generated just $6 million in ad sales per game last season. Even matching that level would give NFL Network just $48 million a season in game revenues. The network would probably be fortunate to generate $35 million from games and other programming in its early years. Growing that dramatically will require a massive programming breakthrough.

Some industry insiders say the NFL may have to settle for around 70¢ per subscriber to get a deal done.

“To be frank, we have been in close contact with Time Warner, and we are still pretty far apart,” says NFL Network's Shaw. “We can be patient.”

Additional reporting by John Eggerton and Melanie Clarke

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