In the wake of the Super Bowl, the highest rated event on TV, one analyst says that the cost to put sports on TV isn’t rising at an alarming rate and that networks that air sports can increase their profit margins.
In comprehensive report, David Bank, analyst at RBC Capital Markets, takes a deep dive and finds that the press tends to focus on the total magnitude of new sports rights contracts, inflating investors’ fears. Instead, he says, looking at year-to-year increases in sports cost provides a more moderate view of cost growth.
“The figures surrounding rights increases aren’t always as simple as they look,” Bank says in his report. “Headlines reflect increases in annual fees after new deals, but the basis of comparison isn’t always correct. Typically, headlines reflect an ‘average’ annual cost on a new deal versus a prior deal (since only total amounts over the life of a multi-year deal are made public, as opposed to price in any given year). This can suggest (for recent Big 3 sports deals) rights increases in the 50%-100% range. However, when adjusting for escalators over the life of the contract, fees might only by up 5% in a normal year (but possibly high singles to 20s, or even higher, in the first year of a new contract, depending on the deal) on total rights increases of 50%+ over the life of a contract.”
With that in mind, Bank says that channel operators can expand margins because sports rights power increases in retransmission fees and affiliate fees.
“Affiliate fees and retransmission consent fees have escalated dramatically to help compensate for these staggering rights fees increases,” Bank says.
“In 2010, there was still skepticism that the major networks could generate $1/subscriber in retransmission consent fees that many industry operators targeted in longer-term plans and the concept of seeking reverse compensation seemed almost like an academic exercise. Currently, the path to $1/subscriber is well on its way and on a very clear day, one can see $2 as a possibility, while reverse compensation is starting to flow in. Further, the seemingly exorbitant affiliate fees for major national sports platforms (such as ESPN), Regional Sports Networks, and even general market stations carrying sports have seen or are expected to see healthy increases.”
NFL football is the dominant player in the TV landscape, and Bank thinks league has the potential to make a move that could shake up the field, now that its NFL Network is fully distributed.
“We believe NFL is still considering selling at least some portion of the package (probably around eight games) and retaining the balance for the NFL Network. While the NFL Network would probably have to offer a lower distribution fee for its channel (given less programming delivery), we believe it could possibly reduce affiliate fees by about 50% and still be net ahead by doing so, given our sense of the current market for NFL rights,” Bank says. Fox, Turner and ESPN would all be likely bidders for such a package, he says.
Among the individual media companies, Bank calls News Corp.’s plan to launch a new national sports channel an “enormous opportunity.” He says margins at News Corp. could improve because the company already has agreements covering much of the programming that will appear on the new network, expected to be called Fox Sports 1. “Revenues could be mostly incremental (roughly 400 basis points a year to affiliate fee growth over three years),” he says.
Time Warner’s profits margins could expand because it has invested in sports right, but is only just now in a position to start increasing its sub fees.
Bank says that Disney’s ESPN margins are difficult to model. “A multitude of rights deals, and lack of full visibility on exact timing of affiliate fee ramp, make predicting margins a challenge,” Bank says. “While we expect a ramp in rights costs in FY2014/15, we expect affiliate fees to catch up over time, allowing for solid longer-term margin expansion.”
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