With the finish line in sight, British long distance runner and Olympic gold medalist Mo Farah made one final sprint at the IAAF Diamond League finals in Zurich, Switzerland, last month. It was the last race of his long and distinguished track and field career and, coming up from behind, he won the last title in his storied career to wild applause.

NBC Sports Group televised Farah’s triumph to track and field fans live via its Track and Field Pass service, a $69.99-per-year, direct-to-consumer service that’s part of an emerging category of digital streaming sports subscription offerings that could threaten to sprint past traditional linear cable sports services to super-serve sports fans across the country.

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Traditionally, live sports programming lived in cable bundles that featured national sports networks like ESPN and FS1, as well as regional sports networks and a handful of general entertainment services.

But now, subscription digital sports services can showcase a huge roster — whether it’s NBC Sports Group offering packages with sports ranging from track and field to cycling to rugby; or Turner Sports kicking up a proposed OTT service geared to UEFA Champions League European football; or ESPN planning a direct-to-consumer service featuring 10,000 live Major League Baseball, National Hockey League and Major League Soccer games.

Getting Cord-Cutters in the Game
The new services seek to provide additional revenue to help sports programmers offset the high cost of rights while giving younger cord-cutting fans an opportunity to access content that’s not typically offered on linear sports channels.

“Before, if you were a cord-cutter or cord-never, you effectively said sports aren’t important to you because the only way to access U.S. pro sports content was through the pay TV network ecosystem,” fuboTV chief financial officer Joel Armijo said. “Now, in the [internet protocol] world, we’re moving toward completely personalizing that experience for a sports fans looking for that lean-forward kind of immersive experience.”

The sports industry has already taken several swings at the multiplatform, direct-to-consumer digital subscription model — all of the major pro sports leagues offer out-of-market packages of live games — while national and regional networks have offered marquee sports via TV everywhere platforms to authenticated viewers subscribing to the traditional cable bundle. As a result, audiences are increasingly viewing live sports content on phones, laptops and computers.

At the same time, younger viewers in particular are increasingly cutting the cable cord or choosing not to subscribe to cable at all, decreasing the pool of potential viewers who watch linear sports content. Pay TV providers lost about 976,000 net video subscribers in the second quarter of 2017, continuing a disturbing trend for cable networks, according to Kagan.

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The realities of the changing marketplace have pushed several linear sports channels, which are heavily reliant on distributor license fees and advertising dollars to offset high sports-content fees, to look for opportunities to generate revenue on alternative platforms. Last month alone, three major sports-media players committed to stepping onto the direct-to-consumer field within the next year:

● ESPN, which has recently suffered subscriber losses — its subscriber total was down 3.5% in its recent third-quarter earnings report — will launch a new service in 2018 that will mostly offer content not currently available on the linear channel. Offerings would include MLB and NHL content from BAMTech, which provides the technological backbone for the two leagues’ out-of-market streaming packages, and which is now majority-owned by ESPN parent The Walt Disney Co. While details of the service are vague, Disney chairman and CEO Bob Iger said during the earnings report that the launch of the direct-to-consumer service marks “an entirely new growth strategy for the company.”
● CBS Sports will launch a new OTT service later this year. It also launched a Showtime PPV app on Apple TV devices for the Aug. 26 Floyd Mayweather-Conor McGregor pay-per-view boxing match.
● Turner Sports — which distributes National Basketball Association games on TNT and Major League Baseball games on TBS — will launch a new streaming service based on its recent acquisition of UEFA Champions League and UEFA Europa League rights in 2018.

Sports media consultant Lee Berke said the recent OTT sports service announcements mark a shift in the traditional cable bundle’s virtual stranglehold on the category as viewers migrate to more multiplatform viewing.

“I don’t think the bundle or traditional cable is going away, but it’s shrinking, and the days of 80% to 90% penetration of cable services in homes are gone,” said Berke. “The key is that [sports networks] need to be in [the digital] space in an aggressive way and take a new look at their programming rights to see how best to divvy them up in an innovative range of approaches that meet the needs of new generations of viewers that may think their televisions are their phone, laptop or tablet.”

NBC’s Niche Play
Still, cable sports networks have to walk a fine line in trying to generate new digital revenue streams with direct-to-consumer services while not syphoning away cable subscribers from its linear cable channel offerings. NBC Sports Group has tried to have the best of both worlds by launching several direct-to-consumer services under its NBC Sports Gold service featuring niche content and international sports.

The company’s Cycling Pass, Pro Motocross Pass, Track and Field Pass, Rugby Pass and Premier League Pass all offer content that isn’t available on broadcaster NBC or cable sports network NBCSN, said Rick Cordella, executive vice president and general manager for Digital Media for NBC Sports Group.

While NBC Sports Group remains a big supporter of the existing cable ecosystem, the advent of new digital technology, combined with viewers’ willingness to watch content on multiple platforms (NBC’s Sunday Night Football drew an average of 600,000 unique digital viewers to NBCSports.com last year), represents a chance to deliver content to underserved groups of fans, Cordella said.

“What I think has happened is, the technology is now available to deliver these products, and the acceptance of that technology allows you create offerings like NBC Gold that weren’t possible years ago,” Cordella said. ”People are willing and open to watch content this way.”

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A huge question looming over this shift is whether enough underserved sports fans would be willing to pay anywhere from $10 to $70 to watch live sports fare on their phones and laptops. Cordella wouldn’t provide specific subscriber numbers for any of the five OTT sports services, but he said the numbers have “exceeded expectations.”

OTT provider fuboTV is one player that’s skeptical that sports alone will draw enough subscribers to change the game in a video-streaming marketplace dominated by entertainment services such as Netflix, Hulu and Amazon Prime Video. A mix of quality sports content and entertainment-based fare will attract a broader audience and score more revenue dollars, CFO Armijo argued.

FuboTV’s 70-plus channel Fubo Premier bundle sells for $34.95 and includes 35 channels that feature sports content, including soccer-heavy beIN Sports, fuboTV Network, Eleven Sports and most recently, Pac-12 Network, to go along with FS1, Golf Channel, Olympic Channel, NBCSN, CBS Sports Network and NBA TV. Also part of the bundle are a number of news and entertainment-based channels including Lifetime, Fox News Channel, USA Network, Univision, El Rey Network, HGTV, Hallmark Channel and History.

“We will continue to work to really super-serve sports fans and that’s very core to what we do,” Ben Grad, fuboTV’s North American head of content strategy and acquisition, said. “At the same time, there’s no one-size-fits-all model out here. We’re confident with our approach of being able to very well serve a number of customers in the marketplace with both sports and entertainment programming.”

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Still, NBC’s Cordella said a sports-only OTT service is an easy sell to fans hungry to watch their favorite sport. “One of the good things about sports is the fact that this is a known entity — you’re tapping into a built-in fan base that already exists,” he said. “When you take a particular soccer game and say, ‘It’s this team versus that team,’ you know exactly what you are getting, as opposed to entertainment services where you have to explain what the content is and why it’s different and better than what your cable subscription already has.”

It could be a while before standalone OTT services replace pay TV providers, Berke said, but companies that don’t explore the direct-to-consumer marketplace do so at their own risk.

“I don’t know if it’s the end game, but it is a necessary step,” Berke said. “It doesn’t mean that that’s the only way consumers will be watching sports in the future, but it means that you need to have a substantial presence there if you’re going to keep yourself relevant for new viewing options. You have to be able to reinvent yourself for each new generation.”

The emergence of over-the-top and streaming services into the increasingly crowded competition for sports rights has upped the ante for league programming, but analysts are split on whether the inclusion of deep-pocketed tech companies like Amazon, Google and Facebook will be enough to maintain the hefty increases of the most recent past.

That could be good news for pay TV distributors, but not so much for content owners — especially as two well-known sports rights properties are up for grabs in the next year: the National Football League’s Thursday Night Football package and the Ultimate Fighting Championship mixed martial arts package now owned by Fox Sports.

Thursday Night Football rights, currently shared by broadcasters CBS and NBC (and simulcast on the league’s own channel, NFL Network), are slated to expire later this year. The property got a taste of what could come when online retailer Amazon won the bidding for streaming rights for the package in April. Its $50 million offer, which puts games on the Amazon Prime Video platform, was five times the $10 million Twitter paid last season and, to some, set the tone for negotiations for larger, more popular packages.

The math is pretty simple, according to Pivotal Research Group senior research analyst – advertising Brian Wieser. “More demand for the same amount of rights should be inflationary,” he said.

Essential Appeal of Sports
Sports has become even more of a hot property for programmers as viewership has fragmented and with consumers just as likely to watch content on their phones or tablets as their living room TV screens. As audiences have scattered, sports watching has been the one constant.

Games are appointment viewing and best watched on larger screens in the home, complete with commercial interruptions, in step with the prevailing business model for most traditional networks.

But declining subscriber numbers at networks such as ESPN indicate that sports may not be quite as invincible as once believed. Telsey Advisory Group media analyst Tom Eagan pointed to declining ratings for NFL games last year — down 9% in the regular season and 6% for the playoffs — as an example.

While some of that ratings decline may have been due to a rather contentious presidential election that drew more viewers to news channels, poor matchups and the absence of big stars early in the season, Eagan said that digital video services are putting more resources into other types of content.

“It seems that most of these companies, ironically enough, are more comfortable with original programming,” Eagan said. “I think it’s because it casts a wider net than sports does.”

The length of most sports deals — 10 years, in some cases — has caused some distributors to pause, Eagan added, especially since the TV business is changing so rapidly. Ten years ago there were no virtual MVPDs and Netflix was just beginning to offer streaming media, making most of its money by selling DVDs through the mail. Who knows what new distribution platform could emerge in a decade’s time?

“I think media companies want as much flexibility as they can get right now,” Eagan said. “When you sign these deals, you have to be specific about what the rights are. And it’s hard to be specific about rights if you don’t know what the platform might be.”

In the past, rightsholders have been well aware of their power in the ever-evolving TV landscape and have been more than willing to wield it, as evidenced by the huge premiums networks paid for sports rights over the past few years. But as other big rights deals come up for renewal in the next five years, there is an increasing belief that the big premiums paid for sports rights in the past won’t be maintained.

It wasn’t so long ago that hefty increases were de rigueur in the sports rights business. In 2014, when ESPN, Fox Sports and Time Warner Inc.’s Turner networks agreed to pay a collective $1.52 billion per year for the rights to Major League Baseball games, that price was double the $760 million paid for the same rights previously. Last year, when Turner and ESPN agreed to pay $2.54 billion per year for National Basketball Association rights, that figure was 173% higher than the $930 million per year the parties previously paid for the same games.

With tech giants like Amazon and Facebook — which offers college football games via its Stadium: Live home page and has rights for 20 Major League Baseball and 22 Major League Soccer games this year — getting into the game, those prices were only expected to get higher.

Canaccord Genuity senior equity analyst Michael Graham isn’t convinced that Amazon and other streaming companies will invest heavily in sports programming, though. While he acknowledged Amazon’s willingness to pay top dollar for TNF streaming rights, he finds it a big leap to go from that level of spending to the billions of dollars that would be required to be a serious bidder for major sports like the NFL, NBA or Major League Baseball.

“Amazon came to the table in a strong way to get those rights, but it’s mostly just a test case,” Graham said of the TNF investment. “It’s possible they may move more into sports, but it’s super-duper expensive and there is no direct revenue associated with that content spend.”

Graham said that for services like Amazon Prime and Netflix, which have no advertising, the payback for investing in content is in the number of additional subscribers that content brings. He doesn’t think making a big commitment to sports will translate into enough new customers. Other analysts feel the same way, but note that digital companies could invest in smaller packages, like perhaps Monday Night Football, which is currently locked up by ESPN until 2021.

ESPN paid about $1.9 billion per year for MNF rights, according to MoffettNathanson senior analyst Michael Nathanson.

In a presentation to team owners and executives at Evanta’s Global Sports Summit conference in July, BTIG media analyst Rich Greenfield said that he believed Monday Night Football would be a good fit for either Amazon or Apple. He observed that Amazon Prime uses content most often as a retention tool.

“Even if there is nothing on Amazon Video that you care about this month, you’re still a subscriber for shipping, or you’re using your Alexa for music,” Greenfield said at the July conference. “They’re trying to make it so that there is always something. That’s why Monday Night Football would fit in great. Just another reason to be a Prime subscriber.”

Amazon did agree to pay $50 million for Thursday Night Football streaming rights — five times the earlier price — but would it be willing to pay the same premium for the full Thursday-night package or for Monday Night Football or Sunday games?

Stepping Up to Monday Nights?
Graham said a Monday Night Football bid might make sense for Amazon or another streamer, but he isn’t expecting a big commitment.

“It makes sense directionally,” Graham said. “Amazon does things on a small scale. Sometime in the next several years, with the exception of Netflix, there is likely to be more intensive experimentation around sports content. It might be most logically with Facebook, because you can have the social media commentary and sharing around that content which could help to monetize it more fully.”

As always, competition will be key. Pricing has a tendency to go higher the more bidders that are involved. And with traditional networks desperate to keep their dwindling subscriber base intact, the entrance of an Amazon, Apple or Facebook into the bidding can only be good for the content owners.

“Will there be the competition among the digital companies to drive those rights values up?” Greenfield said. “I don’t think we know yet, but I think that will be the single biggest swing factor in determining the future of sports rights values from where we are today.”

The Walt Disney Co., battered by fears over flagship cable-sports network ESPN’s declining subscriber base and inability to release an over-the-top product, may not be a lost cause after all, according to a JP Morgan analyst who found the hole the programmer fell into six months ago may not be as deep as some think.

In a 22-page report last week, JP Morgan media analyst Alexia Quadrani called the panic over ESPN’s subscriber losses and fears that the network paid inflated prices for sports rights to keep them out of rival networks’ hands “exaggerated,” adding that even with a 2% annual decline in its subscriber base, Disney’s cable networks can continue to grow.

Despite reports to the contrary, ESPN could introduce an OTT product as soon as 2018 at a price that could be compelling to rabid sports fans.

CRITICS HAVE PILED ON

Disney stock has never quite recovered from its slide in early August, when the company said ESPN had lost 3 million subscribers in 2014 and 7 million since 2012. The idea that the network, long believed to be pay TV’s must-have service, was affected by cord-cutting and so-called skinny programming bundles triggered a sell-off across the sector, with programming stocks losing a combined $60 billion in market capitalization.

The bad news kept coming even as Disney’s movie studio prepared for the much-anticipated December release of Star Wars: The Force Awakens. BTIG media analyst Rich Greenfield, a longtime Disney critic, said in a blog post that ESPN’s fee structure would make it impossible for it to launch its own direct- to-consumer offering.

Later, Greenfield introduced a survey by consumer marketing and intelligence company Civic Science that said more than half of those surveyed would drop ESPN if they could save $8 per month on their pay TV bill.

Other analysts also have lowered their ratings on the stock, including Barclays media analyst Kannan Venkateshwar, who downgraded Disney to “underweight” on Jan. 15, primarily on ESPN fears. ESPN has about $53.4 billion in off-balance sheet programming costs because of sports, Venkateshwar said, which could be exacerbated by a declining subscriber base.

“If the company’s subscriber loss trend lines do not stabilize, the company’s cost recognition may have to accelerate to catch up with revenue trends,” Venkateshwar said in a report.

Quadrani hasn’t ignored the declines; she just doesn’t think they will have as great an impact as others who follow the sector. Even with a 2% annual subscriber decline, ESPN could still grow its affiliate fees by 53% over the next five years, she estimated, from $6.64 per subscriber per month in 2015 to $10.18 per sub per month by 2020.

At that rate, ESPN would grow its affiliate-fee revenue by 39%, from $7.4 billion in 2015 to $10.3 billion in 2020, even with the subscriber decline. Quadrani also estimated that ESPN could go over the top as early as 2018 with a $20-permonth offering, or about the same price that OTT service Sling TV charges for about 20 channels, including ESPN and ESPN2.

OTT OPTIONS OPEN

That’s still considerably less than some earlier estimates that ESPN would have to charge upwards of $36 per month for a standalone offering, a factor of its investment in sports programming. While others have criticized the worldwide sports leader for paying big for football, basketball and baseball rights, Quadrani argued that is exactly what would make an OTT offering most compelling.

Quandrani said the OTT offering could capture about 15% of the 12 million subscribers lost from 2010 to 2018 in its first year and 15% of incremental customers lost in each subsequent year.

Disney has said it has no plans to offer an ESPN OTT product anytime soon, and Quadrani said it doesn’t need to. “If Disney chooses not to move forward with an OTT offering, we still see ESPN remaining a healthy and profitable business,” she wrote.

SIDEBAR: Up With OTT

JP Morgan media analyst Alexia Quadrani believes ESPN can launch with a direct-to-consumer offering for as little as $20 per month, beginning in 2018 — and that it could help recapture some of the subs linear ESPN has lost.

                                                      2018E                     2019E            2020E

Subscribers                                   1.75 million             2.02 million      2.27 million

Penetration of Lost Linear Subs   15%                         15%                    15%

Annual affiliate fees at:

$15/month                                     $315 million             $363 million       $409 million

$20/month                                     $421 million             $484 million       $546 million

$25/month                                     $526 million             $605 million       $682 million

SOURCE: JP Morgan estimates