TV Touch down

When asked to describe the NFL's current TV package, the president of NBC Sports declared, “The dollar figures have reached an insane level. ... It is a foolhardy economic venture on all the packages.”

The year was 1998, and the president was Dick Ebersol.

What a difference a few seasons—and a crumbling prime time schedule—can make. Today, NBC is a football fan again.

As part of the NFL's record $3.7 billion in TV-rights deals finished last week, NBC Universal, which had forfeited sports programming because of the cost, suddenly ponied up $600 million for NFL games on Sunday nights, where ESPN had ruled. Disney's ESPN cable network agreed to pay $1.1 billion annually for rights to Monday Night Football—about twice ABC's average annual payment for MNF since 1998.

Including the deals with ESPN, NBC, CBS, Fox and DirecTV, which run from 2006 to 2012 (2014 for ESPN), the NFL's TV revenue will zoom 43% over the current $2.6 billion deal.

Now consider for a moment that the NFL will collect more money in TV-rights fees per year from broadcast, cable and satellite than the National Basketball Association, Major League Baseball, Pro Golf Association, NASCAR and the NCAA basketball tournament—combined.

The reverberations of the deal have yet to be felt: NBC may squeeze its affiliates to help pay. Congress is watching the move of football to pay cable. And cable customers can certainly expect to pay higher bills—if not now, then later.

How can a pigskin be worth that much?

One truth is irrefutable: NFL football is the most valuable product in television in part because nothing else draws such large audiences of mostly men to a specific network at a specific time. Football offers a male Mecca for advertisers. With digital video recorders and video-on-demand threatening to disrupt traditional advertising, football is one of the few programs that are largely TiVo-proof, something fans want to watch live.

Wall Street is Skeptical

Despite the huge risk of heavy losses, the networks buying the games contend that paying such exorbitant amounts makes perfect sense: The NFL can supercharge ad sales for other parts of the schedule. Furthermore, it gives them a platform on which to promote new shows. And they point to other lucrative cross-promotional opportunities that are simply irresistible.

“Football is heroin,” says the CEO of a top-10 cable network.

ESPN Chairman George Bodenheimer says the network had little choice because the NFL games are a critical ingredient in the brand. “Really, the driver for us is, you can't be the leading sports network without televising the leading sport. It was never a question of whether we would renew the NFL, but on what terms.”

Wall Street was instantly skeptical that ESPN could swallow the deal and still deliver strong earnings growth. “How do you go from $600 million to $1.1 billion and still say you're going to grow at double-digit percentages?” asks Rich Greenfield, analyst at Fulcrum Global Partners.

But Bodenheimer contends that Disney executives anticipated a spike in programming costs, and he vows ESPN, which reaches 92 million homes, will continue to increase cash flow by more than 10% per year for the next five years.

“You can't just look at this and add up the CPMs and the ratings and declare 'good deal' or 'bad deal,'” Bodenheimer says. “It's deals like this that fuel the growth of the entire company.”

Blocking Murdoch

ESPN also cut off a competitor by paying a hefty price for NFL games: Rupert Murdoch's News Corp. Murdoch's regional cable sports networks have hovered around the NFL negotiations for months, angling to snag a package to anchor a new national channel.

Even though ESPN won't sell enough advertising to cover the huge NFL costs, the economics work because it generates two-thirds of its $3.5 billion in revenue from huge fees paid by cable and DBS operators. NFL games help justify future price increases. Merrill Lynch media analyst Jessica Reif Cohen predicts that the sports network will make a small profit. She says it will do better than it did with Sunday Night Football but will attract fewer than the 16 million viewers that MNF drew on ABC.

Even without rosy predictions, Bodenheimer would have done the deal, largely because the NFL games don't just feed his main network but give ESPN leverage in other parts of its portfolio, from startup Spanish-language channel ESPN Desportes to a planned TV-over-cellphone service.

Critics say the NFL deal is more akin to a Hail Mary pass for NBC, an attempt to reverse the steep ratings slide of its prime time schedule, but an expensive and potentially unprofitable one. NBC Universal Chairman Bob Wright claims that his deal will make NBC money out of the gate: “This is going to be a profitable transaction.”

In many ways, the cost is higher for NBC, whose revenue is based solely on advertising. The most expensive prime time series, ER, costs the network a per-episode license fee around $9 million. Compare that with a per-game cost of $38 million in the current deal. A three-hour NFL game, unlike a one-hour ER episode, gives NBC no reruns.

Currently, ESPN's Sunday-night games generate a mere $6 million in ad revenues per game, well short of the license fee NBC just agreed to pay. That's not a fair comparison, says NBC Universal Television Networks President Randy Falco, given the higher-quality games (which NBC can choose, particularly toward the end of the season) and the promotional power of NBC and its affiliates. He contends that, because of NBC's reach and the quality of the games, the network's ratings will be double ESPN's current level, which averages 9 million viewers.

So, how much can a broadcast network hope to make with prime time football? ABC now takes in about $23 million per game in ad sales with Monday Night Football. That won't come close to covering NBC's costs. But NBC executives insist that they'll do far better. NBC will have a 7 p.m. ET pre-game show and an 8:15 p.m. kickoff, giving the network a four-hour block, all of it in prime time. Monday Night Football typically runs three hours, only two of them in prime.

Still, as competitors point out, NBC's Sunday games will follow seven hours of coverage on rival networks that day. Monday Night Football is the only game that night.

Fans, as always, may be left footing the bill, despite the promise of ESPN executives to hold the line on price to cable operators. Congress has long threatened to take action against the flow of football and baseball to cable TV, but to diffuse any threat of legislation, Monday Night Football games will be simulcast on broadcast stations in the two teams' home markets.

At the NFL, team owners are celebrating. The deals were cut just as the moguls gathered for a pre-scheduled meeting in Atlanta. For years, they've listened to networks complain about the escalation of sports costs, but league executives Paul Tagliabue and Steve Bornstein, former ESPN president, persuaded the networks to pay.

One More Package

The NFL has one last package to auction off: two half-seasons of games—one for Thursdays, the other for Saturday—that could be worth $300 million per year. Time Warner's The WB network has approached the NFL about snagging some games, which would be a dramatic departure for the broadcaster, according to industry sources. Comcast may pounce for games to air on its tiny Outdoor Life Network, aiming to put the channel on the map. The league's NFL Network might get the games, but some team owners would rather get immediate cash from an outside network.

Are all these NFL games worth the price? Says NBC Universal Television Group President Jeff Zucker, “The best thing to remember is, a great deal with the NFL is as good a deal as you can get in the whole of television.”