Who's Afraid of the Big, Bad NFL?

One look at the astronomical rights fees for recent deals like the World Cup and the Olympics shows an out-of-control marketplace for live televised sports, one that is leaving analysts and industry observers scratching their heads as to how the “winners” won’t take a financial beating on these deals.

And with prices skyrocketing, the biggest game in town is about to start shopping for new deals. The National Football League is likely to open negotiations sometime soon with broadcast incumbents CBS, Fox and NBC. And the league will undoubtedly be looking for major price hikes, much like it already received from ESPN for Monday Night Football.

And that combination spells trouble for the financials of any network that wants to keep possession of the NFL. While the networks publicly maintain they don’t see football as a loss leader and the NFL can drive everything from affiliate strength to retrans money to promotion (and even lead-ins) for the rest of a lineup, people with knowledge of the deals say that comparing rights fees and production costs to straight ad revenue can show a loss of more than $100 million in a given year in some cases.

But while making money-losing deals is not necessarily great for the bottom line, none of the networks is likely to just say no.

Walking away from the NFL—and its high ratings and enormous cachet with both viewers and the distributors who dole out retrans money— is a scary option, but it’s happened before. CBS let Fox grab its NFC Sunday-afternoon package in 1993. NBC let CBS outbid it for the AFC package in 1998. And ABC gave up the primetime broadcast package in 2006.

But several former network executives say the networks can’t afford to say no now, no matter how much they can’t afford to say yes. As one TV executive who has been directly involved with major sports property negotiations puts it: “I think people will posture and talk and act like they’re not going to step up, but at the end of the day I think people have to step up.”

Are You Ready For Some Retrans?

Last month, ESPN renewed its rights deal with the NFL, agreeing to pay about $15.2 billion for eight years, which represents a 70% increase. But the massive subscriber fees the behemoth gets from cable and satellite providers will help offset those costs (though many industry observers wonder how much more ESPN will ask for sub fees the next time around).

But how are the broadcast networks, with their falling ratings, flat ad revenue and marginal- at-best profitability, supposed to pay for a similar hike? The league has its eyes on the big retransmission fees the networks have been getting from cable operators and satellite providers.

For now, that retrans cash represents high-margin revenue that, as CEOs like Leslie Moonves of CBS enjoy telling Wall Street, goes right to the broadcasters’ bottom line. But because football has been one of the main wedges that has forced distributors to pay increased retrans fees, the networks, in a vicious circle of payments in and out, might as well get ready to sign most or all of those checks right over to the league.

And those checks are getting mighty big. At CBS, which pays $620 million a year under a deal it signed with the NFL in 2005 and was extended till 2013, retrans revenue is expected to reach $250 million in 2012, according to Moonves. CBS also expects to get a piece of the retrans agreements its affiliates make, putting CBS’ retrans revenue in the $600-700 million range in the next three to five years.

The NFL’s other broadcast outlets, Fox and NBC, are also pushing cable operators for retrans money and their affiliates for reverse compensation; they are likely to need that money to cover their new NFL agreements.

The settlement that ended the NFL’s lockout, paving the way for this season to be played, gives the players 55% of the additional revenue that comes when the league renegotiates new TV contracts, according to consultant Neal Pilson, former president of CBS Sports.

“Both the league and the players certainly anticipate getting significant rights fee increases in the next negotiation,” Pilson says. “They will point to the deal they just negotiated with ESPN, where the increase was somewhere around 70%. I don’t expect the networks will agree to pay or have to pay an increase of that magnitude, but certainly the league anticipates and the players anticipate that rights fees from broadcasters will continue to grow in the next renegotiation.”

And that’s where the new cash comes in. “The networks are thinking that if they can drive retransmission money, then they’ll have available funds to pay for rights fee increases,” Pilson says. “And that’s what the league has in mind. They’re happy to see the networks and stations get increased retrans funding, and also there will be a certain amount that will be passed through to sponsors and advertising.”

One former network exec noted that in the old days—when instead of cash payments, retransmission consent was bartered for carriage of new cable networks—it was harder for content rights holders to determine the value of retrans and claim a portion of it.

“We pay close attention to the media landscape, especially as it impacts NFL telecasts,” an NFL spokesman said.

Pilson says retrans will help keep NFL games on broadcast TV. Without it, the league would have to move more of its schedule to cable in order to increase revenue.

Getting Their Fix

The never-ending cycle of higher rights fees isn’t necessarily good for the networks. “It’s like heroin for the networks,” says one TV sports consultant who didn’t want to be named because his clients do business with the NFL. “They’re addicted to it, but it’s not good for them.”

It’s hard to make money paying so much, even for high-rated fare. Fox took a $387 million write-down from its eight-year, $4.5 billion NFL deal in 2002, after a $350 million write-down from its $1.6 billion deal in ’94. But it might be even scarier to try to kick the NFL habit.

Sports in general, and NFL football in particular, are popular with advertisers because they generate high ratings and are mainly watched live, making them virtually DVR-proof. Nevertheless, the broadcasters’ NFL contracts are “probably a loss leader on an advertising basis,” according to David Bank, RBC Capital Markets managing director. “They make money indirectly,” Bank asserts, noting that the NFL is the “kind of franchise that drives retrans, and ultimately reverse compensation from affiliates.”

But the bottom line, according to one former network executive, is that “anyone who tells you they’re making money off their NFL deal is silly.”

It’s not good for cable operators and their subscribers either, who pay for the NFL through retrans payments to the broadcast networks and high subscriber fees to ESPN.

“The cost is enormous,” says Matt Polka, president of the American Cable Association, which represents smaller cable operators. “Although I don’t think there exists a figure that says how much retrans revenue directly goes back to the NFL, it is without doubt that a significant portion of it does.”

Polka says the high cost of sports is pushing up the cost of cable and satellite TV to subscribers, whether they are sports fans or not.

“It’s almost a deal with the devil that sports content providers have to just pay whatever the sports leagues are demanding and push that down to the consumer, regardless of how that affects retail rates,” he says.

While some providers, including Time Warner Cable and Dish Network, are talking about putting together low-cost packages that don’t include sports, Polka believes that the greedy networks and sports leagues are just begging lawmakers to step in.

Unlike in 1992, when cable rates were regulated, this time, “I think a lot more significant and direct attention will be paid to the wholesale side of the business, because that’s where the increase is coming from. It’s not coming from the operators or the satellite providers,” Polka says. “It’s coming from the content owners who are out there paying these flagrant, ridiculous, inflated prices because they’re in competition with other networks, and are simply passing that down to consumers.”

But barring an act of Congress, TV executives say the NFL will be able to demand higher fees for the foreseeable future. “There’s always going to be a market for the NFL,” says one media company exec. “More so today than ever, because of the additional revenue stream that you have now from retransmission consent.”

The NFL takes advantage of its popularity by making sure that when it’s negotiating with one network, there’s another willing to bid for the same package. Also, the NFL could increase the number of games on its own NFL Network—a tactic some argue was the real reason behind the creation of the network in the first place.

“Certainly it’s in the NFL’s interest in creating tension with respect to its packages. They have always done that, and they have always done it very well,” says one TV sports executive.

A New Package on the Horizon

Adding to the intrigue—and the NFL’s coffers— is the fact that the league is probably creating a new early-season package of primetime games on Thursday night. Bidders including Turner Broadcasting, Comcast/NBCUniversal and News Corp. are expected to offer $500- $700 million for the games. Those rights probably will not be sold until CBS, Fox and NBC have new deals.

At a recent press conference, NFL Commissioner Roger Goodell said: “We are dealing with our current packages and our current rights holders. We obviously are evaluating the possibility of an expanded Thursday-night package, and we will talk about that with all of our current partners as well as potential partners.”

The NFL would have to negotiate with those rights holders to determine which games would be moved from their packages to the new Thursday-night lineup.

So all eyes are on the incumbents for now, as those on the outside sit waiting to pounce if anyone balks at renewal. And keep an eye on NBC, which is operating under the Comcast umbrella for the first time. While NBC’s Sundaynight package would be the easiest for a cable outlet like Turner to pick off because it’s a single weekly broadcast that would be less complicated to take over than Fox or CBS’ multiple Sunday-afternoon telecasts, it is quite literally propping up NBC’s primetime in the fall.

But it’s NBC’s cable side that is key, as the company is putting a major push behind turning Versus from an also-ran to an NBC Sports Network that will be a major player.

The cable side is expected to be a major suitor for the new Thursday package, but some wonder if NBC somehow turned primetime around, would they shift Sunday Night Football to cable.

“Comcast would say to itself, if Versus carried Sunday Night Football, we could get to 90-100 million homes pretty quickly, and we could move Versus from 40 cents to a buck. So I think that’s a scenario that could play out,” Pilson says.

The move would be similar to the one Disney made when it shifted Monday Night Football from ABC to ESPN. “I would have made that trade any day of the week, taking Monday Night Football off ABC and putting it onto ESPN,” says one broadcast executive. “They were losing $100 million on ABC. You put it over on ESPN, and that’s a great cash cow.”

Analysts say that ABC has been more profitable since MNF went to ESPN. But Bank notes that “the big question is, without NFL and with a relatively small component of overall programming devoted to bigtime sports, will ABC’s stations command the same retrans and reverse comp in the long run? That remains to be seen.”

In the future, the NFL might also have another attractive option if over-the-top digital distributors gain traction. “Someday, we’re going to wake up and Google/YouTube or Netflix is going to buy a package,” says one TV executive, noting it could have the same effect the NFL had in mainstreaming Fox when the onetime coat-hanger network first started broadcasting football.

All of which leads to the larger, envelopepushing point of whether or not there’s a price at which one of the NFL’s broadcast outlets would simply have to take its checkbook and go home.

“If you’re asking me hypothetically, is there a number at which any of the broadcast networks would have to give up the NFL, there probably is,” says Pilson. “But the NFL is smart enough not to go to that number unless it has a thoroughly viable alternative.”

“Every time there’s a deal done, you think it can’t get any higher,” says one cable sports executive. He adds that one broadcast network exec told him that “I’ve never been yelled at for doing a deal, but I’ve been screamed at for not doing deals.” The cable exec adds, “I think that’s where we still are. No matter what the number is, it keeps ratcheting up. It only seems like with the new technology and media, it’s become more valuable than it was yesterday.”

And no matter what they pay, the networks will think they made a smart deal, said one broadcast network executive. “They’ll think it’s smart because they have retransmission deals, and one of the main ways they can demonstrate value for their television stations is by having the NFL,” he says. “It is nowadays DVR-proof. It is not guaranteed, but it’s a very consistent ratings generator. I think they all think they have to have it. They would have a very difficult time explaining why they don’t have it. They’re all struggling to be relevant, and in many ways the NFL keeps them relevant.”

Still, the network exec believes the broadcasters will have more trouble passing along the cost of sports programming than they have in the past. “At some point, the string runs out. How much more can you charge the affiliates, and how much more can you go back to the operators,” the exec says. “It’s only a matter of time.”

The Nielsen Value

For now, however, there are still plenty of ways to justify the need to have the NFL in a network’s lineup.

From a ratings standpoint, the NFL is worth a couple tenths of a ratings point to the overall season average of CBS and Fox, depending on factors like whether they have the Super Bowl in a given year and how many Sunday games bleed into primetime. It has more of an effect for NBC, which has a Sunday-night primetime game all fall.

As for the myth of the in-game promos driving people to the schedule the rest of the week, most network execs think the NFL audience remains a rented one, meaning they don’t come back to other shows on the schedule based on promos they saw in-game.

“There are a lot of intangibles in terms of your primetime schedule, in terms of promotion, in terms of your attraction of young men, in terms of the revenue stream that flows to your owned stations and your affiliate stations,” Pilson says. “There are a lot of incremental revenue streams generated by the NFL that don’t necessarily occur between 1 o’clock and 7 o’clock when you have the NFL on the air. I made that argument to [former CBS owner] Larry Tisch in 1993, and I lost. But four years later, CBS said ‘We’ll pay whatever we have to pay to get it back.’”

E-mail comments to jlafayette@nbmedia.com and follow him on Twitter: @jlafayette

Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.