sports networks: still got game?

Sports networks: Still got game?Paul Sweeney, Senior Analyst and Geetha Ranganathan, Analyst

Bloomberg Intelligence

Sports rights costs swell to $150 billion, can revenue match?

TV networks have committed about $150 billion for sports programming such as the NFL’s Super Bowl that have traditionally attracted viewers and allowed them to charge the highest fees to cable companies.

The accelerating fragmentation of the media world makes it uncertain the networks will collect the revenue to support those costs. A weakening TV-ad market and threat to billions in affiliate fees as subscribers dwindle may force content owners to move to streaming platforms, which have had tepid success.

Disney, 21st Century Fox, Time Warner, Comcast and CBS are committed to paying at least $148.7 billion for sports programming rights, such as the Olympics, NFL games and Nascar races, according to their most recent annual reports.

Sports content is expensive because live events attract large audiences and advertisers. 21st Century Fox may pay the most at $49 billion. Disney, which owns ESPN and ABC, is committed to shelling out $44 billion, though this excludes its $24 billion NBA renewal with Turner in October.

Disney’s ESPN lost 2.97 million subscribers, or 3.1% of its base, in the past year, according to Nielsen, driven by consumers cutting back or cutting the cord.

ESPN2 has lost a similar number of subscribers, and other sports networks, NFL Network and the MLB Network, also lost about 3% of subscribers, slightly better than the 3.5% drop in total cable network customers.

ESPN commands industry-leading affiliate fees of $6.61 a month, for an estimated $7.5 billion in 2015, according to SNL Kagan.

The emergence of skinny bundles and streaming products are threatening not only the ad market but also almost $50 billion in 2015 affiliate fees.

Sports networks are highly exposed to falling subscribers and lower affiliate revenue, given carriage fees make up about 75% to 80% of total revenue at the big networks. Ads account for the rest of operating sales. In contrast, a non-sports network such as USA derives 50% of revenue from affiliate fees, which make up 44% of Discovery Channel’s revenue.

75% carriage fees

44% affiliate fees

Disney’s ESPN is well ahead of peers with estimated monthly affiliate fees per subscriber of $6.61 in 2015, according to SNL Kagan. ESPN’s fee is four times Time Warner-owned TNT’s $1.65 and five times Disney Channel’s $1.34, affirming the high value for sports content. ESPN and its sister channels generated $8.4 billion in 2014 affiliate revenue, accounting for almost 80% of Disney’s affiliate revenue. ESPN’s leading position also exposes it to the highest risk, should the TV bundle concept start to lose favor.

An erosion of its subscriber base may spur ESPN to launch a streaming platform sooner rather than later. While Disney said it doesn’t plan to go over-the-top in the next five years, the fast-changing landscape may prompt ESPN to hasten its foray into streaming.

Bloomberg Intelligence offers valuable insight and company data, interactive charting and written analysis with government, credit insights from a team of independent experts, giving trading and investment professionals deep insight into where crucial industries start today and where they may be heading next.