With upheaval in cable market, Power 5 bet on Silicon Valley to keep rights revenue flowing
By Andy Staples
PHOENIX — Even as they spent some of the spoils of their television haul on swanky meeting space at the Arizona Biltmore last week, the leaders of three Power 5 conferences probably couldn’t help but notice the difference in the roster of non-league attendees. Fox executives and on-camera talent came in force because the Big Ten was there, and the network’s new six-year, first-tier deal with the conference begins this year. But ESPN, which used to send a flotilla of execs and talent to this event even when the Pac-12 and the Big 12 were the only Power 5 leagues in attendance, kept a lower profile.
The Worldwide Leader still sent a contingent, but it wasn’t as impressive in number or in titles as in years past. This is completely understandable; after all, the Phoenix meetings began less than a week after ESPN axed nearly 100 forward-facing employees. (Two years ago, when ESPN cut about 300 mostly behind-the-scenes employees, the layoffs began a few months after these meetings.)
The more recent mass layoffs were supposed to send a message to Disney shareholders that ESPN leaders have a plan to deal with rising overhead (from expensive media rights deals with the NBA, NFL and Big Ten) and falling revenue (from people either ditching cable or never signing up in the first place). Instead, a professional bloodbath that played out so publicly only served to raise more questions about the longterm viability of ESPN’s business model. Such questions are especially thorny for the commissioners of the major college conferences because after years of runaway revenue growth, those commissioners must confront the possibility that the gravy train could slow considerably in the coming years.
The easy hot take given these circumstances is that the sports media rights bubble will pop, and the money college leagues make from selling the broadcast rights to football and basketball will peak just before the Big Ten, Pac-12 and Big 12 deals expire in the middle of the next decade. The revenue that has fueled huge coaching salaries, a facilities arms race and angst over the size of the cut the majority of the labor force receives will slow or fall. Power 5 athletic directors will have to—gasp—manage money responsibly instead of simply relying on the next media rights bump to cover any overspending.
The reality is more complicated and less certain. Like newspapers before them, ESPN and Fox will grapple with disruption to their business model and ultimately may have to remake themselves if they want to continue to thrive in the new media landscape. But reflexively forecasting doom assumes television networks are the only entities that will bid on sports rights in the future*. That is almost certainly not going to be the case. “I really see a time when there are going to be a lot of players in the marketplace and there are going to be a lot of distribution methods,” Big 12 commissioner Bob Bowlsby said. “The unknown is how much is it all worth? I don’t think there’s anyone who legitimately knows what it’s going to be worth.”
Bowlsby is correct. No one knows. Not him. Not Big Ten commissioner Jim Delany. Not SEC commissioner Greg Sankey. Not Apple CEO—and Auburn grad—Tim Cook. The only thing we do know is that there is a limited number of major college football and basketball games available for sale and there is a built-in demand for them. How much that demand is worth depends on how many companies wind up bidding. “I don’t think anyone knows exactly what the landscape will look like or what health ESPN or Fox will have in 2023 when we’re negotiating or how significant a player a Twitter or a Facebook will be,” Pac-12 commissioner Larry Scott said. “My sense is that there will be more competition. There will be more and different types of players. And there will still be very limited and highly valuable sports properties.”
Commissioners and ADs look at tech giants as the white knights that could allow their leagues to keep growing revenues, but the question is whether a Google, an Apple, a Netflix or a Hulu would even want to get into the live sports business. If they did, it would be unwise to assume they would overpay simply because their market capitalizations dwarf those of the players in the marketplace now. The money could stay flat or drop even if the tech companies join the fray, but the leaders of college sports hope the competition for a limited resource might drive up the price. “Long-term, I’m very bullish on the value of premium sports rights,” Scott said. “I see more competitors. And frankly, competitors with bigger market cap than ESPN or Comcast or DirecTV. Some of these companies we’re talking about are huge by comparison. If they decide that sports is a vertical they want to get involved in in a big way, that’s good news for the Pac-12 or the NFL.”
Everyone in college sports is watching Amazon’s streaming deal with the NFL closely. A year after Twitter paid a reported $10 million to stream Thursday night NFL games that also were broadcast on television, Amazon is paying a reported $50 million for the same thing. The games will be available for streaming by Amazon Prime members, who pay $99 a year for expedited shipping as well as streaming access to a large library of movies, shows and music.
Why might Amazon want to stream sports? Because it can serve up ads during games. A fan watching a game on TV would have to note a product that interests him and then seek it out either on the Web or at a brick-and-mortar store. Amazon could place a link within the ad that allows the viewer to purchase the product immediately. That ability to cash in on an impulse buy could be valuable to Amazon and to the manufacturers of the products purchased.
We can further extrapolate that Amazon might want to buy exclusive sports rights to leverage fans into purchasing Prime memberships. Research has shown Prime members spend more money at Amazon than non-members. If Amazon were to buy the Big Ten’s Tier 1 rights—meaning you’d need a Prime membership to watch Michigan-Ohio State or Nebraska-Wisconsin—that could mean millions of additional members who might eventually spend thousands more a year. Fox’s new six-year deal with the Big Ten will pay the league an average of $440 million a year for those rights. If Amazon paid $500 million a year for the same thing and it netted two million new Prime members who then spent an average of $1,500 more per year on Amazon than when they were non-members, Amazon would do an additional $3 billion in sales. Amazon’s profit would be $2.5 billion minus its cost on the products purchased and the production costs of the games. Assuming a respectable markup on its retail offerings, Amazon could make money on that deal.
The key is the incentive for a tech company to jump into the sports rights marketplace. Why might Google do it? Because Google is a television distributor now. Last month, the company launched YouTube TV, a $35-a-month service that offers streaming access to the most popular broadcast and cable networks. By 2022, when the conferences begin exploring their next deals, Google will have very detailed user information that will tell it who watches what sports and in what numbers. If the company sees huge demand, it might pursue rights to leverage more users into buying its service. Google and Facebook also can profit from anything that causes users to spend more time on their services. Those companies can collect massive troves of user data that they can then use to sell ads that target the perfect audience for the product. Google and Facebook already do this with their Web sites and mobile apps. Access to your viewing patterns would only enhance their ability to sell these targeted ads. And if they could buy something that guarantees you’ll pay for that service monthly and use that service for three hours at a time on a regular basis, that might be more profitable for them.
Or these companies might kick the tires on sports rights and decide they don’t need them. Remember, they’re already wildly successful without live sports. This is the gamble Delany took when the Big Ten opted for six-year deals for its Tier 1 and Tier 2 rights. “There’s no doubt we’re in a disruptive environment,” Delany said. “There definitely is money and interest on the sideline. It really hasn’t emerged very much yet, but I’m sure that there is—whether it’s Apple or Google or Hulu or any number of companies.”
Delany is betting that demand for Big Ten football will be so valuable that the revenue from the next deals will outpace these deals. But he also has a hedge; the Big Ten Network’s deal with Fox runs until 2032. On the other end of the spectrum is the ACC, which allowed ESPN to lock up its rights until 2036 in return for getting a conference network that is scheduled to launch in 2019. “If you go shorter, you take out a little more risk,” Delany said. “But you also have a little more upside.”
The SEC is in a similar position to the Big Ten. The SEC Network, which is locked into ESPN until 2030 along with the rights to SEC games currently broadcast on ESPN’s other networks, is ESPN’s most successful new venture, and this excellent story by John Talty at AL.com explains how the huge demand for the network within the SEC footprint has insulated it somewhat from the sea changes in the industry. Meanwhile, the league’s deal with CBS for the best game of the week (in most weeks) runs out after the 2023 season. This is perhaps the most valuable single package in college sports, and how well it performs on the open market should give Bowlsby and Scott an idea who will be bidding on rights when their leagues prepare to make new deals soon after.
The Big 12 may have strife within its ranks, but its media rights deals actually are among the best in the space considering the quality of the football offerings. Bowlsby said each of the 10 schools will receive close to $40 million a year by the end of the contract, and that doesn’t include the Tier 3 deals that each school has made individually. (The Longhorn Network partnership between Texas and ESPN is the most lucrative example.) Every school in the Big 12 makes more off its third-tier deal than each school in the Pac-12 makes off the league owned-and-operated Pac-12 Network. The underwhelming performance of the Pac-12 Network continues to be a sore spot, but Scott said it isn’t reason to panic. “There’s anxiety in our conference, but I think it’s more about the future,” Scott said. “We’re reading about the success of the SEC Network and the Big Ten’s new TV deal. There’s fear of might we fall behind in the future. But sitting here today, we’re in great shape.”
That anxiety about the future isn’t limited to the Pac-12. Every league is feeling it as the cable networks hemorrhage subscribers. An industry that has become accustomed to economic growth now has to grapple with the very real possibility of flat revenue or less revenue in the near future. Of course, the possibility is just as real that some deep-pocketed newcomers could swoop in from Silicon Valley and keep the money flowing. “We could be right, or we could be wrong,” Delany said. “History will tell us.”