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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: Media companies are in a “spinoff moment,” beginning to compartmentalize their cable assets, either restructuring the company to split them out as their own line of business — Warner Bros. Discovery — or spinning them into a separate entity altogether — NBC Universal. We look at why this is occurring and what it means for sports.

• 🍸️ Impress Your Friends at Cocktail Party: Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• 🤯 “Whoa of the Week”: NBA valuations are out, and a first look at how Power 4 schools are potentially going to split up the $20 million revenue sharing pie among athletes next year

• 💪 Weekly Reminders that Sports are Awesome: A Vikings legend is honored, a walk-off NCAA championship, and one of the best wrestler entrances ever.

Hey team,

Big Q4 moves in the cable world, as Comcast announced just before Thanksgiving that it was spinning off NBC Universal’s cable assets into a separate public entity.

The new company, imaginatively named SpinCo for the time being, will include most of NBCU’s cable television networks, including USA Network, CNBC, MSNBC, Oxygen, E!, SYFY, and the Golf Channel.

Comcast will maintain ownership of the NBC broadcast network and Peacock. The Bravo channel, which provides a ton of key original programming for Peacock, will be the only cable property not included in the spin-off.

This news was followed by a similar story a few days ago, with Warner Bros. Discovery announcing that it will be restructuring its company so that its cable networks will be in a separate operating unit from its streaming platforms and movie studios.

The cable TV business, including TNT, Animal Planet and CNN, will be in a group called Global Linear Networks. Streaming platforms Max and Discovery+ will be under a separate division along with film studios, including Warner Bros Pictures and New Line Cinema.

These are two significant changes in the industry, and there will likely be more to follow based upon the industry rumblings — leading Rich Greenfield from LightShed Partners to dub the trend cable’s “spinoff moment.”

Sports will be impacted by this moment, but the good news is I think it’s mostly positive.

In this week’s SBP, we’re entering the spin zone. You’ll learn:

• Why the “spinoff moment” is occurring

• What other major media companies will potentially do

• The three impacts I foresee it having on the sports industry

Why the spinoff

As you know from being an avid SBP reader, the cable news business is not an easy place to be right now.

These historically great, cash cow type businesses have been in free fall for over a decade due to cord cutting and shifting viewer preferences.

To put this decline in perspective, cable viewership was roughly 39% of all U.S. viewership three and half years ago. That number now sits at 24% and is falling, particularly as the overall number of households with cable continues to rapidly decline.

Despite the grim viewership numbers, the cruel irony is that these businesses are still somewhat profitable due to the negotiated carriage agreements that stretch out over multiple years.

But, it’s a race to the bottom, and the ground is getting closer for some. WBD and Paramount took write downs on their linear TV businesses earlier this year that totaled roughly $15 billion, for example.

The question all of these media companies are now facing is how long to hold on to these profitable entities before pressing the eject button, particularly as newer, more well capitalized tech companies enter the fray and eat further away at their market share and make life more challenging.

To continue the example above, despite that large write down, WBD still derives roughly 80% of its profits from its cable networks.

So, what to do?

The spinoff has long been seen as an option by industry experts, but few entities have taken the plunge because of the aforementioned profitability dilemma.

The likely tipping point is that these media companies are:

1. Tired of seeing their share prices dragged down by these albatrosses and their grim future outlook, and they need to come up with a solution to keep shareholders happy

2. Slowly finding their footing in streaming. While streaming entities have mostly been money pits for the last several years, they are now beginning to get their businesses in check and reach profitability for the first time. They are nowhere near Netflix’s $4.5 billion in net income in H1 2024, but breakeven is a start.

A spinoff at this stage gives the company the flexibility to cordon off its low/no growth assets into a specific entity that operates in its own lane, while refocusing the broader company’s efforts on the high growth opportunity areas of the business.

The expectation is that both companies will trade higher separate than combined, and the core entity will likely be able to appreciate faster now that it is streamlined.

Plus, because they are now neatly separated out, it makes them a more attractive target for acquisition by larger players. More on that shortly.

Who is doing what

Comcast

It’s unsurprising Comcast is the first mover here.

The media behemoth is best positioned to break apart its cable assets because it its additional revenue streams — i.e., broadband, distribution, broadcast TV, theme parks — are huge growth drivers and bolster the company on its own.

For reference, the new SpinCo’s assets generated about $7 billion in last twelve months (TTM) revenue and roughly $2 billion EBITDA. Comcast’s total TTM revenue during that time was $123 billion, so that $7 billion accounts for only about 5% of total revenue.

That being said, while it’s not big inside of Comcast, SpinCo is big in the dying cable business, where many legacy cable media companies are struggling to stay ahead of the decline.

It will likely use this scale to be aggressive in M&A activity over the next few years, rolling up networks from other entities and creating economies of scale by consolidating back of house while offering enough variety of programming to create an effective bundle to sell to distributors.

In short, Comcast SpinCo can be the king of a one horse town as everyone else is looking to get out of Dodge.

WBD

WBD has restructured to align its cable assets in one operating unit, but it’s not spinning these cable entities off yet. Why?

There is some speculation about stipulations around WBD’s nearly $40 billion in debt — a lot, but much of it is on a friendly, long-term deal structure — coming due faster if spun off, but the more likely scenario is that WBD doesn’t have the same luxury as the media giants (i.e. Comcast) with cash cows in other revenue streams.

Plus, WBD likely needs the cash still to fund its streaming platforms, which have reached profitability but are not out of the woods yet in terms of true stability.

Challenges aside, there are some bright spots for WBD.

Despite all of the turmoil the company has faced this year, the stock is back to roughly even on the year, and WBD head David Zaslav has seemingly pulled off somewhat of a soft landing for WBD’s sports interests in a post-NBA world next year with a series of smaller rights deals that will hopefully allow them to maintain their above market average carriage fees.

In conclusion, the likely outcome here is WBD selling these cable assets at some point in the future as its streaming and other high growth businesses continue to gain footing. This initial restructuring is Zaslav and his leadership throwing up the bat signal that they’d likely be willing to talk to potential suitors, whether it’s a strategic like Comcast or even a private equity firm interested in riding the cash flows down to the bottom.

Disney and Paramount

Whether it aligns the business units, spins them off, or just sells the assets outright remains to be seen, but expect Paramount to potentially do something to capture the “spinoff moment” as it completes its $8 billion merger with Skydance Media next year.

The stock was on a steady decline pre-merger — down 76% the past five years — and the controlling group has faced a ton of scrutiny for its handling of the company, so it’s likely that they will look to streamline operations if/when the merger goes through.

Disney is the one that likely stays pat.

They are the closest to Comcast in terms of scale ($91 billion TTM revenue), and they have the strongest cable foothold with ESPN.

Speaking of ESPN, they have some logistical challenges to a spin off based upon their positioning of the sports network:

• Using both ABC — a traditional broadcast network — and ESPN in their marquee sports packages

• Consolidating ESPN+ into a high profile bundle with Disney+ and Hulu, which keeps the bundle profitable ($47 million reported quarterly profit with ESPN+ earlier this year; -$19 million loss without)

• Still driving towards launching the standalone ESPN “Flagship” streaming service next year

All of these moves signal they are likely not going to be breaking these cable groups out further.

What does this mean for sports?

I see three big impacts to sports from the spinoff moment, and all are relatively positive.

First, expect more bidding in the primary market for media rights among these new SpinCos or aligned business units.

Increased bidders means increased competition, which usually means increased value for the sports entities.

On a similar note, I’d expect to see more net new cable networks beginning to kick the tires on sports as a way to drive concentrated demand. A simple example is the CW’s recent jump into sports with LIV Golf and the ACC and zombie Pac-12 football the past two years.

Same principles/benefits as above for all parties, but a few more coming in at the lowest part of the pyramid.

Lastly, I think this creates even more demand for the sublicensing, or what I’m calling the secondary, sports media rights market.

This trend has taken hold in general streaming, where the media companies will license their content to other platforms (i.e., WBD content on Netflix).

WBD was again one of the first movers on the concept in sports earlier this year, both acquiring the rights to early round CFP games from ESPN and also reaching an agreement to license the ultra popular Inside the NBA to ESPN once their contract ends after this season.

This gives the secondary buyer quality content at a lower price while reducing some of the upfront hit for the primary buyer, who likely overpaid to acquire/retain these rights in the first place.

Overall, the big winners are burgeoning and/or non-Tier 1 leagues.

TV money is still the lifeblood of any sports property at this point. A more robust market means these leagues can find a TV home that pays out steady, repeatable figures, and the cable networks are able to secure lower cost programming that fills hours and keep carriage fees high.

Who knows what this world looks like in five years, but the “spinoff moment” likely breathes some life into this industry for at least the time being.

🍸️ Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Opener: Q4 has included two major moves in the cable space, as Comcast announced it would be spinning off its cable assets into a separate public company, and Warner Bros. Discovery followed it a few weeks later by saying it was restructuring its business to put all cable assets into one specific operating unit, away from its streaming and studio lines. These are two significant changes in the industry, and there will likely be more to follow based upon the industry rumblings — leading an industry expert to dub the trend cable’s “spinoff moment.” Sports will be impacted by this moment, but the good news is I think it’s mostly positive.

• Shot: The cable business as a whole is not doing well. Cable viewership was roughly 39% of all U.S. viewership three and half years ago. That number now sits at 24% and is falling, particularly as the overall number of households with cable continues to rapidly decline. The dilemma is that while many of the cable businesses are shrinking, they’re still profitable. So the question is, how long can these group hold on?

• Shot: Spinning off the cable assets allows the companies to refocus on growth areas of their business and likely have the two separated companies trade higher than when combined while maintaining control over both. We are likely seeing the spinoff moment finally occur because shareholders are growing wary of the cable business, and many media group’s streaming businesses are finally starting to reach breakeven or even profitability.

• Shot: Looking at four big players in the space:

  • Comcast is the 800-pound gorilla of this group ($123 last twelve months revenue), and they can afford to be first movers here. Expect them to try to use their spun off cable company — imaginatively known as “SpinCo” for now — to be on the offensive and roll up a number of distressed assets in order to create scale and a compelling bundle to sell to carriers.

  • WBD restructured for the same reasons but likely can’t spin the cable assets off fully because of how much it needs the cable profits (~80% of total) to fund the streaming services. Their cable assets are a likely acquisition target, though, and this is a signal

  • Paramount is expected to complete an $8 billion merger with Skydance Media next year, and it seems likely do some kind of restructuring or spin off to streamline operations given the stock’s five year performance (down 76%) and management challenges

  • Disney likely stands pat for now. They would have some logistical challenges with unwinding ESPN from their rights packages and streaming bundles, and the reality is that ESPN is still the best cable network out there, so there’s no real reason to do anything here.

• Chaser: As for how it impacts sports, I see three main areas:

  • More bidding on primary rights from both current and net new companies

  • An increased secondary market for sublicensing rights, similar to how WBD has licensed early round CFP games from ESPN and ESPN has licensed Inside the NBA from WBD next year after WBD loses NBA rights

  • The big winners here are non-Tier 1/burgeoning sports groups. There have been concerns that the media money would dry up for the smaller entities, which is the lifeblood of a sports league. But, this spinoff moment is likely going to breathe a bit of air back into the industry, for at least the time being.

🤯 “Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. The NBA valuations got released, and despite some concerns about the early season viewership/direction the game is headed, the average franchise is now worth $4.6 billion (+94% in the last four years)

2. First look at how a Power 4 school — in this instance, Texas Tech — is thinking about the ~$20m revenue sharing pool split across sports. Unsurprising amount devoted to football and men’s basketball, but the big question will be if these splits attract Title IX lawsuits due to the lack of investment in women’s sports.

💪 Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place.

This section is meant to highlight the amazing, hilarious, and touching things that happened in sports this week that serve as that reminder.

1. The Vikings honor legendary wide receiver Randy Moss, who is battling liver cancer

2. What an iconic way to win your school’s first ever national championship

2. On a much sillier note, I saw this tweet on Monday about how a grunge-themed wrestler named Steven Flowe uses Pearl Jam’s “Even Flow” as his intro music but has changed the words to just be “Steven Flowe” over and over, and I have not stopped laughing since. Below is the full 90-second entrance in all of its glory.

Thanks for reading! Let me know what feedback you have.

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Until next time, sports fans!

-Alex