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

• This week’s topic is the sports TV rights market and the storm clouds on the horizon that need to be navigated by the rightsholders (i.e., teams/leagues), media companies, and ultimately the fans

• 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”

• Reminders that sports are awesome

Hey team,

It was reported by the Wall Street Journal last week that ESPN is making plans to create a standalone streaming service in addition to its ubiquitous traditional cable network and partial streaming offering, ESPN+.

The announcement sent shockwaves through the sports industry not because it was unexpected but because it’s the latest, most surreal example of the paradoxical impact cord cutting has on the media rights market and the fan experience.

We’re going to talk about the economics of sports media rights, the players involved, the current issues in the market, and possible outcomes for resolving it. Let’s dive in.

Media Rights 101

“Media rights” refers to a company’s legal ability to broadcast a rightsholders live sports content. A few simple examples are NBC’s Sunday Night Football, the NBA on TNT, or the Apple TV MLS Season Pass.

The league or team (NFL, NBA, MLS) owns those rights and essentially licenses them out to the media partners (NBC, TNT, Apple) for an 8-10 figure annual fee over a period of years.

The rights are divided up in the following ways domestically (we won’t get into international rights in this article, but know the leagues do broadcast globally with partners in those international markets). I’ll also include examples about how I as an LA resident and my fellow sports-crazed friend in New York (shoutout to my boy Noah!) would be able to watch the various programming.

• National: All viewers who have access to a specific channel or service can see these games, regardless of the viewer’s location. These are usually for specific weekly time slots and playoff games.

  • Example: Both Noah and I can turn on ESPN to watch the NBA playoffs on ESPN, the SEC on CBS, or Amazon’s Thursday Night Football without any restrictions.

• Local: Viewers in specific regions can watch the games of teams in that region.

  • Examples: When I turn on the NFL on CBS on Sunday afternoons, I’ll see one of the LA teams or most likely another west coast team. Noah would see one of the NY teams or another east coast team. To watch an Angels game, I’d turn on the local regional sports network (RSN) – i.e., Bally Sports West – since I’m technically in-market. To watch a Mets game, Noah would turn on SNY, which has rights to the Mets in the New York market.

• Out of Market: Some viewers want to watch non-national games that are not in their local market. They can pay for a premium service to access those games.

  • Examples: To watch my beloved Denver Broncos rip my heart out one more time (I will unsubscribe you if you send me a Russell Wilson “let’s ride” gif), I’d pay for NFL Sunday Ticket. For Noah to watch his Philadelphia 76ers underachieve and prove “The Process” didn’t work, he’d buy NBA League Pass.

As we have talked about in prior editions, live sports rights are one of the biggest revenue drivers for the sports industry and fuel the rapidly increasing valuations of the clubs. Why?

Supply and demand across the value chain.

Follow the Money

There are four key players that interact in the media rights market:

• Rightsholders: leagues, teams

• Media partners: Networks (CBS, TBS, RSNs) or a streaming service (Amazon Prime, Apple)

• Distribution platform: cable company (Comcast) or streaming service (Peacock, YouTube TV)

• Viewer: fans

Linear Cable Model

Rightsholder —> network —> cable company —> viewer

Step 1: The rightsholder is paid an annual fee by the media partner for the specific rights to a slate of games. As you can imagine, the stronger the viewership/following of that rightsholder, the bigger the check (see: NFL).

Step 2: The media partner then can make revenue in two ways. The optimal situation is that these revenues outpace the capital expenditures on the sports media rights.

• Sell advertising in commercial breaks. A better product on the screen means more coveted advertising spots, which means more revenue

• Charge a “carriage fee” to the cable company for the rights to carry the media partner’s channel. Having a suite of premium products means the cable company’s viewers will want the channel, so they’ll be willing to pay more. For example, ESPN receives somewhere between $8-10 per user on the cable platforms.

Step 3: And finally, the cable company then charges the viewers a monthly fee for using the platform.

Streaming Model

The value chain is relatively the same in streaming, but the key differences are that the cable companies (and sometimes the channel if the streaming service is also broadcasting it – i.e., Apple TV, Amazon) are removed and the viewer is paying the streaming service directly. In this instance, the flow would go:

Rightsholder —> media partner (if a network) —> streaming service —> viewer

As noted above, the rightsholders really have most of the leverage here, and they negotiate increasingly lucrative deals because live sports have two key elements that make it enticing:

1. One of the few remaining things that can make people sit down and watch something in real time. As I noted in last week’s edition, almost 95% of the 100 most watched live events in the US were sporting events.

2. Potentially cheaper and more consistent than continuing to develop original programming. For example, a cable network or streaming service’s investment in sports rights is predicated on the fact that it can generate more profit from advertising and/or subscriptions due to these sports assets than by developing original content or buying syndicated content. And unless you’re one of those TikTok conspiracy theorists, there are no writers’ strikes in sports!

A Streamlined Path?

A quick history lesson.

The traditional linear cable model was long seen as flawed because it limits the actual reach of the games to fans who are willing to fork over the money to pay for the cable company and the razor thin margins for the media partner and distribution partners have led to “carriage disputes” where the consumption partner won’t carry the channel because they can’t come to an agreement on the carriage fee. This means the fans who use the cable network or streaming service can’t watch their team’s games even though they’re paying good money for the service. Dumb.

A better way should exist, and this was where streaming was supposed to be the savior. A more cost effective model, on-demand content, and salvation from having to scream “REPRESENTATIVE!” into the phone for the 5th time when trying to get ahold of your cable company about why your monthly bill just increased? Sign us up!

The model took off, as being a “cord cutter” became one of the biggest Millennial flexes of the last 5-10 years, and every major network plus Apple and Amazon started a streaming service and spent money on content like drunken sailors to attract users. And it reached a critical mass — there are reportedly now more than 50% of US viewers watching live events via streaming than traditional cable according to Nielsen, which represents a monumental shift.

Who wins in that scenario? The rightsholders, again. Increased competition for an in-demand product means more money for them, and the money machine has been in overdrive the last several years.

Mo’ Money, Mo’ Problems

The challenges with the hybrid linear-streaming world we’re in now begin when you start to reach the market saturation we’re at now, though, and this model has created a series of interconnected externalities for all aspects of the value chain laid out above.

This also brings us back to our friends at ESPN. The potential ESPN direct-to-consumer service signifies the market shifts and also the type of contagion we’re talking about that could exacerbates these already existing issues.

Let’s review the market problems and how ESPN’s move would impact it further.

Problem #1

The model for non-major market cable RSNs is broken. The reduction in cable users has put downward pressure on advertising revenue and the carriage fees the RSNs can charge to be a part of the cable package, particularly for those in smaller media markets where demand for the in-market teams isn’t as high and the advertising money isn’t as good. This throws the business model out of whack and makes profitability nearly impossible.

We’ve seen the first domino fall in this area, as Diamond Sports Group filed for bankruptcy earlier this year. Why does it matter?

Well, that bankruptcy filing jeopardizes nearly 40 US teams across the NBA, NHL, and MLB that work with DSG. This, in turn, puts pressure on the revenue models for a number of the clubs who were used to getting 8-to-9 figure checks to help fund payroll, and they’ll have to drastically adjust their approach to keep pace with the major markets that still have high demand.

ESPN has been seen as propping up the cable model for a long time, so a move away from that could deepen these issues.

Problem #2

Many of the networks and streaming services are becoming more profitability-conscious after their unbridled spending periods of the past several years. Subscriber growth isn’t enough anymore when you’re having to explain to shareholders why your service lost billions of dollars last year.

A simple fix? Raise the price to cover the increasing costs.

Who doesn’t care? The rightsholders. Who does? The consumers.

It’s now at the point where being a cord cutter may be more expensive than that damn cable bundle we were so eager to get rid of. TV Rev does a good breakdown of this cost by showing how much a cord cutting Yankees fan would have to spend to watch every game:

• YouTube TV or another MVPD with ESPN, Fox, and TBS: ~$60 per month

• YES Network: $20 per month with annual YES Network DTC subscription

• Apple TV+: $7 per month

• Amazon Prime Video: $9 per month

• Peacock: $5 per month

• TOTAL: $101/month 

This, of course, does not factor in other popular streaming services (i.e., Netflix, HBO) or other sports that may be watched and require additional monthly fees. Those incremental costs plus a strong internet connection probably moves you above the price point of a standard cable + internet bundle (~$90-$130 in the LA area).

To come back to ESPN, just think about how much content they have the rights to and how unwilling most of us would be to go without it. That willingness to pay probably means ESPN could get $20-$30 per month from most of us without breaking a sweat.

Problem #3

Lastly, the increased fragmentation of the rights has become a nightmare for the user experience when trying to figure out where the game is. Let’s look at another example for our Yankees fans.

The above schedule is enough to drive even the most tech savvy individual crazy, let alone the aging MLB fanbase. This is only going to get worse as more groups lean into the media rights frenzy, and ESPN now putting things behind their walled garden would create additional friction across most sports.

Don’t Know What Ya Got ‘Til It’s Gone?

So, this is kind of a mess. For the optimists out there, you’re probably also wondering what the possible solutions are. Well, there are no silver bullets, but here’s what I broadly believe could happen.

The rightsholders will continue to hedge and snap up both the linear TV deals while also working with streaming services, much to the chagrin and wallets of its consumers.

This arms race is going to continue to inflate prices, and there will be a tipping point where we realize that we may actually be better off with a single service for a single fee. This is what’s known by the media nerds as the “Great Rebundling,” and it may lead us to utter words no human being has ever said before: “Damn, I miss my Comcast service.”

The hope would be that the cable companies will have lowered their prices to entice new customers, and this move back to equilibrium would potentially cool off the skyrocketing prices.

It’s going to get worse before it gets better, though. Most of these league deals are slated to run through the end of the 2020’s and the streaming services will continue to ramp up their efforts to try to grab market share. This creates a prisoner’s dilemma for the various media partners because while they know the fundamentals are off, “if I don’t spend, someone else will.”

What would actually cause a true reset is a shift in consumer preferences.

But I’m skeptical that happens because, ironically, our inability as sports fans to separate our emotional attachments from our teams means that we continue to prop the market up. Younger generations may not care as much or be jaded by the Frankenstein viewership model that’s been created, but there’s still going to be a critical mass of viewers across multiple generations that cares enough to buy the packages.

Thus is the blessing and curse of being a sports fan. We will continue to press forward and support our teams and communities that we love so much, even if it means subjecting ourselves to economic stupidity (and almost certain emotional trauma).

We know it’s a racket, but we’re still holding out hope to be watching during that one magical season. Go Broncos

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

• ESPN is expected to launch a true standalone streaming service to go along with its cable channel

• Three tiers of domestic media rights: national, local, out of market

• Media rights players: rightsholders (leagues, teams), media partners (networks — CBS, TBS, regional sports networks — or a streaming service — Amazon Prime, Apple), Distribution platforms (cable companies — Comcast — or streaming service — Peacock, YouTube TV), and viewers (fans)

• Linear Cable Model: Rightsholder —> network —> cable company —> viewer

• Streaming Model: Rightsholder —> media partner (if a network) —> streaming service —> viewer

• Problems with the current hybrid world: breaking the current RSN model which hurts the teams, cost prohibitive for the users, and insanely hard to navigate the fragmented service environment as a consumer

• I can foresee a slow return to cable given it centralizes and streamlines everything

• Model ultimately will not drastically change until consumer preferences shift, which I’m not certain of

   

“Whoa” of the Week

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

1. Supply. Meet Demand.

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, though.

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

1. Michael Block, a golf pro at a public golf course in California, finished top-20 at the PGA Championship this past weekend and absolutely crushed all aspects of his time there.

2. Even better, check this shot out.

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

Also, if you enjoyed this breakdown, please consider sharing it with your friends and network by clicking the social media icons at the top of the newsletter.

Until next time, sports fans!

-Alex