Do Sports Networks Still Have Game?

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

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

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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.

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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.

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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.

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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.

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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.

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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.

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

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

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75% carriage 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. 44% affiliate fees

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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.

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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 fastchanging landscape may prompt ESPN to hasten its foray into streaming.

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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.

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