Cable Bundles of Joy

0:04Mike Morris:Congratulations! You made the varsity podcast. My name is John Arand and I am Puck's sports correspondent and the host of this pod. We have a great pod today. It's a single issue podcast on NFL media rights. So I asked one of the smartest minds in the business to join us. That's Guggenheim's Mike Morris. NFL MediaWrites made headlines again last week when Lachlan Murdoch told Fox's quarterly earnings call that his network will not alter or renegotiate a new NFL deal early. This was a surprising declaration because everyone believed that TV companies would do deals early as a way to buy out the NFL's opt-out clause, which it can use after the 2029 season, or in ESPN's case after the 2030 season.

0:48Mike Morris:If Fox isn't going to renew early, what's the impetus for ESPN or NBC or even CBS to rip up their deals and pay conservatively hundreds of millions of dollars more per year? There are so many angles of this story. It's an NFL story. It's a media story. It's a sports story. It's an entertainment story. It's a business story. It's a finance story. I'm really happy to have Mike on the pod to wade through all of it. But before we get to Mike, today is Wednesday, August 12th. And I want to give a shout out to In the Arena, the sports business conference that Puck is hosting with Moffitt Nathanson. We're going to hold it on October 1st in New York, and we already have a who's who list of speakers.

1:27Mike Morris:Netflix's top content executive, Bella Bejeria, the heads of the SEC, Greg Sankey, and NCAA, Charlie Baker. Matt Strauss is speaking. He runs all of NBCU. I'm really excited for this one. Go to puck.news for more info. And as for now, let's get to Guggenheim's Mike Morris. Mike Morris, you were my first thought of who I wanted to get on this pod when I heard Lachlan Murdoch's comments on his quarterly earnings call saying that, you know what, we're good with our NFL deal. We're going to wait until the end of the decade, until 2029, when you actually can use the y 'all. We don't need to open it up early and pay a lot more money for that.

2:12Mike Morris:I was really surprised that Lachlan said that on the earnings call because Fox had, by all my sources, been silently negotiating with the NFL. Maybe not negotiating, but meeting with the NFL about these rights. And it seemed to be going well. The relationship between Fox and the NFL hit a low point when the NFL is blaming Fox for everything that was happening in D.C., for Rupert pushing this narrative over there. And so when Lachlan Murdoch made that statement during the Ernie call, I was surprised. And I think I just want you to open up, like, why do you think Lachlan Murdoch decided to actually say that?

3:02Mike Morris:What was a point of putting that out publicly like he did? Sure. Well, thanks for having me back, John. Great to be here. And yes, a couple of pretty big details since you and I last spoke about the NFL media rights negotiations, which are in my world, which is looking at the stocks of these major media and internet companies, arguably the biggest and most important single thing that happens. And so I agree with your assessment right there that hearing a company like Fox make a more specific statement about a negotiation with a major partner is certainly, I would categorize it as atypical. And to try to answer your question of why, I think there are a couple of items.

3:49First of all, I do think that while I agree with your assessment based on what I know, that Fox and the NFL, maybe behind the scenes, continue to have a healthy relationship, I do think that there's a narrative in sort of the broader market of the potential disruption to, say, Fox's economics and others, but we're speaking specifically about Fox, but a risk to Fox's economics based on the potential for a change in contract terms, maybe a change during the current period of the contract. And I think Fox wanted to make a sort of clarifying statement about their position, which was both standing firm with respect to the existing term of the contract, as well as saying that they feel like they have a good relationship and they would like to and expect to have a relationship well into the future.

4:41So I think it was a little bit about maybe standing firm and letting the market know what their position was. It was a little bit about making sure the market knew that they had had discussions and they weren't trying to be incredibly vague about their position on those discussions. And I think a little bit about just some, maybe some clarification, if you will. But it's certainly a very big topic and one that has garnered a lot of coverage and differences of opinions.

5:13Mike Morris:you called it atypical do i take that to mean that you were as surprised as i was on this i was i was surprised i don't know how surprised you were but i was surprised um because you know it's it's um like i said a an agreement of this magnitude uh which there are a few of these in the media industry it can be media rights as we're talking about with a big contract it can be carriage agreements, for example, the Fox network being on Comcast or DirecTV or something to that extent, YouTube TV. These are the types of discussions that generally happen behind closed doors. You occasionally hear about some sort of disagreement that makes it out into the press, less typically when it comes to these sports rights than some of the carriage disputes that maybe a channel will be dropped or something like that.

6:08So to have the discussion take place in the press, I think, or take place in the public realm was a little bit surprising with respect to the statement. But there's been so much in the press and market when it comes to these NFL rights and the potential for them to come open early. I understand where the motivation came from. And like I said, it's tough. On the one hand, you want to express what is happening within your company and make sure that the market, the stock market, the debt market, the public markets know what is going on and at the same time making sure that if you want to continue to have a healthy relationship with this partner that you're expressing it as such and i think that's what fox tried to do

6:50Mike Morris:we'll we'll see if it um was successful you and i are uh alike well everybody's alike the nfl is the most pop powerful and popular entertainment program just not not just sports program there's a reason why all of the networks engaged in this. Okay, we'll open it up early because they want to be able to get rid of that out that the NFL has after the 2029 season or the 2030 for ESPN. And they want to just basically buy out that out so that they can go into the middle of the next decade. And that's a good business case for these networks. That being said, and this isn't based on any reporting this is just you know i cover these things all the time i have to believe that that fox and cbs we'll talk about later you know they have the change of control but all of these tv networks at some point are going to negotiate before 2029 and and try to get this done before 2029 i can't fathom that they're that they're going to want to really risk going into 2029 and you know and who knows what what what happens then yeah i think the the um the question here was more about whether the existing deals would be open earlier than their expirations so you brought up the 29 and 30 seasons um the nfl has done a tremendous job of of having all of their media contracts aligned which is to their strategic advantage uh because it allows a circumstance where if they want to make changes to packages, if they want to have competitive bidding for certain things, with everybody coming up at once, it's a bit of an open playing field.

8:40And that was the strategic move that the NFL made a number of years ago that still benefits them. The question really that you and I've talked about in the past couple of calls or pods, and I will say you and I predicted correctly, I believe we spoke in maybe the May timeframe, that there would not be a reopening and recutting of those contracts this year. I think that that is correct. But these contracts are typically renegotiated years before the ending deal. If you remember, I believe it was March, April of 21, when we got the last set of announcements for this set of contracts, which I think started before the 23 season.

9:23So even if you look at Lachlan Murdoch's specific comments, he talked about the negotiation being part of the typical pattern. And if that's the case, you could be talking about a calendar 27, 28 negotiation announcement new deal. So we're really not that far away from what new deals may look like, even if the existing contracts play through to those full seasons prior to the NFL's option to opt out, which we all believe they will opt out. So 29 and 30 are the relevant seasons.

10:21Mike Morris:Good time and always 100 % unfiltered. Follow and listen to Sophia with an F wherever you get your podcasts. All right, this is going to be a super boring podcast if we just talk about the strength of the NFL and why the NFL media rights, even with this, is going to go well. So let's talk about red flags that you see with the NFL right now. I mean, we are entering a period. Entering a period. We've been in a period for a decade of cord cutting of broadcast networks and media companies that depend on linear TV have been declining for more than a decade. And there's less money out there. The view has always been that the NFL will be able to get that money.

11:09Mike Morris:And the cliche I've always been saying, Mike, is just like my job is to figure out who's on the good side of that line and who's on the bad side of that line. And because where that line filters out really does matter. So we have that sort of going on. And we always thought the NFL was going to get theirs. And I still think the NFL is going to get theirs. But what are the red flags that you see right now if you were running the NFL media company, media business? Sure. I think I will say just first, I don't call any of them red flags. I understand the spirit of your questions, but I think I still stand this.

11:52Let's go millennial.

11:53Mike Morris:Are they beige flags? What are they? I still, I understand your point. And I still think, you know, the caution flags, if you will, the things to me. The, the, the, um, I think there is still a very healthy and lucrative path forward for the NFL and the media industry. Okay. Um, I have a very consistent view we've talked about in the past, and I'll tie this into your question about what those concerns or red flags may be, which is that the bundle is very maligned. and the data shows you that you've gone from 100 million subscribers to 60, 65 million subscribers, the data backs up that the bundle has declined in value or lost its relative value for a large part of the population.

12:39However, I try to remind people that there are still 65 million homes paying. And while that probably will continue to come down a bit more, those homes pay, those entities pay, let's call it$100 a month for access to all the sports. That's why they do it. Where the business has been diminished has been on the entertainment side, the unscripted programming side, these types of things where whether it's Netflix, it's YouTube, you can get these substitutes, these virtually perfect substitutes at a price point that's more like $15 as opposed to$100. But if you want all the sports at this point, you either can pay for the bundle or you can pay to build a collection of the apps that matter to you, which is still going to be relatively expensive.

13:27That's the way you get all the sports. I just don't think there are a lot of sports fans out there that only want some of the sports. Okay. There's not none. There's not none. I would argue maybe those people are incremental to those who are willing and able to pay for the full bundle. So I think that you're getting closer to a point in time where the rate of decline in the bundle subsides. obviously YouTube TV is growing. Charter's video product has become more stable. It's not definitive, but I think we're going to go into football season here. I think we can see even further stability. In the case of the NFL, we've said this very consistently, the power of the NFL content is a very large part of the efficacy of that bundle.

14:07And the NFL's focus, in my opinion, should be on continuing to make sure that they are receiving full value for the power they provide within that bundle as opposed to pulling out of the bundle. I think the bundle still brings a tremendous amount of economics to the industry and the NFL is worth, intrinsically worth a bigger piece of that. And that's what they will push to receive while also expanding their reach with new digital partners. I think it works. What I worry about is under appreciating the amount of money that comes in through the bundle when someone like the league thinks about their future.

14:44I think they want to continue to have a vibrant bundle in addition to having new partners like Netflix.

14:49Mike Morris:You know, that is such a good point. And to me, it underscores just how great a business the cable bundle was for such a long time. And that they've been cut in about half, right? They went from 100 million. I think Nielsen actually had them down to 54 and dropped well below 60. But it's still very profitable. ESPN still brings in most of its revenues coming from these distribution fees that they sell to Comcast and to Charter and to YouTube and DirecTV. And you name your multi-channel video provider. So you're absolutely right on that. And one other aspect to that, too, just in terms of the money that's out there, my colleague, Matt Bellany, you've been on his pod before.

15:41Mike Morris:He's Mike. He covers Hollywood so well for Puck. And he said that there's just this fear out at Hollywood, a very real fear in Hollywood, that that all these media companies are going to dip into the entertainment budgets in order to afford to to pay for the NFL. You know, because it even goes because it's the number one TV program, you know, decades running now. And so there are plenty of other levers that you can get that sort of reach beyond just the, you know, the sports revenue that's coming in. Yeah, well, look, I think as a fan of efficient economics and capitalism, I think there's a lot of simple sort of rationalization of the value to the consumer being better aligned with what the consumer spends.

16:38Very simply, I think if when we rewind 20, 30 years and all we had was the bundle, all All we had was cable and was the first thing we got. And by the way, it was great because before that we didn't even we had three channels in on our antenna. And it was technology and it was great. And there's a reason 100 million households paid for it. And how that money was then allocated was not necessarily a purely efficient system. And when you when you added things like YouTube and Netflix and gave the consumer different options to be entertained with different breadth of programming and different price points, it rationalized.

17:17That drove the cord cutting, etc. And then as that filters through the model, it comes to maybe some channels that aren't as popular, those that aren't as differentiated from those other entertainment products, them seeing their fees cut or being dropped or things like that. I don't think that it has been irrational other than some of the structural barriers that have made it happen slowly. When it comes to the point you just brought up with respect to the risk to entertainment programming, make your programming good. Look at Spider-Man right now in the theater. There's nobody out there that's saying that it's not doing well or people don't want to pay to be entertained by that.

17:53But if it's not good enough or differentiated enough for you as the consumer to want to pay for it, and the NFL, which brings a great new storyline every weekend, every three hours of every Sunday, you have a totally new experience at a very high quality watching an NFL game if you're a fan. I mean, almost invariably. And so does that make it more valuable within the bundle when I pay for my bundle relative to maybe an entertainment program that it's replaceable if I were to watch it on Netflix or some other source, then they should be taking the money. And I have no negativity toward the entertainment industry.

18:37Like I just brought up Spider-Man. I think that there's an amazing amount of quality product out there right now. But the economics are going to follow the scarcity. All right.

18:46Mike Morris:You've convinced me. I'm not going to do red flags. We'll call them the big flags that are out there. number one to me is that the the nfl has always had that one other partner that's looking to get in uh and and for the longest time you know the uh i guess going back a quarter century you know cbs lost and they always wanted to get back in and then nbc lost and they wanted to get back in and then nobody wanted to to to lose it when david levy was at turner he was banging on the nfl's just trying to get a package because they always had another outlet that they could get somebody in and then they turned to the streamers and and they they had those streamers and what what i see now is everybody has a package turner's no longer a bit they're being uh bought i guess by uh by uh you know paramount um and uh so so they're taken off the table uh youtube you know they have the the sunday ticket deal i'm like we'll get into the streamers later but they they don't seem to have the appetite for certainly these sunday afternoon packages uh at least not not currently um how much of an issue do you see that as being for the nfl right now it is an issue it matters right so number one nfl strong negotiating position by virtue of how popular the content is But part of what you bring up in tying together the last point we just talked about with the bundle, when you have a game on every week and you are paying for that, you need to have a revenue source.

20:31If your revenue source is being part of this bundle where you can continue to push for more and they can't drop you, you understandably can take a weekly package. right if you are a new entrant and when you have one game on in a month and somebody signs up for that game that second game if the same person stays signed up you don't make any more money right the NFL money coming from the bundle they those channels that have the NFL they even pay with revenue that they're getting out of the NFL season right it's it's such a powerful product having the NFL that you have stickiness to your bundle year-round and and you you make those payments for a streaming service that has these discrete monthly payments that are at much lower price points, it's very hard to justify coming in and competing above the existing price in the market.

21:24So that's a challenge. Businesses like Amazon are able to do it because they're deep pocketed, because they're trying to build a video business and they don't cover the cost of the deal with advertising, but They have great advertising based products and they're very early in their growth plan with respect to their ecosystem overall. So just like Fox bought the NFL as a loss leader in 1990 and built a business on the back of that, it makes sense for a company like Amazon to do it. But it is really hard to get to your point to once you have CBS, Fox, ESPN, NBC, Amazon, you've got Netflix buying things, you've got YouTube buying things.

22:08Who is the additional bidder to sort of drive up pricing in the future? What is their business model that looks to take this up, quote unquote, 50 percent? OK, the one thing that I would point out that the NFL has, which has not really been discussed yet is the ability to change the composition of the packages. Now, I am not predicting right now that there will be big changes to sort of Sunday games, Monday night games, those types of things. But there is some flexibility in there for them to create maybe some exclusivity to some packages, even within that ecosystem and try to drive bidding and relative value that somebody might bid up the most attractive package.

22:46I would think that's the type of thing that the NFL is considering right now is they look at all of their options coming up from that position of popularity strength when they think about how to drive that upside in their total dollar take relative to the existing contracts.

23:04Mike Morris:That is such a great point because I've been on the, it's a great point because I've been on it, but going back to the 1960s, like we're still operating with the same type of packaging. I guess there's less of an NFC-AFC between Fox and CBS, but you still have sort of the bigger NFC-ish package, a smaller AFC-ish package. And then you have a couple of primetime packages. These are packages that have been developed and built more than 50 years ago for a broadcast TV system that only had three channels and then eventually a couple of more channels. So the idea of stepping in and blowing all of this up and creating new packages that would account for the streamers where it's like, you know, Netflix wants, you know, it has it's found a lot of success with that quarterbacks show.

24:00Mike Morris:So it wants the quarterback package. And so it wants to make sure that, you know, maybe three weeks ahead of time, it's going to have two good quarterbacks going at it or who knows who knows what that's a that's a silly example. what do what do you see as a potential new type of package that the nfl could create that would make the broadcast networks happy because that's where the most most of the money comes from obviously and drawing some of the streamers say like yeah that's something i really want to what to bid on sure i will a couple things first of all i don't think the quarterback's concept is a silly concept um as you as you just said i think that that it could be a very interesting concept and one that wasn't really contemplated in the past because this distribution dynamic where one of your partners was also promoting the game, the game overall, and some of the events through some of this.

24:52We've always had the shoulder programming, but even that was an evolution, right, over time. But the opportunity for a partner to come to the NFL with something creative that adds value is a real opportunity. Remember, the NFL has the IP, and they've created this incredible intellectual property with this durability and this power to support the media partners and their models. But at the same time, the media partners can come to the NFL and pitch their concepts and pitch why they are good partners, how they add value to the league, right? It's a two-way street. Even things that now we take for granted, like the first downline in the game and things like that.

25:32I think that the media companies created these things to improve the experience to their benefit. The league also benefited from that. So I can't really even contemplate a specific concept like you did seemingly on the fly there on quarterback. I do think that there is scarcity to the best game of the week and things like that. So you could have the ability for one of the media partners to choose the games that they want, have that a bit stratified in a way that makes one package worth more than another as an example of something that the NFL could consider. But if I were the NFL and I were thinking about this renewal cycle, I would certainly be doing a lot of diligence on the existing package structure and whether I could unlock value with whether it be tweaks or bigger changes to that packaging.

26:37Mike Morris:My God, Mike, this is only an hour long show. We could go on for five hours on this. I love this topic so much. Let me bring up another of my bugaboos that I've been talking about forever. People have dismissed it, but you touched on it. You had a great report on this that you put out through Guggenheim on Sunday afternoon. It's the whole idea of Fox potentially living without the NFL. um the way that i view it and and sort of what you wrote is uh you know they have the big 10 you know they they have a special relationship with the big 10 if if they get most of their money from cable and satellite operators uh which they do who is going to drop them in the fall if they have this if they all of a sudden own the big 10 rights or own the big 12 rights or you know if If ESPN has to pay up, they could possibly poach the SEC.

27:38Mike Morris:They'll have more money to poach other rights. Sure, up the fall. Sure, they'll lose some advertising because they don't have the NFL. But they're not going to be dropped by anybody. And you could make a point that they would make more money on these sort of smaller sports moving forward. How real of an option do you think that is for you? You referenced Fox earlier. I always reference ESPN, you know, as doing it, but, but really any one of the networks, how, how realistic is this, uh, uh, within the next, say five years or so? Yeah. How realistic, um, I'll, I'll give you a, a guesstimate. I think it's 10 % realistic, 15%, something like that.

28:22Um, very unlikely, but certainly non-zero. Okay. I think, and we did cover this topic in the note we just published, which you referenced, and Fox has an attractive college football rights package. And it's Fox's responsibility, right, I think they would say, to look at what is the market rate for the NFL rights? What is it going to cost us to have a similar package, bigger package, smaller package, excuse me, whatever the case may be? And what would it look like if we, instead of spending that amount of money annually, we had it in our budget and we allocated it in some way to other replacement rights?

29:10I think that there is significant top line risk. First of all, the advertising revenue from the NFL is meaningful, doesn't cover the budget, but it's significant. you need to consider that there's some halo effect of being able to sell a broader package of advertising when you have those NFL rights. And then, of course, the biggest thing is what happens in your carriage negotiation with your largest partners if you no longer have the NFL? You just said they don't get dropped if they still can offer the Big Ten, the Big 12, those types of things. And I think that's very plausible, but I think there is certainly risk pushback on what the proper fee would be relative to what these providers are paying other networks if they did have the NFL and Fox did not.

29:59So it could be a challenging, you know, a big challenge. And as we point out, it could be an existential problem. We're not convinced that it is. We also don't think that Fox really wants to find out. And we don't think the NFL really wants to find out at end of the day the best path forward for both of them as we say always a win-win of collaboration but i think it has to be considered uh what would you do without it if you were fox yeah it's the