Can Linear TV Actually Afford More NFL?

0:04Congratulations! You made the varsity of the podcast. My name is John Arand and I'm Puck's sports correspondent and the host of this pod. And today, I'm happy to have one of the country's top media analysts on the pod. Steven Cahall is with Wells Fargo Securities and we're going to spend a lot of time today on the NFL's media deal. We're also going to talk a lot about Comcast's to spin off NBC Universal and Sky and Fox's decision to buy Roku. But before we get to Steven, today is Wednesday July 8th and here's what I'm watching. Versant Media announced a pretty cool deal on Monday morning that offers a glimpse at how the media company recently spun off from Comcast views the business.

0:47You see, Versant still runs a bunch of cable channels like CNBC, UMS now, cable still is a really profitable business for the company. But if you've spent any time with the people that run Versant, Mark Lazarus or Matt Hong, over the past few months, you've heard them talk about the need to diversify. And on Monday morning, Versant paid$530 million to buy a golf simulator business called Full Swing from Bruin Capital. Now this matters because Versant already runs Golf Channel. And Golf Channel, in particular, has found a ton of success outside of traditional linear television. It owns a business called Golf Now that books tee times.

1:29It created something called Golf Pass with Rory McIlroy that has a bunch of instructive videos and entertainment shows. Now it bought full swing. Golf Channel launched in 1995, that was 31 years ago, as a cable TV channel. But today, Golf Channel is still a linear TV network, but we all know that cable TV is in decline. Cord cutting is still happening, which is why Versant is expanding its golf business into content, commerce, training, venues, performance, data. It's a look of an entirely new media company. As for now, let's get to Wells Fargo Securities Analyst Stephen Cahall. Stephen Cahall, I've been wanting to get you on this pod for quite a while, so thank you very much for for stopping by because there's a you know with fox and roku with uh comcast spinning off it's uh entertainment assets and it's in its tv networks and the nfl rights there there's so many really big stories that are hitting the media uh marketplace and of course the sports media marketplace uh let's let's start with with the nfl and and the um how do you see things happening with with the nfl going in right now i mean this this seems most people that i speak with believe that this is existential for the linear tv networks to to keep their nfl rights going forward into the middle of the next decade.

3:00How do you see things there right now? Right. So maybe to start is it doesn't seem like much is happening right now. I know there has been a lot of excitement around NFL renewal. I don't doubt that that is coming in the next 12 or 18 months. But my observations as a media analyst have been that when those negotiations are sort of at full tilt or certainly getting close to a conclusion, a lot is leaked through the press, probably intentionally by one side or the other or both. We're not seeing that right now, which leads me to the conclusion that those negotiations aren't really going on. However, I think everyone is trying to get their ducks in a row to know what they can do and they can't.

3:54That's both the league and the networks. And so it is, if not an existential threat to networks, something pretty close. I think the size of the company depends on whether or not it's existential or not. But there is no more valuable and strategic property than NFL rights. So there's going to be a ton of competition for it, for sure. Well, this also adds to it. I can't wait until we start to talk about Fox and Roku. Because Fox has been, all of the networks say, we're at the ceiling right now. We can't afford to pay any more. and then the NFL sits back and watches the NBA get$7 billion for its rights and watches Fox pay$22 billion for Roku.

4:43I thought you had no money left there. How much more though? Because the networks need... The idea of programming being a loss leader moving forward is sort of antiquated thinking in the media business. They need to make money off of their investments. Where is that line for you? What can the networks realistically afford when it comes to paying an increase on the NFL? I'd start by saying there's a lot of different ways to think about loss leaders. You can think about the loss leader as, or just the economics more directly as, you know, the ad revenue versus the cost. But we know that there's a subscription revenue component to that as well.

5:39And we know there's a distribution component. You know, when you have strategic sports, then your carriage terms tend to be better, not just pricing, but packaging as well. And having sports rights like the NFL or the NBA or the World Series or college football allows you to sell non-sports advertising at usually higher prices because you kind of sell the good with everything else a little bit or the great with everything else. So there's a lot of different ways for media companies to decide exactly what an NFL right is worth to them. And none of the companies that I cover have zero dollars of cash flow right now or EBITDA, which means that they can all afford to pay more technically, right?

6:27So if I'm in the NFL, I'm looking at thinking about a couple of things. One is I want to continue to meet the consumer where they are and where they are headed. That's clearly the tension that I'm sure we'll get into between linear and streaming. And you could almost say there's different audiences between linear and streaming. And there's some age demographic you know, weightings to those that are pretty intuitive. And then the other thing is how to maximize revenue. But, you know, maximizing revenue kind of goes back into meeting the consumer where they want to be and being sure that you're sort of spread around and that you still have healthy partners, both from the distribution side and from the economic side.

7:09So I think everything is going to be, you know, this great balancing act. But it's not to bury the lead, I think we should expect there to be some pretty significant changes by the time these rights are renewed. The difference, different, I want to get on what you just said, the different audiences between linear and streaming, and you immediately went to age because, of course, every statistic you see coming out is the streaming audience is much younger than a traditional, certainly broadcast audience, but linear TV audience. What are other differences beyond just age? I mean, that is the big one.

7:51And the reason that is the big one is I think often sort of what we grow up with or what we experience in early adulthood is what we normalize. And then that sets our expectation as to how things should be. So I think consumers who grew up with a linear ATV ecosystem still see the efficiency of the bundle because it puts all of their sports into one place. And that's as simple as on Sunday afternoon, it's easy to flip between Fox and CBS, and then in the evening, go to NBC for Sunday night football. And you've got college football going on all weekend as well in the fall. And so you've just got everything in one place.

8:32But to a digitally native consumer who had a device in their hand at a very young age, who's used to on-demand programming, that experience is actually not as intuitive. And Netflix and YouTube can be far more intuitive. So I think that's where, from the NFL's perspective, it isn't just about global growth in the sport. It's also about the fact that Netflix has like 50 % more probably U.S. subscribers today than PayTV has, or at least in that ballpark. So meeting the consumer at where the PayTV universe is, is not the entire market. It's just a percentage of the market. So we know that the linear TV networks, they need the NFL.

9:22That's clear. Let's go to streaming, though. You referenced Netflix. Netflix has a five-game package of games. The opening weekend, Christmas Day, Thanksgiving Eve as well. I have, well, not me, Netflix has invented the word eventizing. They like to go after big events. What could cause Netflix to say, okay, we want more than five games. We actually want, you know, a full schedule of games, even if one might be on September 28th, not a big event, you know, or whenever. Yeah, you know, I think about Netflix as, you know, a rational actor, because that's what being a public equity does, forces you to look at everything as an economic decision.

10:16And, you know, rationally, the biggest pool of revenue, where they under index is live and advertising. And sports is a huge percentage of live content, and it's a huge percentage of revenue, both subscription and advertising revenue. And so I think it's rational to say that if they want to continue to grow their revenue or accelerate their revenue, then a lot more sports rights is a way to do that. And I don't think they want their margins to go backward, And I'm not sure that investors want that either. But certainly, I think that they would be rational to say, hey, more is more. So they can find an economic way to get a lot more sports.

11:06And the NFL is a unique sport in that it is almost eventized by definition because of the short season, the importance of nearly every game, the prominence of national windows like Monday night, Thursday night and Sunday night, and also being able to get into the playoff picture, you know, from a rights perspective, all of those things probably make the NFL more eventized than anything else, you know, other than like the World Cup or the Olympics. Okay. So I want to point to then, I'm going to hop around the different streamers. Amazon Prime, They have Thursday night football, a full season of a game every single Thursday night, and then a Black Friday game here or there as well.

11:55It doesn't seem to me that they have any interest in increasing that load. that that that you know that's that that's where maybe they'd be more interested in you know trading Thursday for Sunday or something along those lines but they don't need more than one package uh on Amazon because they have the one package that that's their package is that the way stream all the streamers are viewing the NFL I mean is is so for going back to Netflix now is is there too many games that they could get is is there a point where they uh the amount of games that they get is is sort of you know de minimis it's not worth sort of moving forward with yeah i mean i think you could sort of look at this uh through the framework of whether or not you have a foothold with the nfl um you know whether you have a package with the nfl and so I think your point is well made of like, if you have a package, whether it's Thursday night or Sunday night or part of Sunday, what is the incremental value of another package?

13:05Some packages are better than others, for sure. And I think every business model has a slightly different version of what's the best. Monday seems to work pretty well for Disney. Sunday night is probably the most attractive package for virtually everyone. Sunday day sits up pretty well for Fox and CBS because they own so many stations around the country. But I'm not sure that for any of the players, going from one package to two is necessarily financially enhancing to their business model, which is why the more interesting things are, what are the companies that don't have packages today? And that's for the universe.

13:51We're talking about, that's Netflix and YouTube. As you said, Netflix has a few games, but not a package. So that doesn't make Netflix a strategic part of an NFL consumer's viewership choices. And YouTube with Sunday Ticket is a rebroadcast package. So I'm just not sure it's quite the same thing. For instance, I don't think there's much ad sales that you can do against it. So those are the two sort of incremental, in my opinion, where they don't have much today and they're at least going to make an economic decision about having something potentially bigger. So you know what fascinates me about what you just said is that I keep talking about these streaming companies who have the deepest pockets, the market caps that double or triple some of these linear TV networks, But when they come to negotiate, they generally don't overpay.

14:50And we saw that with YouTube when some of the negotiation, the price for the five-game package of NFL games was getting too high. You know, they just, okay, we're out for this time. Do you find that, did that surprise you at all? Because if they want it, they can certainly pay for it. And they lose a little bit on the NFL at first. Like, who cares to a certain extent? But none of them operate that way. Yeah, you know, there is a time and place for share gain, you know, with economic loss. But that, you know, loss is justified through the share gain. But that has to get you somewhere. And one of the challenges with sports is that you're always renting the rights.

15:39And so if you overpay for something, it doesn't guarantee you that you're going to scale into a business that then goes to profitability. You contrast it to what Netflix used to do on the original content or entertainment side. I've had a lot of meetings in L.A. with studios and content makers over the years. And there was certainly a time when Netflix, according to a lot of my sources, was happy to be the high bidder on lots of different projects because they were in the share gain business and they wanted to make it very hard for their competitors to pay what they were willing to pay. And they built this big subscriber base and they've managed to hold that subscriber base and then grow their margins later.

16:21And again, that just doesn't work with sports. You don't scale into it over time in the same way. So you have to be rational from the beginning. Yeah. Before we move off this topic, I want to put you in the role of Roger Goodell or Hans Schroeder at the NFL. And in the year 2026, broadcast still has the biggest reach by far, I would say, has a lot bigger reach than the streamers. um the international advantage that the streamers have uh if you take a look at the international numbers coming from youtube's brazil game last season only a million people i would think they would get more than a million people just in brazil to watch it for goodness sakes i i found that to be a disappointing number if you're the nfl going into this next round of media rights negotiations how do you prioritize what clearly is the trend it's no longer a trend of streaming things are moving to streaming versus where we are today with broadcast television.

17:28Yeah. And I think that that debate is less about domestic versus international and more about age cohorts. So, you know, if we look forward 15 years to the 2040, you know, hopefully I'm nearing retirement by that point. And, you know, someone who I'll invite you back on the pod, Steven, to talk about it then. Yeah. Yeah, that's right. That's right. That sounds great. And I'll really, you know, be if I'm retired, I'll really be willing to say anything, but you know, someone right. Who's who's 25 today, who watches a lot of content, at least maybe if they do it like I did when I was 25, it's a lot of out of home viewing.

18:16And, you know, when that person is 40 years old and, you know, is much more likely to have household formation, is much more likely to be in childbearing, then, you know, their habits are going to change. And again, this is a native digital consumer. And the prospect that they're going to be signing up for the network bundle, I mean, it just plunges over that sort of timeframe. Right. So I think putting, you know, as you suggested, like putting on the mind of the NFL, they have to look at how consumer choice is changing from a distribution standpoint. And, you know, brands like CBS and Fox and NBC are probably not going to matter as much as brands like Paramount Plus and Peacock and Netflix and YouTube.

19:10So that's the thing and ESPN. So that's the thing that they really, I think, are thinking about. And you even see this in the advertising community. You know, there's not a lot of advertising to people over the age of 65. And the way they're counted in impressions is very diminutive. Because of this perspective, the choice doesn't change once you get above a certain age. So I think the NFL view is probably the linear audience. If they're NFL fans, they're always going to find the NFL. And the key is making sure that we don't lose the digital audience where the amount of content continues to proliferate.

19:58In your opinion, what linear companies are doing well with the movement to streaming? You shouted out Peacock, Paramount +, ESPN, the app there as well. Well, I would say it's tough to say what is a linear company today. You know, so that's a great answer. And, you know, if we just put things on a spectrum, you know, if we looked at a company like Fox, the percentage of revenue that is digital is pretty low today. So fair to say, you know, Fox is a pretty linear company. And then if you compared it to Disney, excluding its parks business, Disney is much more of a streaming company today. Now, ESPN doesn't look that different than Fox does.

20:53But Disney as a company has a lot more on the digital asset side than Fox does, which probably means, you know, in terms of making that transition, when you have consumers engage digitally and you're trying to move them into sports or move them over on sports, it makes it easier. And so I think that every sort of media company or let's just call them by name, Paramount Skydance, Comcast and NBCU, Fox and Disney, they're all at a slightly different part of that journey. but you know the the rights bring in the viewership and the biggest thing is again can you get young people to stay and watch these sports and and meet them where they want to be and they've already voted with their feet that a large percentage and they're probably not going to sign up for pay tv and so you do need to have you know something like a like an app to do that but to answer your point directly, you know, I think that, you know, those companies that I named, Disney's probably furthest along and everyone else is sort of doing the same thing, but they're all doing it in concert to try to make it more consumer friendly.

22:14Can you tell how much I love talking about the NFL rights situation? I could make this entire thing on NFL rights, but there's so many, as I said at the beginning, there's so many big stories going on that I want to switch topics here and go to Comcast's decision to spin off its entertainment assets, NBC and Peacock into its own company. Brian Roberts said flatly that he has no interest or no plans to sell NBC. Many of the people who I trust that cover Comcast very well think that, sure, he's saying that, but it certainly is leading to a sale or something. What's your best guess right now? Like, what's going to happen with NBC?

23:10Yeah, I think that, you know, the press and maybe some of my peers have made too much of M &A happening in the near term for NBC. Um, and, and I think the way that it's been looked at is, you know, there were multiple buyers for Warner brothers. Therefore there's a buyer for NBC. And if we were more specific about that, it would be Netflix wanted to buy Warner brothers. They ultimately opted not to when it became a bidding war against Paramount Skydance. And so they're the natural buyer of NBC. I think the flaw in that argument is that Warner Brothers, what Netflix was interested in was streaming in studios.

23:54So it was the LA studio lot, IP, and HBO, both the content and the streaming service. And Netflix is in the streaming business. So all pretty core stuff for them. The split from Comcast is going to be the NBC broadcast network. owned and operated broadcast stations, all of which operate under FCC licenses, the Bravo cable network, Peacock, and Sky, both satellite distribution and programming. It's much more complicated. It's much more kind of non-core. And most importantly, it's much more linear because what Netflix was interested in with Warner Brothers didn't have any linear. And then you get into the, it's also the studio and the theme parks, which are more interesting for companies like Netflix or other maybe streaming IP-focused companies.

24:48So I actually think that the chance of a deal for NBC is pretty low. Who else would be out there other than Netflix? It makes a lot of sense, I mean, other than what you just said, but it makes sense because it bit for Warner, so I can see where people would attach Netflix to buying this one. Is there anybody else out there that would be willing to kick these tires outside of private equity or something like that? I don't think so. You know, again, like this is this is not going to be. There's plenty of things about this company that could make it attractive, but it is not a clean company from an M &A story.

25:30You know, just again, you've got UK European satellite distribution and and European sports rights. You've got a studio in Hollywood. You've got a theme park business, both domestically and globally. You've got a broadcast network. You've got a cable network and you've got a kind of subscale, slightly profitable streaming service. You know, yeah, the bits and pieces can maybe fit into a few different companies, but you know, what we've seen generally in media, and that's why we're seeing all these separations is M &A works for pure plays, not for conglomerates. and NBC is still going to be a conglomerate after this separation.

26:12If I'm the Big Ten or the PGA Tour, name any of these companies, leagues that are not the NFL or the NBA that has rights deals with NBC, seeing them untethered from Comcast would fill me with fear. Should it? You know, fear or concern. I'd maybe put it more in the concern camp, which is just to say, you know, which is just to say like Fox is a much smaller company than Comcast from an earnings perspective. But there's no doubt about Fox's ability to pay for its sports rights. And that's really what the leagues want to be concerned about. If I enter into a 10 or even a 15 year deal with this counterparty, do I have to worry about their ability to pay me down the line?

27:10Yes, that's higher for smaller companies, but it's also really depends on the balance sheet. And so P-Sky is going to have a lot of leverage if they complete their deal from Warner Brothers. Comcast hasn't been specific about the capital structure of Comcast versus NBC Sky. But if they do it in a way where there's not going to be much debt on this new business, then it will generate a lot of cash. And that shouldn't really impair its ability to continue to pursue these major sports rights. So what's the change? What is NBC going to look like? I'm using NBC and Peacock in the same thing, the media part of this.

27:56What is it going to look like if there's no buyer and the spinoff is completed as everybody is expecting? Yeah, again, you know, it's a broadcast network in stations and Bravo and Peacock and Sky and Parks. and the Universal Content Studio, you know, with things like Minions and the Odyssey. And I watched Obsession this weekend, which was great. So not a lot different than today. And, you know, reasonably profitable as well. So again, there's not really issues about its ability to pay its bills and probably pretty low leverage. Because again, you can just put a lot more debt on a cable company than you can on a media company.

28:46Cable has its own problems, but not cyclical issues. And so the margins on those businesses tend to be really, really high. So you could have always made the point definitely that Comcast's cable balance sheet made it more able to do things like, say, the NBA contract. But I think what Comcast would say is that they always looked at the NBA contract on what is the media business's capacity to underwrite this deal. Not just because they knew or had inklings that they might have been separating this business at some point, but it's just bad business to pay for the media business with the cable business when there's really not a lot of linkages between the two.

29:30Again, you don't really want to get into the loss leading business, assuming that you're going to scale into something over time. that doesn't really happen in sports. Another big story is the Fox buying Roku for$22 billion. Fox, to me, is fascinating. They sat out the streaming wars and they let all these at Disney and Paramount and everybody spend billions doing their streaming and sort of watch what was happening, got best practices, and this appears to be their big move into streaming. First of all, is it a good deal for Fox? Is it a good deal for Roku? Who is this better for, this type of deal?

30:21Yeah, I mean, I actually think it's kind of neutral for both parties. And so as not to make that too boring of an answer, here's the way I think about it. Actually, Steve, if I can interrupt you. If you had said win-win, that would have been a boring one. Neutral-neutral is not necessarily boring to me. I want to hear you talk about this. Yeah, so let's think about the background on Fox, right? You know, this is a family-controlled company, and they monetized a large amount of the assets at Disney in 2019. And, you know, they've nicely grown what was left, which is sports and news. They have a very strong balance sheet.

31:04So what do you do with that excess cash? Well, you can use it to keep repurchasing box shares. And when they've had a lack of other opportunities, that's what they've done. They did an accelerated share repurchase not too long ago. But, you know, I think from the controlling shareholders perspective, you just do you really need to put more cash into the bank account versus owning a company that's growing into the streaming era. Roku certainly has very high share and strong growth, much higher level of growth from a top line basis than what Fox does. So I think they were able to just use the balance sheet to get into an asset that is different than what they own now.

31:48And that's pretty good business. And I think from Roku's perspective, you know, they always face cyclical challenges. They always face market share challenges. So they are growing really nicely. But same thing, they had an opportunity to kind of monetize the business with a premium and a control premium. So that's why I say kind of neutral, neutral for both sides. But doesn't lose industrial logic between these two.

32:16I guess it's going to take the better part of a year for this to sort of go through all the regulatory hurdles and everything. But one year from now, how are consumers, what's going to be different for consumers? How are consumers going to react to this merger here? Yeah. So what I said right at the end, and I probably should have started with it, is like, To me, this deal does not ooze industrial logic. I don't really think taking Fox and taking Roku and putting them under the same company creates a meaningfully different Fox or a meaningfully different Roku. So for the Roku users, I don't think you're going to see much different.

32:55Subtly, there might be a bit more promotion of Fox content in there, but not meaningfully. From Fox's perspective, they do gain EBITDA and cash flow. So their ability to pay on things like an NFL renewal is improved. But again, I don't think that Fox as a business, news, sports, etc., is meaningfully different because they own Roku. So one plus one equals slightly more than two, I think, on this transaction. And you contrast that to like Peace Guy for Warner Brothers, you know, where there is a ton of industrial logic behind that. Well, you talked about Warner Brothers. You talked about NBC as being possibly on the market if anybody's out there to buy it.