Can ParaBros Keep the NFL?

0:00Mike Morris:The Varsity Podcast is brought to you by Major League Baseball, who this month is staging the World Baseball Classic, where 20 countries and territories compete in an international baseball tournament featuring rosters loaded with 78 MLB All-Stars. Avoiding your unfinished home projects because you're not sure where to start. Thumbtack knows homes, so you don't have to. Don't know the difference between matte paint finish and satin? Or what that clunking sound from your dryer is? With Thumbtack, you don't have to be a home pro. You just have to hire one. You can hire top-rated pros, see price estimates, and read reviews.

0:38Mike Morris:All on the app. Download today.

0:45Mike Morris:Congratulations! You made the varsity of the podcast. My name is John O 'Ran, and I am Puck's sports correspondent and the host of this pod. And today, Mike Morris joins the pod. Mike is a senior analyst at Guggenheim Partners and, for my money, one of the smartest financial voices covering the sports business. I mean, there's so much going on right now. We're going to go deep on the NFL's media negotiations and all of the knock-on effects that these massive deals are going to have on the rest of the sports business. But before we get to Mike Morris, today is Wednesday, March 4th, and here's what I'm watching.

1:22Mike Morris:Yes, I am focused on Paramount's deal to buy Warner Brothers Discovery. Sports is definitely not the focus of this$110 billion deal, but it certainly will affect some of the sports that you watch, especially considering that CBS Sports and TNT Sports are going to be under the same umbrella. Now, CBS Sports and TNT Sports, they have different strategies. CBS has long prioritized big events like the NFL or the Masters. They have March Madness, the PGA Tour. TNT Sports, well, they have big events, too. They have March Madness, Stanley Cup playoffs, some college football playoff games. But TNT Sports also have events like a small NASCAR package or maybe the French Open.

2:06Mike Morris:They have rights that CBS may not want. And that's where I'll be watching, because make no mistake, these are all decisions that will come out of CBS. After all, Paramount is the one buying Warner Brothers Discovery, not the other way around. So during an analyst call on Monday, Paramount used UFC as an example of how this newfound synergy between the two is going to work. Paramount, of course, paid$7.7 billion to put on UFC fights on Paramount Plus and on CBS in the U.S. Once this deal closes, though, Paramount's David Ellison said that UFC fights also could be carried on TNT, too. We do have that flexibility, he said.

2:50Mike Morris:Now, to me, that was as clear an indication as any that the company, which now basically owns the U.S. cable business, plans to splash its various rights around its portfolio to buttress declining carriage fees. Okay, now let's get to Mike Morris. Mike Morris, thank you very much for joining the pod. You have been somebody that I've been reading for years, of course. But in particular, at Guggenheim Partners, you started doing a report on these NFL rights that are coming up. And you had one at the beginning of the regular season. You just put one out earlier this week. you're somewhat unique among financial analysts in that you're really diving into this issue in a big way, which surprises me a little bit.

3:46Mike Morris:Every time something I cover sort of bubbles up to the level where you're putting out reports on it. When did you decide that the NFL rights deal is an issue that you should be covering as you cover the Paramount Warner Brothers Discovery or any of these other sort of big public companies?

4:09John:Yeah, great question. And first of all, thanks for having me on, John. I'm a big fan of your work as well and a frequent reader. So it's a pleasure to get to have this conversation with you. And look, the NFL, I'd say there are kind of two things here. One, it's been a great topic for the balance of my career. It is the single biggest source of content in terms of audience levels for television programmers. And it's the single biggest cost that they have. And so the NFL, more than any other piece of intellectual property, is this incredible driver of the financial side of the industry that we cover, right, which is the media network.

4:48John:So the NFL has long been important for me and I think the industry and of big interest. More specifically to your question about why did we start looking at it last fall in particular, you know, we had heard a little bit through the grapevine that there was the potential the NFL might look to reopen its contracts with its partners prior to the end of the current contract, which we we can get into, but most people in my seat sort of felt that these contracts would go at a minimum through the 29-30 season. And we started to hear that it was possible that they might look for opportunities to reopen.

5:28John:And then that topic came up on CNBC, I think right around the start of the season through an interview that was done with Commissioner Goodell really kind of solidified our view that this is something that needed to be looked into given the pretty broad implications it can have for the media industry.

5:45Mike Morris:So, Mike, one of the things about the way that you cover this that I find to be so instructive is, you know, I can tell you exactly what ESPN is paying for Monday Night Football down to the, you know, the average of rights fee that they pay every year. I can also tell you about, you know, Sunday Night Football and their record ratings are the highest prime time, the most prime time viewers, I think it's 13 years running or 14 years running, going back for a long time. But you've done what I have since found out a lot of the networks do. And you dove down even further, which is the cost per viewing minute.

6:30Mike Morris:Why is that something that's important. Walk me through exactly what that is and how it pertains to the NFL programming.

6:42John:Sure, absolutely. It's a critical topic in our view to really determine the value of the rights that these networks are acquiring. So when you look at the content and contract landscape currently, you have seen a couple of very major rights renewals since the NFL did its last renewal. So most notably, the NBA, UFC, several others, as we have covered, have seen step ups in the per year cost of their rights fees. And the NFL looks at those large numbers with respect to percentage increases and thinks, you know, we want to see these types of increases as well. And the real question here is what is the distributor, the network or the streamer who's buying these rights?

7:27John:What are they getting and what can they do with those rights? So we look at how those rights can drive the two largest forms of revenue for those businesses, advertising and subscription fees. And those are really driven by the amount of engagement with the product. The advertising is fairly straightforward. The more hours you have, commercial spots, and of course, given the scarcity of this content, you see the rates that the networks are able to charge go up. And so there's a pretty straightforward calculus there. The subscription revenue gets unique. In the past, when the pay TV landscape was at its all-time high, everybody was sort of participating in this full payment mechanism where you had 100 million households paying, for argument's sake,$100 a month, and the spoils were somewhat divided.

8:17John:There's been incremental pressure on that, as you know, with cord cutting. So you're getting to a point where the people who pay for a bundle are those who really care about the sports. And you also have each of these distribution partners having their own standalone streaming services that give consumers an option. And so when these companies think about how much revenue can we drive based on the number of people who watch, engage, and ultimately potentially subscribe, you have to really think about the amount of engagement and the number of different individuals who are subscribing. And for that reason, we look at this cost per viewer hour.

8:52John:And the biggest takeaway, we can talk about this more, is that the NFL on that cost per viewer hour, which arguably is the ultimate driver of value for the networks, is it a significant discount to some other properties, most notably the NBA, which saw these pretty massive step ups several years ago.

9:09Mike Morris:It's crazy to me to think that the NFL and their, you know,$110 billion worth of deals that they signed just a couple of years ago, not that long ago, is undervalued, according to the cost per viewer. And the NBA, when you actually did their cost per viewing hour, I mean, it was a, you know, a big step up. So it's not as though they just inched ahead of the NFL. They're way ahead of the NFL.

9:37John:Right. And so here's the interesting thing about this. Okay. First of all, I said a couple of years ago on the NBA, of course, this is the first year. It was several years of sort of being in the press. This is the first year under the new deal that's with Comcast, ESPN, and Amazon at that meaningfully higher rate, both in terms of a large step up in the annual cost for the network or the streamer carrying them, but also another step up with respect to taking that dollar amount that's being spent and dividing it by the number of viewers and the number of hours spent with the content, right? So a big part of that baseline is the fact that even with the playoffs, the average audience of an NBA game is meaningfully lower than the average cost of an NFL game.

10:25John:And we allocate those costs between the more highly rated playoff games for the NBA and the regular season, but they're just even in the playoffs for the NBA. There is nothing like NFL content when it comes to driving audiences in terms of size, in terms of unique viewers, passion, these things, it's incredibly valuable. Now, we can look at that cost per hour And that informs the way we view the sort of what I would consider the intrinsic value of that content and what the media partner can do to try to drive that growth, assuming that the consumer has that passion, sees that value, and is willing to spend to get access to the content.

11:07John:That doesn't mean that the numbers go there. So what I mean by that is if the NBA was fortunate enough to perhaps be quote unquote overpaid, and I don't want to say that that's a subjective statement, but certainly let's say that were the scenario, that doesn't mean that the NFL can sort of wave a magic wand and move its rights fees to look similar on a per viewer hour basis to the NBA because they have four times as many viewer hours. That is a big price. Even if it's worth it, it's not necessarily something that a network can afford. So we look at that as being more informative of the direction that the industry should go, that these rights fees should go.

11:48John:And really, I think if somebody did overpay for the NBA, they may have tied up their resources in a contract that won't be as fruitful as somebody else who might be willing to pay a bit more for the NFL and get more efficacy with respect to driving subscriptions and driving advertising.

12:05Mike Morris:So we are going to talk about these negotiations that are coming up and what we can expect. One of the things about the NFL that is it is so powerful and none of these networks want to experience life without the NFL. And in fact, you know, they go back, you know, 30 years to the mid 90s when CBS didn't have the NFL and it crippled the network for a couple of years. They go back a quarter century to when NBC was out of the NFL, and it really hurt NBC's finances. And that was a different media time. It was a different life. It was 25 years ago. But these networks, it's etched in their memory, and they don't want to get back to that.

12:51Mike Morris:From your perspective on Wall Street, sort of you're looking at the finances of this. We talk about loss leaders sometimes. Does that make sense? Would you look at like the NFL as, yeah, we're going to take a loss on the NFL, but it's going to help our overall business just to have it?

13:13John:The short answer is yes, maybe, you know, not to get too carried away specific on losses. Mike, right? Come on. Well, the reason I say that is because when you are allocating advertising, it's a very straightforward mechanism, right? Did I sell an advertisement during the game that I paid for? When you're talking about subscription revenue, it's much less well-defined. Meaning, when you think about the inefficiency of the bundle historically, a lot of that was based on the fact that you did have all these people paying for a pay TV subscription because it was their only option. And then a significant portion might be going to a sports network and they might not be a sports fan at all.

13:54John:Right. And so the how do you determine whether that NFL contract was a loss leader or making money? And I think that the industry has really seen some some constructive evolution, certainly to the detriment of extra profits, if you will. And you got to earn you have to really earn it now. And you've seen businesses like Fox really slim down to the types of content that they feel is the most impactful in the form of sports and news. But to come back to the question and really try to get the answer there, I think if you were able to assign the revenue specifically that the NFL drives on the subscription side to this calculus, I actually think that the networks would make money, but I don't think it would be a high margin product.

14:41John:I think it'd be a very fairly priced product. And the reason I say that is both the popularity that allows the networks to drive the subscriptions that they do, but also the intense competition for the rights. And the NFL has done a fantastic job of building out at this point, seven different partners, five of which have major in-season contracts, meaning a game a week, essentially. And so that competition for those rights has really probably kept a lid on the ability to drive outsized profits when you're talking about being a financial or distribution partner to the NFL.

15:22Mike Morris:The sixth edition of the World Baseball Classic is underway with 20 countries and territories competing for the coveted International Baseball Championship. This year's tournament features the most talented rosters in history with 190 MLB players and an all-time high of 78 MLB All-Stars competing. The combination of national pride and baseball competition creates electric crowds in the ballpark and has generated worldwide interest with more than 150 global brand partners and distribution to 172 countries on six continents. Can Shohei Otani and Samurai Japan defend their title? Can Aaron Judge and Team USA return to glory.

16:07Mike Morris:Tune in to the Fox family of networks to watch all of the action and find more information at MLB.com backslash World Baseball Classic. The World Baseball Classic. Expect everything.

16:22John:For years, Gone South has been a podcast about crime in the American South. But for our new season, we're widening the lens. Through deeply reported narrative-driven stories, we're digging into the myths, scandals, and power structures that still shape the South, and in a lot of ways, the country itself. Follow and listen to Gone South Season 5, an Odyssey podcast, available now on Apple Podcasts, Spotify, or wherever you get your shows.

16:55Mike Morris:All right, I'm going to throw some dumb numbers at you because you know how to drill into it. Amazon, ESPN, and NBC paid the NBA 150 % increase off of their average annual value of their contract of what they paid. Of course, that was a contract that was originally signed in 2013, and the average annual is probably somewhere in the mid-teens. if you're the NFL and you're the networks, and I mean, you're not going to see a 150 % increase. That would bankrupt everybody. But moving forward, like what is the NFL, what do they want to see a percentage increase off of? Is it an average annual? Is it what you're talking about the, you know, the per viewer minute or what should people be focused on here?

17:55Well, I don't know the answer.

17:57John:I can't speak for the NFL with respect to something they're trying to achieve on a, you know, we're going to raise our prices by some percentage. I really think, and the NFL has been, I'd say, fairly communicative over a long period of time with the press and with the investment community. I think the NFL and the leadership there has a responsibility to make sure they're generating the maximum value of those media rights, both for the near term and long term. And so to the extent they look at that step up at the NBA and say, hey, you know, we should be making more. There's a little bit of a tug of war in there.

18:38John:And the fact that they do have contracts that are through, as we said, the 2029 season with most of their partners, 2030 with ESPN. And so how do we sort of reopen those contracts in a way that helps us achieve our growth goals that our partners agree to because they don't necessarily have to go back and re-up their agreement. So yeah, summarize this and just say, you've seen the 150 % to your point. It begs the question, what are the NFL rights worth? We would make the argument that they are worth more, but that being worth more is a function of sort of managing the ecosystem such that the consumer's passion for the NFL turns into solid, sustainably solid and growing spend for access to the content and that that spend more efficiently makes it to the network, to the league, to the network partners.

19:34John:Okay. So I think the foundation is there. The league is as possible as ever, as profitable or as popular as ever. It's interesting. It was the second highest rated season this year. I had to look because I was like, what was the most highly rated? It was 1989. I thought that was pretty interesting. but it just shows you the league has done so much to expand its partnerships and sort of diversify who it is working with and yet those games are as popular as ever and as valuable as ever and I think the real last phase here which is going to be fascinating is how the league manages incentivizing its partners to perhaps reopen their contracts early which would lead to higher costs but maybe more visibility over the long term, or whether the league decides to allow the contracts to play out as they are and have an open bidding process as we get toward the end of the decade, which arguably would drive the most incremental value, but with a greater degree of risk.

20:39Mike Morris:That's phenomenal. In 1989, I think Fox had just launched their network. There were four broadcast networks and a very small cable footprint where you could get everything else. And the idea that with TikTok and Instagram Reels and all these viewing options, YouTube, of course, out there, that the NFL could have ratings that compare back to the late 1980s, which is such a different time. is just shows why we're going to spend this entire show talking about the NFL. It shows how popular that programming is.

21:18John:Yeah, it's a great point. And one of the things you just mentioned is this proliferation of ways that consumers engage with media. And we, in my line of work and trying to help investors make the predictions about how these contracts and these changes may impact the companies. It's very exciting to be somebody who uncovers disruption and drives reactions in these stocks. But I think there's also a lot to be said for trying to be very consistent about how things play out. We try to look to historical precedent as one of the reasons. And the NFL has used the term partnership a lot and their actions are consistent with those words.

22:07John:When you look at something like CBS being a distribution partner for the NFL since 1959, for example. And so while certainly the NFL has expanded its partnerships, I said before they have seven partners now that includes YouTube and Netflix most recently. And yet they still do have a core package on CBS that CBS pays a very full price for. and CBS's audience size is as big or close to as big as it has ever been. So the NFL has done a great job of expanding its touch points with consumers, leveraging new ways to distribute. I think you'll see them try to do that going forward. They have a new international package coming up that I think they're going to look for a very strong streaming partner to help distribute.

22:53John:But they've had this growth in this diversification of the way they meet the consumer while also keeping really strong partnership with the distributors that have done a great job for them for a long time. And frankly, it pushes those distributors to find even better ways to monetize. So the NFL, by pushing on the rights fees cost, really drives the entire ecosystem to be efficient in aligning consumer spend with where the payments end up, the most popular programming.

23:28Mike Morris:You know, Mike, if I see a red flag for the NFL, which is, I mean, the NFL can get whatever it wants. It's like we said, it's in terms of media, it's the most popular programming that's out there. The NFL has a, they have a reputation, of course, of never wanting to leave a dime on the table. I mean, they go out and they take everything they can get and bring it back. If you throw out, let's throw out Sunday Night Football. NBC is paying$2 billion per year on average for Sunday Night Football. I'm not sure what exactly the cost is for this year. Let's say that the NFL says, okay, we want you to pay$3 billion.

24:08Mike Morris:That's$1 billion for the exact same programming that's coming off of NBCU's profits. And it's going to at some point, if they if the NFL drives too hard of a bargain, these these linear TV networks, the ESPN, Fox, CBS and NBC, they have to have it. They can't envision life without the NFL. But when the next the next time the rights come up, you know, will they be in a position to will they be killing the golden goose, so to speak? Will they be in a position to have it? The NFL, they give lip service. They do say they recognize that. How are you viewing that?