In Defense of Apple’s Crazy F1 Math

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1:04Congratulations! You made the Varsity podcast. My name is John O 'Ran and I am Puck's sports correspondent and host of this pod. And today, I'm happy to have Peter Cepino on the pod. Peter is a senior media analyst at Wolf Research, and he's going to give us an informed Wall Street view of the sports rights marketplace. Peter is a really well-respected analyst and he has interesting viewpoints on Paramount's UFC deal and Apple's F1 deal that I'm pretty sure you're all going to find very interesting. But before I get to Peter, today is Wednesday, May 27th, and here's what I'm watching. Every Thursday in my private email from Puck, I word somebody as Player of the Week and send somebody down to the JV.

1:49Well, this week, Don Rea has to be down to the JV. He was officially kicked out as president of the PGA of America. That's the group that runs a Ryder Cup in the PGA Championship. Rhea has only been president since November of 2024, just a year and a half. What a downfall. But the truth is, this has been a slow motion car crash ever since the Ryder Cup at Bethpage last September, when Rhea had a bunch of missteps, including failing to apologize for unruly fan behavior. But it was much more than that. Really, whatever could go wrong did go wrong at that Ryder Cup. The crowds were boorish. When presenting the trophy, Rea said that Europe quote, retained the cup rather than won it outright.

2:33That's actually a pretty big deal. And to top it off, as the U.S. team was getting pummeled, a video of Rea doing karaoke on Saturday nights started to circulate. He sang Eminem's Lose Yourself, If You Must Know. The PGA effectively sidelined him ever since. He didn't even show up to the PGA Championship in suburban Philly a couple of weeks ago. It was really odd to see new CEO Terry Clark lead the press conference at the major rather than Ray M. As for now, though, let's get to Peter Spino. Peter, first of all, thank you for joining the show uh i i wanted to get you on here because uh you know i write so much about the uh these sports rights and the the deals that networks and now streamers are making with with the leagues and that's something that you're paying special attention to um i i have in in the on the panel here, the sports rights bubble, because people have been telling me for the past 30 years, why aren't you writing about the sports rights bubble that's going to be collapsing at some point?

3:43So at some point, it's not a bubble anymore. But I want to start out like a 50 ,000-foot level. How do you see the sports media ecosystem specifically as it pertains to sports rights right now? Sports rights are about 20 % of the total revenue of the whole paid TV business broadly defined to include linear television, cable and satellite, as well as streaming of all varieties. it's even a greater proportion of viewing, which is an interesting fact. And stepping back a little bit from the sports media discussion and focusing at the widest expanse on what's happening in media. We think digital broadly and streaming specifically, social media, these mega trends that aren't new, but are still changing the media industry, are amplifying the most high value stuff.

4:55Whether it's an athlete, a team, a musician, a creator, whether you're an incumbent or an insurgent, if you're great, you're in somebody's pocket all day, every day. They have, to use John Malone's term, random access, nonlinear access to you and what you do. And it just creates even greater value for the extremes of mainstream superstars and niche, high value added talent. And then the same forces gut the middle. The rent seekers in the middle who lived on physical distribution are giving share away. And so We think sports is very much on the right side of that trade in the same way that Taylor Swift is on the right side of that trade and Mr.

5:43Beast is on the right side of that trade. All right. So who's on the wrong side of that trade?

5:50Gosh, I worry that Major League Baseball could be on the wrong side of that trade to get a little bit nuanced about sports. But the more obvious answer is broadcast primetime scripted dramas. The more obvious answer is low value add game shows. The things that people might have watched because they were on TV or because they were on a portal page of a website, the things that scrape your attention because of their location just get bypassed. All right. So I really interesting to me because, look, there's an unmistakable trend towards streaming. I mean, and when you say digital, you're talking about streaming.

6:39You're just talking about everything that's not linear television, I'm assuming, right? I am. Yeah, everything that's not subject to somebody else's schedule. So if you're advising, forget like the NFL or the NBA, which are sort of the top of the heap. Let's say you're advising the Big East, which is a basketball first college conference. It's not going to have a bidding war for its rights moving forward. And there's an unmistakable trend towards streaming, but the streamers don't necessarily need the Big East as much as the Big East needs the streamers. And the idea of of building around, you know, the New York market and the D.C.

7:30market and some of these big markets that the Big East hits with their basketball teams. You know, the if you're advising the Big East right now in 2026, I would think that you would you would say, look, get get a mixture of both. but certainly like linear television still will have the the the money and the pot and and the i say distribution the reach that would make it a more attractive place for something like the biggies if they can get a a linear only um deal it sounds like you you don't necessarily agree with that so if i disagree with that the biggie strikes me as a high value niche asset And I think that high value niche assets will find their customers in a digital or nonlinear distribution world.

8:24Maybe there's an analogy between the Big East and something like Formula One, which is not geographically defined. The way the Big East might be somewhat more geographically defined, at least in basketball terms. But the audiences are similarly a subset of sports fans. and those need to be distributed carefully. They need to be marketed intelligently and I'm sure we'll get to F1 later, but the Big East is certainly not the NFL or the NBA, but it is something that is of high value to some people. And so they're in a better than average position. Well, we know, and you cover all media, and so we're gonna dive down into sports, obviously, for this podcast.

9:10But I can't think of the last entertainment show that I sat through and watched on a linear television station. Entertainment has almost completely moved towards streaming. Sports is putting its toe in the water of streaming. As you take a look at this landscape, is that migration, the total migration, a la what's happening with entertainment, is that what's going to happen with sports programming as well? Or is sports programming the one thing that the traditional linear television networks know that they need to exist and they're going to go down fighting? I appreciate the question. I think my answer is going to start with the distinction between the path and the destination.

10:06Someday in the distant future, there will be no traditional linear television. There will be live television. But all the distribution will be digital and all the formats will be a blend of live and random access. Having said that, I sympathize with the argument that if it ain't broke, don't fix it. And sports have in common across all types, genres and geographies that they're much better to watch live. Their audiences appreciate them being live. And so the linear TV format is far less disadvantageous than it is in the delivery of things that aren't better live. So why am I making this point?

10:52Because the consumer problem that was solved by streaming was first and foremost that it was a better experience. I mean, it was great when you could save money. That was a moment in time. But the reason streaming is still gaining market share today when actually a streaming bundle is often more expensive than your linear TV bundle is because it's just a better experience for consuming things that aren't sports. The demand for sports on streaming is coming from cord nevers who weren't ever going to subscribe to YouTube TV, let alone Comcast or DirecTV, who do like sports and are willing to consume it through Peacock or P Plus or ESPN direct to consumer.

11:31That demand is going to bubble up. Sometimes I think about these megatrends. Well, before I get to this analogy, I'll just kind of make a summary statement, which is that I believe that sports is on linear television, still providing a good experience to consumers. And so the rate of change from today's paradigm to this future end state that I described where everything is streamed ought to be pretty slow because consumers are pretty well served other than a high price. and the price is high on streaming as well. The analogy I was going to use is drinks. So Diet Coke versus Red Bull and Monster, everybody knows that every year there are fewer Diet Coke drinkers and more energy drink drinkers.

12:18That's not a new trend. That trend started in about the year 2000 when Red Bull got big and Hanson Naturals launched Monster. And yet every year, Diet Coke's 2 % smaller And every year, those energy drink companies that are familiar and fully distributed grow again. And that's because older households diminish in number and they consume Diet Coke and younger households that consume energy drinks expand. And so we think that's generally what's happening with television and streaming, where streaming is obviously the energy drink category. And we think that the path is inevitable. But again, sports doesn't need to change as fast because the product serves consumers better.

12:58and and and they are getting paid by by the uh the uh well number one they're getting paid by the linear networks but number two the the strategy and again the strategies change year to year month to month but the strategy right now for the the bulk of the streamers is that we don't want everything we want to we want to pick and choose uh the the biggest events So you have Amazon Prime with the NFL saying, well, we'll take Thursday Night Football and we'll own Thursday. Do I think that they have an interest in a second NFL package? I don't. I think they have the NFL and that's going to be what they use to get their subscribers.

13:41Netflix, we see what they're doing. It's like we want the opening game in Australia. We want Christmas games. We want the Thanksgiving Eve game. They want big events that they can work around. CBS, Fox, they want everything.

14:01Is that something that you see changing, perhaps? I mean, the whole idea of Google, YouTube, and Netflix keeping the same sports strategy moving forward, whether they even want sports moving forward, is an open question to me. The streamers are, as I described, in a gradual takeover mode. And the most profitable way to take market share is gradual. You don't want to force people to do something that they're not ready to do. You do want to provide a little more value every year and continue turning your flywheel. Netflix already has all the subscribers. And so their calculation about the NFL is entirely different than Peacock or Paramount Plus' calculation.

14:53They're looking for subscribers. They're looking to get their churn rate down. Netflix doesn't have those problems. And so there's no pressure on Netflix to pay premium prices to get into sports. They might as well wait for the next cycle when the broadcast bidders will be weaker and they will presumably be stronger. But again, the total wallet for buying sports keeps growing. And that's why we think the outcome for the better leagues will continue to be strong. As it relates to Amazon and YouTube, their models are far less clear in sports because they are playing a bit more of an infrastructure role than Netflix.

15:33Netflix has really branded itself as a content provider. YouTube and Netflix are kind of straddling some of that and some of infrastructure rails through which other people's content can get to consumers with that other company's brand on it. And that's a very relevant position for distributing sports. It also helps that those companies are owned by much bigger companies. And so they don't even report video segment profitability. For that reason, we can imagine Netflix continuing to emphasize event programming in sports for many years to come, while the others most likely are more attracted to bulk packages that drive their infrastructure businesses.

16:21Can you help me out here? What do you mean by bulk packages? Is that these out of market packages? Is that? Oh, your example of Amazon Thursday Night Football. You know, the fact that Amazon and YouTube doing Sunday Ticket, you know, Netflix hasn't chosen to do those types of deals yet. Why, if you're advising these streamers, why would you tell them to get into sports? What's the advantage of sports programming to these streamers that already have a lot of subscribers? So broadly, the answers are subscriber acquisition, churn, and ARPU, which are the three variables for any subscription media business.

17:08How those variables benefit a given streamer in thinking about licensing sports depends upon that particular streamer's business situation. So in the case of Netflix, where they, at least relatively speaking, already have the subs and have a low churn rate, the opportunity is primarily ARPU. And I think we could all pretty quickly agree that Netflix could increase prices more if it had the NFL than if it didn't. But Netflix has a very tricky pricing conundrum in the case of trying to socialize the cost of a big NFL package, NFL on Sunday afternoon, if they were to take it away from somebody else.

17:51across all their subscribers because actually fewer than half of Netflix subscribers are going to assign a lot of value to that NFL content. And so it becomes hard to socialize a really big incremental cost across a monolithic pricing model that treats every subscriber the same. And then Netflix has to start thinking about tiering, which is an interesting new frontier at Netflix. Meanwhile, at Peacock or Paramount Plus, the calculation is very different because their churn rates are high, their subscribers are much lower, and their ARPUs are lower. And so they have an opportunity to benefit from all, to drive all three of those KPIs with the addition of a sports package.

18:37And, you know, the longer the season, the better. One of the reasons why we've been positive on the renewals of the sports rights owned by TKO and F1 is because those sports are year round. And that's really good for the churn rate of the minority of subs at a given streamer that value that content. You said so many things that I wanted to jump in right away. The first is that, you know, Amazon, when they did their Thursday night football deal, my wife has been a very happy prime subscriber until she got this letter saying, oh, we're increasing our prime subscription because of an NFL package that they got that she doesn't even watch.

19:25And she was like, I didn't ask them to get that. I had a pretty good. Of course, she continues to pay for the prime subscription. So, you know, the price elasticity is still there. But I do think that there is a funny sense of, you know, it's like when ESPN started doing the UFC pay-per-views and then the pay-per-views wouldn't work and people got really mad at ESPN. and all these cable operator types would be like, welcome to the club. Because everybody, cable operators are so used to people not hating them, basically, because they would raise the prices, because their technology wouldn't work.

20:09And now all of a sudden that's turning to these, you know, you're getting rid of the middleman. And now a lot of the ire of consumers is being trained right on you. You did mention Peacock and Paramount+. There's, of course, the Disney bundle. Of the legacy media companies, who's doing streaming well?

20:44My pause is the answer. Each of them has come a long way. I mean, full credit to each of them for finally deciding to adapt and bringing a lot of resource to bear. But there are really big holes in each strategy. And so I'm going to be critical. I mean, I'll also answer your question. Disney is doing it the best. Why? Because they have the lowest churn rate. Why do they have the lowest churn rate? Because they have more engagement per household. They have about 5 % of total household TV viewing compared to Paramount Plus below two and Peacock below two. And so it's harder to cancel or cancel the Disney bundle than one of those other subscribers because they play a bigger role in your life.

21:35And part of the way they do that is a multi-brand strategy. Disney Plus and Hulu add up to twice as much engagement as either of those two pieces. And ESPN is a new and rising contributor to the stickiness of the Disney bundle. And so that, hands down, is the answer. Disney's profit margins reflect that. Disney now has a 10 % operating margin in streaming. And Paramount Plus is allegedly almost break-even. And if you want to get the financial analyst in me going, we could have an energetic conversation about allocation accounting and EBITDA quality and free cash flow conversion and how media businesses can uniquely make decisions about those, how to account for their businesses that influence profitability of a streamer.

22:24as part of a broader conglomerate that's moving expenses around. So Peacock, as part of Comcast, gets to make some similar decisions, and Peacock's not profitable yet. So Disney, hands down, is the answer. But even Disney has some serious issues. A time series chart of how much time U.S. households spend watching the Disney bundle is growing more slowly, or it's stagnant in an industry that's growing. So streaming leaders are experiencing growing engagement. For all the perseveration about Netflix's engagement trend, it's mostly positive, certainly on a rolling basis. And Disney's isn't. And so they've got a real question about how to grow, but their model is profitable today with integrity.

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24:07Vanished civilizations, doomsday prophecies, paranormal phenomena, and events that science still can't fully explain. On Hidden History, I treat these moments like open case files. Not myths, not superstition, just incomplete explanations waiting for a closer look. Listen to and follow Hidden History, available now wherever you get your podcasts. Traditional linear business, you know, went from 100 million homes and cable to, I don't even know what it is now, 60 million. Is that something around that? But so there's certainly been a decline and it doesn't look like that's stopping anytime soon.

24:46It's the average age. It's going up and the number of subscribers is going down. And so you have these these broadcasters. They can't make these decisions with money that they used. Cuts here and there. And one of the one of the interesting trends that I've seen is like we've seen a Power Five conference, the Pac-12 virtual. We saw Major League Soccer, you know, have to you know, it wasn't getting enough attention from linear networks. So it had to go to go all to streaming, which which I found I found, you know, to be somewhat somewhat interesting.

25:42The the UFC, you brought up TKO and UFC, and I thought the TKO was going to fall. The UFC certainly was going to fall down that line. It didn't seem to be growing as much on ESPN as ESPN had thought on its ESPN Plus app. It was very easy to steal the pay-per-views, so they were losing a lot of that money. Paramount came in and got the UFC. I was totally shocked by that deal. And you, I don't know, were you shocked at the time? You seem a lot less shocked now because you were talking about why UFC matters in a streaming environment.

26:32So I like the phrase keeping receipts. And I try to keep receipts on my own opinions to make sure that I give myself proper credit for the mistakes. And in this case, we were more right than wrong, although we didn't get the degree right. So we were positive on the UFC having a successful outcome selling the new media rights. Our estimate was closer to$900 million and$1.1 billion. You had to think at the time that they were going to make that money because they were going to have to spread across like four or five different media companies, right? We were simpler than that. We just viewed the right estimate as$900 million, which was a little above consensus and certainly above the worst case and way below the$1.1 billion that they got.

27:21And our view was that actually one party could pay for it. And we had a few different of them in mind. And the math we did to support that was that the pay-per-view statistics, the decline of the pay-per-views was misleading because of piracy. that the audience was many multiples of the pay-per-view audience and really misunderstood because of all the groups that get together to watch the pay-per-views because of how expensive they were. And then that the audience, the sport itself, had a couple of attributes that made it absolutely mission-critical to streamers. One, that it's a year-round sport, and two, that it's a young sport and a global sport.

28:01So good demos and year-round. And it didn't hurt that Ari and Mark were representing it. So anyway, we were positive, but not positive enough. It went even better than we imagined. The number is that UFC, the average annual value of the rights sold to Paramount is 12 % higher on an annual basis. So the growth rate of the average annual value was 12 % per year from the prior UFC deal. It's 50 % better than the average. So across sports media, by our calculations, the average growth rate of the value of sports rights has been 7 % per year. So UFC blew that number away, despite, as you said, having bad headline numbers for the pay-per-view business and disappointing ESPN Plus results.

28:53Yeah, and it's also hard for them to create stars. You know, stars can like lose, you know, and then you have no names and things along those lines. I always get people whispering my ear, rival networks, some of the streamers saying, boy, Paramount really overpaid on that. But what I'm hearing from you is that they didn't necessarily. Well, OK, I love that. So let's talk about what overpaying is. If the right price to pay is the price that an asset is worth based on its historical performance, then I would get behind the view that Paramount overpaid. Investors and I bet David Ellison thinks of himself as an investor, get paid, have high risk, high return jobs because they try to imagine the world as it will be instead of the world as it is and position their capital for the world as it will be.

29:57And David Ellison is making some big bets. And I think the UFC is an asset that if managed correctly by both TKO and its distributor could grow a lot, could have a really unusually bright future. And we'll have to see if that vision plays out. If it does, Paramount Plus will benefit by more than the value it overpaid by. I say this all the time. Every rights deal that I've covered, and I've covered them for decades now, looks like a terrible deal at the beginning. And by the end of the deal, all of a sudden it's like, boy, these guys have a steal. I mean, if you look when the NFL signed$110 billion worth of deals,$110 billion.