Michael Nathanson’s Sports Media Pulse Check

0:04Congratulations! You made the varsity, the podcast. My name is John Arand and I am a sports correspondent and the host of this pod. Today I am joined by Michael Nathanson, a friend of mine who is a star analyst at Moffitt Nathanson. I've known Michael for a long time. We've spent hours together talking about the business. This time, we're actually going to have microphones in front of us as we talk about Stephen Colbert. Seriously, we found a sports angle. Netflix, ESPN, it's kind of like a greatest hits. We're going to talk about everything with regards to the future of sports media. I love my conversations with Michael.

0:43This will be a good one. But before I get to Michael Nathanson, today is Sunday, July 20th, and here's what I'm watching. Anyone who listens to this podcast or reads my private email knows all about the struggles regional sports networks are having. These channels, which carry local baseball, basketball, and hockey games, have a miserable business model. Every year, the amount they pay teams for the rights to carry the games goes up. And at the same time, the amount that cable and satellite companies pay to carry the channels goes down. That's because so many people are dumping their cable subscriptions.

1:21This scenario is just not sustainable. But this is actually a pretty good news story for the RSNs. That's because RSNs still have real power. In the email that I wrote on Thursday, I documented Major League Baseball ratings on the RSNs through the first half of the season. And this is a stat that really stuck out to me. in 16 of the 26 MLB markets in the United States, baseball games beat everything else on linear TV, including shows on both over-the-air stations and cable channels. Not only that, in 21 of the 26 markets, those games drew the highest audiences on cable TV in prime time. Incredible.

2:03RSNs may be going downhill, but they are going downhill, but they still command big audiences locally. In baseball, for example, the best local story is in Detroit. And that's where Tigers games so far this season have more than doubled the audience from last season. It helps, of course, that the Tigers have the best record in the majors. People want to see them. But viewership of Tiger games on FanDuel Sports Network Detroit, they're up 107%. I've done this story looking into the RSN ratings a bunch of times over the past 20 years. You don't see that kind of increase every day. Other good news in local markets, Mets games are up 41 % from last year, Cubs 30%, Dodgers 29%, the Red Sox and the Royals are both up 26%.

2:51And then there's a bottom end of the table. Viewership for the terrible White Sox is down 50%. And the A's first year out of Oakland, it's not translating to TV. Those games are down 44%. My Orioles, who are having a miserable season, are down 43%. And rounding out the bottom five, the Mariners down 30, the Rays down 27. Okay, enough numbers. Are you still with me? Sorry about that. Now, let's get to Michael Nathanson. Michael Nathanson, what a week. We've had a couple of stories come through, big stories come through, that just, to me, illustrate the accelerating problems that are happening with linear television.

3:39One is Netflix put out their second quarter earnings, which, of course, were great and beat estimates to the point where are there any general entertainment viewers that are left watching linear television? Probably not. And the other one, and the one that I kind of want to start with, we'll get to Netflix and sort of your thoughts on where they are and where they're headed. It's not strictly sports, but it is live and CBS canceling the Stephen Colbert show. There are a lot of questions about whether this was part of the settlement with the Trump administration. I'm going to suspend disbelief and let's take CBS at their word and say, this is a cost cutting decision to get rid of the top rated late night show in the 1130 window of all the networks, because it was losing money.

4:35It was losing a lot of money. And to me, that is like, I mean, late night television, late, those late night talk shows that, that is the whole tradition of broadcast television. So as you and I have been talking about like, you know, the cord cutting, you know, cord cutting, it started, cord cutting started probably about a, um, a decade ago. And, and now, now we're here, right? I mean, what, what's your sort of grand takeaway? for the business from CBS's decision? Good morning, John. My grand takeaway from CBS's decision is, look, we have to protect our sports rights. Basically, the one thing we have to pay for is sports rights, right?

5:22Like, we have to pay for the NFL. We have Big Ten. We have some golf. Maybe they want baseball. Everything else is not that important anymore, right? And the speed in which, to me, cord cutting we've always had, it's been worse than we thought post-pandemic because of the bleed of content to streaming. But now what's happened to is that the linear ad market has really collapsed as well. So it's like that was the inevitable decline. But look, it takes a while, right? So to your big point, I'm looking at declining ad revenues. I'm looking at acceleration and cord cutting. what drives what drives engagements live sports everything else is extraneous and basically what can i cut well i can cut late night now you've seen from fox over the years once fox sold their studio to disney they started making more and more reality shows they were the first ones to realize we need to limit our scripted content you know nbc with the nba is going to put more games on on nbc you know nbc so you know abc simulcast a ton of sports john that's where we're going it's going to be literally broadcast equal sports and those linear cable networks for the most part are just in deep trouble those besides espn and fox news and the news networks really fox news is news right now they all have just ticking time bombs over their heads that's the takeaway.

6:48It really is. Yeah. And, and, you know, I think your point is that CBS is not willing to lose money on an entertainment programming live or not, if it's not going to bring in ad revenue, and if it's not going to make money on ancillary benefits, I mean, the Colbert report did, I call that that was a comedy central show, the late show with Stephen Colbert didn't have a digital presence. It didn't extend the CBS brand at all. I mean, it was a money losing show. And so, again, taking the whole Trump administration and that out of this, to me, it's really kind of a breathtaking decision to make saying like, and it shows, I've been dining on the F1 media rights discussion, and ESPN is not coming off of$80 to$90 million per year.

7:48And in the past, it was always like, look, if you just get somewhat close, we'll go to you. And now they're like, we cannot lose money on a property that isn't central to what we do. We can lose money on the NFL because we have to have the NFL and we can probably lose money on the NBA. But F1, the Colbert show, like, yeah, we're not losing money on that. We're holding a parade for ESPN. Thank you, ESPN, because for years we've been waiting. And they would say, look, we cut back on baseball. Check. College football, some of those big 10 deals, walked away from. But they needed to show discipline.

8:30And as a, you know, Robert Fishman covers Disney, but as a long-term Disney analyst, I'm happy to see this discipline, like showing up in this way. And they would say they've been disciplined all along. But look, holding your line on programming costs is a great sign for investors at Disney, right? It's like something that has to be done. Formula One is nice to have, but it's not going to change the direction of ESPN or Disney at this point. Here's where I'm a little bit confused, though, Michael. Back at the rise of cable TV, back in the aughts, the broadcasters really felt at a certain level like we have to bid to keep cable from coming into taking all of these rights.

9:14What we're seeing here with the streaming is, I'm just going to use F1 as an example. ESPN is, they're not coming off what their bid is, but nobody else is stepping up either. Fox, which has IndyCar and NASCAR, I would think F1 would work well with that. Plus, NBC used to have F1, loves F1, and CBS sort of, they're in a netherland right now. So it's a little bit more difficult there. There are no other linear TV companies because something like F1, it just needs to be profitable. They're not going to take a flyer on it. For Apple, it doesn't need to be profitable for them. They have sort of deeper pockets, at least at first in the initial get-in offer.

10:05Exactly. I'm going to lead you in your podcast. The question I have for you, John, is NFL next set of negotiations, right? Because if Apple's willing to pay$150 for F1 and$250 for MLS, why haven't they bid on those Christmas games when they had a chance, right? Why don't they do Thursday Night Football? do you think now as the next deals come due, you'll start seeing Netflix, Amazon, and Apple try to pick off a new set of packages, like a new package, right? Do you think the NFL says we're going to basically stratify the games into like an A bucket, B bucket, C bucket, and that A bucket will be the Chiefs and the Cowboys?

10:49And basically, Apple, Amazon, Netflix have at it. Like these are the best games. What do you want to pay for it? Do you think that's a realistic outcome the next time we do this. Is that a realistic outcome for 2029? Uh, when, when they lose the, when they use it out? No, I, I don't think so. But, uh, I think that what you just described is where things are headed. I mean, the NFL TV packages essentially are the exact same things that the league put out how long ago was 1970 30 then i more than more than half a century ago think about how much media has changed over over the over that time but it still is okay we have an afc package an nfc package that's a little bit more amorphous i would i mean remember how innovative the prime time package was but it's still just a prime time package for broadcast tv So I can see where it'd be like, okay, we're going to say if, if these streamers are coming in and saying they want to event ties, what can the NFL and these other leagues do to make their games more, more events?

12:02Is it, is it, we're going to have the jets at the Jaguars on a Sunday at one, you know, or is it like, okay, we're going to have, you know, the chiefs at the bills. This is, this is a game that everybody wants. You get your number one pick every week of whatever game and work it out. Because to your point, these guys, the streamers don't need run-of-the-mill schedules. They don't give a damn about your Jets-Jaguar game. They want the A, gather around the TV set opportunity. The league is going to have to change that. So you don't think it's this time because you need the broadcasters and the cable guys to stick around one more bid.

12:42You can't go too aggressively now because the risk is the weaker the package, maybe the more risk there is for a CBS or a Fox, not to bid as much for a weaker package. Because if they can't drive re-trans with the Jets, Jaguars, they got a problem on their hands. They need some bills. They need some chiefs. They need some cowboys. They need that to drive. And funnily enough, my viewpoint is that in the next round of rights negotiations, 2029, or maybe a little bit earlier, the legacy media companies that are in the best shape right now, ironically, is Paramount CBS and Fox, because they have those Sunday afternoon packages.

13:26is they make it look pretty easy, but do you know how difficult it is to produce six games at the same time and then regionalize them so that they're, I'm not sure if, look, the streamers can figure it out, but I don't know if they're there yet in terms of doing it. The ones that I think are in great peril, NBC, you want to eventize? Okay, we have an exclusive game on Sunday night. Here you go. Thursday night, that's already at a streamer, albeit all the TV networks passed on that one. But then anything that is sort of a prime time out there, Monday night football, that's another one that I think could be in peril for ESPN.

14:11What's changed a lot since the last NFL deal is just the growth of ad-supported streaming. So last time around, Amazon was just playing around with advertising. Netflix did not have an ad tier, right? I'm not sure there's an ad tier at max. Now that everyone needs ad-supported streaming, you know this, the history of using sports to get people into your ad slots, right? Hey, if you want to buy the NFL, you must buy five other shows. So I just think the next time around, these new ad-supported streaming tiers, those owners are going to get more aggressive because they realize that the way you bring the ad dollars in is using sports and sports dollars have only been going up and everything else in linear has been going down.

15:04So it's like they have to go out there and grab sports that bring ad dollars in. That's what's changed since the last NFL negotiation. What a segue. Let's take a quick break, come back. And I want to talk about the Netflix results, which have been sort of the talk of my inbox for the past couple of days.

15:36all right give me your top line uh view of the netflix results what did you learn from uh from their opinions robert fisherman covers it and god bless him because i've been rolling that stock my entire career so we gave it to robert this year first thing he did is he upgraded stock to buy. You know what? God bless them for doing that. It's been a home run even this year. What you learn is, to me, it's about their margin, just the margin progression. I never thought I'd see a 30 % margin at Netflix, 30 % margin. We always ask them, will you be as successful as cable networks, which are in the 30s and 40s?

16:14They wouldn't say. And we're like, well, they can't be as successful because they have this global enterprise. They have to base basically, go direct to their client base. They're not riding on someone else's rails. To me, it's just the domination of this business model, right? It's like they're growing mid-teens, margins are 30%. You look at the next couple of years, this thing just keeps going and going and going, John. And it's like, it's their decision to do what they, like, it's pretty much under their control to buy any piece of content they want. Like, they basically could be the kingmaker on, we want this, we don't want that.

16:50They have so much just profitability flowing through that as you start the conversation about cutting Colbert, they're not cutting Colbert. They don't have to cut anything they don't want to cut. They're just going on the offense. So I just think they've proven skeptics like me wrong about the business model. We kind of realized that a couple of years ago, but just even now, the extent to which they can mint profitability, it's kind of amazing. If there is one thing that we differ on, I look at their engagement in the US and say, look, their engagement's kind of flattening out within the US. Don't you need to grow engagement to grow advertising?

17:30Don't you need to do something in live or sports to bring more people to come back on a more frequent basis? I have the ads here. I freely admit that it's a great, great value, but I'm a sporadic watcher of it. But if you gave me recurring sports content, you have me hooked, right? So I think at some point they keep checking off content verticals on the old cable dial and where they're currently just not as strong as they could be. It's just live sport. But to your point, it's not random games. They have to go for the top, top opportunity of a game, right? And just try to get the best of the best.

18:09to drive that engagement. We'll see what happens. So what do you make right now of their programming strategy as it pertains to sports? Because look, they've been very clear. They want to quote unquote eventize. That's probably the third time drink. That's the third time I've used that in this pod. And so that means, yeah, they're going to swoop in and get a couple of NFL games. And but those are going to happen to be games on Christmas Day. uh they're they did the uh outbid fox for the uh women's world cup uh you know they they want they wanted to get the women's world cup uh uh they have been um really out there uh surprisingly to me in in terms of boxing um uh just had you know a boxing match last weekend have another one coming up in uh in in september boxing was supposed to be dying but netflix is single-handedly sort of resuscitating that sport.

19:08How do you see this strategy developing? I think they've said consistently they don't want to loss lead sports, right? So they basically are trying to identify where the return on invested capital, return on these sports licenses equals profit. They don't need to add the NFL to drive retrans, right? They need the NFL to drive engagement and ad monetization. So I think it's really a case-by-case basis. I think event ties is definitely a theme. But what did the Women's World Cup cost them, right? Was it$150 million,$200 million? Was it that range of cost this time around? Is that possible? If I was at Netflix and doing the math, it's very straightforward.

19:56We're not going to add more subs because of FIFA World Cup. But what can we drive in terms of engagement? How do we sell this package to our advertiser base? We can make it more exciting. Let's just do the math on what the P &L looks like on a case-by-case basis. So they don't have to think about the retrans angle. With 80 million subs in the U.S., incrementally, it's hard to see that people are not subscribing to Netflix because of the Women's World Cup. So I just think it's pure P &L analysis. Like, what's the cost? What's the benefit? we're in. So do you have a number? Is it 200? Is that possible?

20:38You know, they, they did not put the number out. I think that's, I don't want to speculate on it. I know that Fox put in an aggressive bid that, that was well over a hundred and, and was nowhere near close to getting it. And it's, it's funny. Those Fox soccer deals they have are really good deals. Like Fox pretty much a while ago decided, Hey, we're going to get into soccer in the U S and they've, they've, they've made money on their contracts. The question is men's what's, what's our men's world cup story. See, I'm not a big soccer fan, but, but my point is in your, to answer your question, it's case by case.

21:15I think put the eventized world word in another bucket, but every deal they're looking at simply does this add, you know, profitability to our business model. Like we, We have a very good business as it stands. Anything we do cannot be for loss leading purposes. We need to basically look at this as a P &L decision. That's how I think of it. So in 2029, when the NFL comes up with its rights packages again, presumably, what do you think would most interest Netflix? Do you think it would be something like one of the primetime packages for the U.S. audience? Or do you think it would be something that Roger Goodell has said openly, kind of skimming off the international games?

22:04He wants every team to play at least one international game and possibly selling that to Netflix to where they can, you know, Netflix and all the streamers are global entities in a way that ESPN, NBC, CBS, Fox are not. Yeah. I mean, he would like Roger Goodell, like them to buy the international rights and build the international story. As much as I love the NFL, I don't see it as having the same international heft as NBA as the NBA by a long shot. I think if I'm them, I'm going after one of those two primetime packages. I really like either Monday or Sunday. You basically, your thing about Sunday night or Monday night is like you'd wake up the next day and your channel would be tuned to either NBC or ABC or ESPN.

22:51Like basically you go to bed, you shut it off and you come back. And, you know, for NBC, you have the Today Show at 7 as a lead in from the night before. I just think in the world of fragmentation we're living through now, having a show like the best game of the week or Monday Night Football, it brings you traffic, right? And it basically makes your platform into a weekly, 20-week, annual type of 20 weeks a year at automatic tune-in. I think it makes a ton of sense, John. So, yeah, I would put odds that they show up for one of those packages. Why wouldn't they, right? And we've heard this through the grapevine.

23:33People don't want to say this publicly, but when you get to even the last year, some of these NFL contracts, the rights owners are making as much money on advertising as the contract itself. So it's like, even though you think, wow, they really bid off too much here, the monetization, the dollars keep growing, and the ratings have been really strong over the years. And look at relative reach. Look at the NFL relative to everything else in the world. it gets stronger and stronger so like the dirty little secret thing is hey these these contracts are not that onerous because the advertising dollars keep coming through you know yeah every media deal that i've covered michael looks ridiculous at the outset and then by the end the people are like oh what a steal these guys are getting always every single one of them and then when you look at the nfc or afc championship game they're like mini super bowl events like the ratings are off the charts, right?

24:25It's like, if it's Bill's Chiefs, you know, it's going to do a massive rating and it's going to be three hours and even a pregame show. It's free money in terms of like, you know, it's not even thought about after you like look at the contract costs that you have a Superbowl every four years. And for these guys, every year they have a mini Superbowl and a championship game, right? By the way, I do love your comment about like, you know, You're watching primetime and then you wake up and it's on NBC. Your TV is on NBC. I mean, in television. That was the old world. Before I had YouTube TV. Now I wake up after flying my next seat.

25:02But in the old, I'm sorry, it's an old world comment, John. Well, you know how the streamers are doing it now. How many times have I watched Thursday Night Football on Amazon Prime? And then I'm answering emails and the game ends and I'm still answering emails. And I sit through the postgame show until I get the blue screen that comes up. And I always see these Amazon press releases about like, oh, guess how many people watched our pregame? I'm like, that's old guys like me that don't know how to change a channel anymore. I'm really interested to see how Disney integrates sports, Hulu, New Flagship, and Disney Plus.

25:39Because Disney has this incredible asset in sports rights that they've not fully leveraged yet in streaming, as we know. And I would argue like that ability to draw me in every, like I'm watching the British open, but that's on Peacock. But if I'm watching the master of streaming, you have me all morning on ESPN. And then I should go into something at Hulu or Disney plus. Like you have me, you have me for college football, right? So I'm looking forward to seeing how these guys start integrating sports more and more at ESPN. You know, we'll see what happens. Wow. By the way, this like Kismet, cause that's our next topic, But I want to take one more quick break before we come back and we talk about ESPN.

26:21And I still call it Flagship. Sorry, guys.

26:34So ESPN is launching ESPN, the app, the direct-to-consumer formerly known as Flagship, this fall. It's been kind of quiet over there. It's got to be more than just some gambling programming on the side and ESPN2 News, you, etc. What are you expecting to see from the app at launch? A year and a half ago, again, one of the other things I've done, I've given Robert Disney coverage. Robert had a Christmas bag, gift bag of coverage. So he now covers Disney. I stepped away after many years. But we had Bob Iger at our conference in 2024 as kind of our swan song. And Bob laid out a vision of of AI, basically more targeted sports content that they'll know that you are, you know, based in Maryland, Washington, you're an Orioles fan.

27:39and you care about Maryland sports that I'm expecting to have much more targeted, deliverable content that, you know, doesn't need me every week to go pull out my NHL as my big hockey fan. So I just think you're going to get a lot more targeted, curated content for you. And that's, I think, going to be the big play. They hired the CTO. Can I interrupt you for a quick second, Michael? I happen to be a very happy Hulu Plus Live TV subscriber. And I have noticed, like, if Maryland's playing lacrosse, that's on my homepage when I log in. Like, they already sort of know what my likes are and not. So, it's, you know, the NFL, when they're playing, that's the first thing that pops up.

28:29It's not like, you know, Bridgerton or anything like that. No, exactly. I'm like, my poor Rangers. I got more Rangers games. But, you know, they made a decision about a year ago, year and a half ago, to change their CTO out, right? So Disney swapped CTOs. They brought in the CTO from chief technology officer from YouTube. I'm like, aha, you know, that's a very big move because look at how advanced YouTube and Google are with machine learning and AI, right? So I think you will see a product that it's a lot more modernized in terms of that type of deliverable engagement for you. Like I'm excited about that.

29:07And also news, right? So why do I have to sift through all my stories to get my New York sports news? It should come up right away. Like it should be personalized. So I think you're going to see a level of personalization that they're really excited about. for example like the parks disney's parks when you go to disney world your entire schedule like you have you you pick your restaurants you pick your your priorities they personalize parks forever and look how well the parks businesses run so i think that's gonna be a big a big change here so that's what i'm looking forward to seeing you know one of the things is um of course they're still talking with nfl about doing something with their media that's a deal that has been likely to go through for the past year.

29:52I forget when I first started reporting about that, but I expect it's going to happen before the app launches because the idea of having the app and having access to the Red Zone channel through that app is going to help. This app, if it's going to be successful, though, it really does have to be more than just the ESPN sports programming. What do you see them doing around that angle? You would think in a perfect world, they aggregate Fox and they aggregate Turner Sports. But Fox has made a point that they don't want to sub-license their sports. There's a new Fox One product coming out. Turner has lost the NBA.