The NFL’s Media Monopoly

24:53And then as they raise their rates, the entire ecosystem sort of evolves to figure out how do I extract the money to pay for those rights? And then how do I use these rights to grow my business more broadly? And that's the next 10 years, 20 years of the way we're going to be talking about this, in my opinion. And the things we talk about now are the little chess moves within the bigger game. Yeah.

25:14Mike Morris:And what I find to be so fascinating about this is that I am so solely focused on what this NFL deal means to Major League Baseball or or to the National Hockey League. Well, my colleague, Matt Bellamy, who covers Hollywood for Puck, had a really interesting story about what it means for the entertainment, how people in Hollywood are freaking out about this NFL number. Because the idea that the NFL is just going to sort of overtake this sport and sports isn't going to grow is fantasy land. I mean, if the NFL gets the increases that we all think the NFL is going to get, a lot of the money is coming out of entertainment, out of Hollywood as well.

25:57It's definitely a reasonable concern and thought process. As these rights fees go up, the media companies that are paying for them are going to have sort of one of three paths, right? One, they increase their monetization by charging their distribution partners more, charging the consumer more for a subscription if you're a streaming service and raising your advertising revenue, which by the way, take a look at what Disney ABC is now asking for, for Super Bowl ad spots. I'm hearing eight figures is the new ask. So certainly this ad revenue continues to rise at a rapid rate. I'm sure we're going to hear a lot more about that during the advertising sales upfront processes over the next couple of weeks.

26:40So option one is you raise your revenue. Option two is you cut your costs somewhere. And that's probably in some of these other sports. So option three is that you kind of shed maybe some of the content that you consider non-core or non-needle moving. And I think there's still a lot of demand for entertainment content, quite frankly. But yeah, I mean, tough decisions are made if your most important supplier of product raises their price. You know, that's how it kind of shakes out.

27:15Mike Morris:I have to say, I think the favorite part of my job is that I spend other people's money and I take risks and there's no potential payoff. So with that as a preamble, let me just focus on ESPN right now. And if the NFL comes in and wants to increase the cost of Monday Night Football and the highlight rights by, you know, I think ESPN's at$2.7 billion on an average annual basis right now. And let's say it goes up, you know, even to$3.2 billion or or more. It would be a risk. But ESPN right now, they get paid by advertising, like you mentioned, but also by affiliate. And so if ESPN says, we're going to save$3 billion a year, and then we're going to invest that in the Big Ten, we're going to invest that in the SEC, we're going to own college football.

28:14Mike Morris:No cable operator or satellite distributor is going to drop us in the fall, because we have the Big Ten and the SEC and the Pac-12 and everything else that's available there. We'll give up advertising on Monday nights and maybe for the Sunday highlight shows, but we will gain that in college, and it could be an acceptable risk to take for a network like ESPN just to say the NFL is getting too expensive for us. And then, of course, the knock-on effect of that is the NFL potentially loses a bidder. Because right now it has just enough bidders for the packages that are out there. And there could be a little bit of a domino effect.

29:01Mike Morris:But would you – I'm not asking for your advice. I was about to say, would you advise? I'm not going to walk you into that. But how big of a risk would that be for ESPN to take? Pretty massive. honestly. Look, I think there are a couple of reasons that the current sort of paradigm and the evolution of this paradigm as opposed to a big disruption is the way we're going to go. Okay. Number one, as popular as college football is, and it is number two most popular sport, it still is dwarfed by average NFL games, let alone playoff games and things like that. Right. So there just is no reasonable substitute for the NFL when it comes to getting the same, the reach and the unique audience at one point in time.

29:54Okay? A little sidebar, we talk a little bit about the NFL versus the NBA. And I don't want to be negative about the NBA because the NBA has great audience sizes, several million viewers, and they've grown significantly this year. But we still all know that an average NBA game has about one-tenth of the audience of an average NFL game. And if you say, well, we'll make it up on volume, they have this 82-game schedule, etc., it starts getting messy because you're not going to get 10 different people every time you multiply by 10. So the reach is not as different or differentiated. I use the NBA as a bit more extreme example.

30:31It's really the number three property out there. So if you go to college football and it's still a significantly smaller audience, you're probably getting a lot of the same viewers. You're not getting the same type of reach that you're getting with the NFL. Also, college football doesn't want to do that. They don't want all their eggs in one basket either. These leagues, and we talked about the Major League Baseball and the rights deals that they have done as they've kind of evolved, they want more, not fewer partners, right? You shut down all your partnership expansion opportunities and you sort of limit your next round of bidding.

31:03What you want to do is you want to support a very healthy ecosystem them with a lot of potential bidders. And so I don't see college football saying, you know what, we're just going to go all NESPN is the anti-NFL play. NESPN say, look at how much more profitable we are. I just don't think it's the path.

31:21Mike Morris:You know, that's such a great point to that. One of the surprises that I've run into is that when I talk to friends or family, they get frustrated because they have to find their games in every different sport. But when you talk to the leagues they love having their sport marketed and carried by by these major international media uh companies and so that that idea of like okay yeah we'll just give everything to to espn is uh you know the uh money talks of course but that that is that is somewhat fanciful there you're you're totally great um uh let's talk about the streamers for a second amazon has Thursday night football.

32:04Mike Morris:Do you think that from what you're hearing, do they want to increase the number of NFL games they have, maybe get a better package of games? Or are they happy just kind of like with that one package of games, which drives the price for Prime and the number of subscribers for Prime? Yeah, I'll tell you, I don't know. Amazon is pretty good about playing it close to the vest on specifically what they want to do with their resources. But they have clearly, of the streamers, leaned the most heavily into sort of traditional packages, right? That Thursday night package is certainly a much more robust and, you know, quote unquote, typical package than what YouTube or Netflix has done so far.

32:54This NBA package is a classic sort of number of national games plus the postseason. So Amazon Prime seems to be very interested and feel rewarded by making that investment into a more traditional paradigm. I think some of that comes from Amazon's amazing advertising platform and what they're trying to do there and them being in an earlier stage growth advertising platform than Google, for example. And so they're looking at this investment as a means to supercharge. Now, do they want two packages or would they expand that investment? I think of everybody that has a package right now, I'd argue Amazon is probably the most likely.

33:38I wouldn't want to say that there's more than a 50 % probability or anything like that. I don't really know because there is a diminishing return on the subscription side with each of these packages. But again, because Amazon is doing so much with the advertising portion, and that's really a huge part of how they're leaning into it. If somebody was going to just try to go for more tonnage, more volume by bidding for two packages, which by the way, looks like it could be something like$6 billion a year and growing in the next round of negotiations, they would be the player. But like I said, I think it's less likely than 50-50 that that's the kind of thing they would want to do.

34:19And by the way, I just point out that we talk about, could these agreements be reopened? The opportunity for Amazon to say, take a second package is not going to happen unless the existing deals go to expiration. It's not going to be something that's going to happen in the near term because no existing rights holder is going to open up their deal to have it get away could you imagine nbc

34:42Mike Morris:as a lame duck on sunday night football going for another four years like that that's a long time to sort of uh wait wait to see that happen because like like you said that they can reopen the deals but the deals do go until the out uh at the uh in uh 2030 for uh nbc uh fox uh cbs and amazon on 2031 for ESPN. I'm a little bit confused about YouTube's strategy. The NFL has a package of five games. We don't know what five games they are. YouTube appears to be the likely place for that. And the belief is that it's going to go before a paywall, so that'll satisfy DC a little bit. What do you make of YouTube's interest in the NFL and how can we see that sort of start to manifest itself?

35:39Yeah, I mean, it's complicated, especially on that very last point you just brought up about putting it in front of a paywall instead of behind a paywall, right? Making it a sort of broadcast-esque type of business. A couple of things. First of all, Google, YouTube, incredibly powerful company, media company, very deep pocketed with a number of ambitions across their businesses that span well beyond media. And yet YouTube is arguably one of the largest, if not the largest player in media at this point, at least as measured by the amount of time spent with the property. So very powerful. And they have existing NFL relationships, one directly with the Sunday Take-Up product, one indirectly through their virtual multi-channel provider, which as you know, YouTube TV is a bundle, which offers ESPN and CBS and Fox and NBC.

36:28And so they are able to air games on their service as the consolidator and distributor of those packages. Could YouTube be a bidder for another package. First of all, I'd say this concept of a five-game package is really the sweet spot for the NFL is they want to draw more streaming partners into the game and have more streaming partners invest more. When I think about the NFL strategy and we talk about this concept of whether they can re-up their existing partnerships prior to the expiration, following the 29-30 season, 30-31 for ESPN, I think that there is a non-insignificant and value-creating path that does not necessarily reopen those, but does exactly what we're talking about right now, which is create some smaller packages that bring new spenders into the ecosystem so that when you do reopen those deals in three or four years, you have seven bidders instead of five, for example, and that gives the NFL some optionality.

37:34You know, in terms of YouTube, if they do not put it behind a paywall, right, so they have a premium product, it's a subscription product, they will not make money on it. But they, like our story with Amazon, they are on a steeper part of their advertising growth curve, if you will, especially when you think about the amount spent sort of per viewer. So this would be massively premium inventory that they would be adding, which would drive value for them, but I would argue at a loss. So it's not clear to me exactly what the end game would be. Maybe it would be being a big partner for global expansion.

38:11But I certainly think it would be an investment in the near term in terms of the revenue falling short of the cost of the deal, most likely, but perhaps a way that they want to leg into a bigger deal over time. I just wrap up with this point that this distinction between being in front of or behind the paywall. If it were behind the paywall, okay, like what we talked about with Netflix, that would be a vehicle for them to sort of try to broaden out their appeal and drive users. And I think Netflix similarly is probably looking at an expanded package beyond the two-day, two-game Christmas package that they have, but they want events.

38:48They want something like a five-game package that has a game in September, a game in October, a game in November, sort of spread out as opposed to a week after week cadence of games, because they just have this diminishing return on the subscription side if they have more than one game per month.

39:03Mike Morris:That is so interesting to me because it gets into, you know, for decades, the idea of broadcasters using, you know, spending a lot of money on a specific property and using that as a loss leader, you know, because it's going to draw people to the network. They can sell advertising across all of prime time and they can end up making money off of it. It's a very TV way of doing business. The streamers, and I know that all the streamers have slightly different strategies, but in general, they all have such deep pockets. Do they need to make a profit off of this? How do they view the business in those terms?

39:50Um, yeah, look, I think. I think it's not a need, it's a want, I think is what I would say. Do they want to make a profit off of this? And I think the answer is absolutely yes. This concept that somebody like Google or Amazon is comfortable just saying, oh, I don't mind that I'm losing money on this because I sort of want to be in this game and therefore I have no long term plan. I don't think that's right at all. Any of these investments, I believe, are made with the best of intentions with respect to driving profitability growth over time. If you have a deeper pocket or if you have more ways to win or if you have more just a larger profit base such that, say, taking a loss of a couple hundred million dollars a year on an NFL contract just doesn't really even hit your financials because you're such a huge company, then you just have kind of more runway in the public realm as defined by what happens to your stock price to take bigger risks.

40:54And every one of these things, it's a risk, right? It's calculated risk, but it's a risk when you make an investment of this size. And so you can, if you're Google or Amazon and you say, hey, look, we're going to, we know this is going to be money losing based on the current paradigm. However, over the course of the next five years, we think we can exit this with X number more subscribers, X amount deeper advertising partnerships, X amount of expansion to AI tool adoption and our advertising technology and all these things, right? It's a calculated gamble in that regard that I think the deeper pocketed players can take that risk.

41:31And I would contrast it just to what's happening at NBC right now. And Comcast and NBC similarly have taken some big swings on some pieces of content. And they had an amazing February with respect to their audience size and the amount of revenue that they generated. But it was at an incremental loss, right? You saw revenue was up a significant amount. Over$2 billion of the incremental revenue came from events like the Olympics and the Super Bowl. And the losses were also bigger. And I think at the end of the day, the jury is still out on how that plays out for that company over time. You have to look at how many subscribers stick around and these types of things.

42:11So I don't think that you evaluate whether it worked or not on a one-quarter basis. I think you have to look at it on a rolling basis. But it's not a situation where it's so clear that they can afford to sustainably just lose money on sports because it somehow is part of a bigger strategy because the entire company saw pressure on profit as a result of some of these rights costs.

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44:48Mike Morris:You brought up Comcast NBC. They just had their quarterly results last week and Peacock, the losses of Peacock still, like, they take my breath away. I mean, they're so big. However, they did come out, Comcast did come out and say that it's on the path to profitability. And within the next quarter or two, they expect Peacock to be profitable. How healthy is Peacock right now for Comcast? Oh, gosh, John. That's a tough question. I'm going to stick to sort of the facts, if you will. And the fact, to your point, is that as of right now, Peacock is losing money. Okay. And so it just speaks to the challenge of the industry and the competitiveness.

45:43And I think that when you've had guests on the show who are very fluent in this topic. Comcast clearly believes that the investments that they're making will have sustainable and broader reaching positive impacts across the business, whether it's on their connectivity business with their broadband subscribers and wireless, and whether it's the sort of sustainable growth of the media business, which includes Peacock, that's the sort of calculated risk that they were taking. And so, you know, well, I'll just say we will see where it goes from here. I don't have a, you know, an opinion on Comcast as part of my coverage universe.

46:24But we do have the numbers that they have reported to date. And clearly those numbers show that they are squarely in the investment portion of this process. And, And the market, the multiple on the stock is certainly below peers, which shows some skepticism or concern from the market standpoint. It's possible they'll make it work, but right now that's not the way it's being reflected in the stock price.

46:51Mike Morris:Were you surprised to hear that the profitability could come as soon as the – it seemed to me that Comcast executives put themselves out on the ledge by speaking that way. But they do have a lot of these rights deals, NBA rights deals, the NFL rights deals that are really weighing down on it. You know, I want to be careful because I don't want to specifically voice an opinion on what will happen with Comcast. OK, but let me just like mention a couple of things that I think should be considered when hearing a statement like that. First of all, getting to profitability doesn't mean a whole lot, right?

47:33$1 of profit or$1 million of profit is a profit. That is a truthful statement. It is not enough to drive the valuation of the business or a feeling that this is a value-creating endeavor. So again, I'm not saying that it can't be. I'm just saying that just saying profitability is kind of a small scaling of an important topic, okay?

47:55Mike Morris:By the way, I always use that metric whenever people talk about ratings. Our ratings are up 100%, up 100 % from one viewer or up from a million to one viewers. You know, I think you have to have a little bit of just a healthy skepticism, right? When you hear these things as an analyst or an investor, and try to make sure that you have some defensible thoughts, okay? And I think the same thing with the audience sizes. I think it's great to hear about ratings growth and especially when the streamer reports their own metrics and beat their expectations. We beat our internal expectations or what, you know, I don't know what any of that stuff means, right?

48:37So at the end of the day, is it directionally informative? Maybe. I mean, you'd hate to hear somebody report their own metrics that they fell short of their expectations. Ultimately, that's why we look at these reported financial statements and audited financial statements and agreed upon metrics. And so you can tell me your sort of metrics all you want, but I'm going to kind of compare you to your peers with respect to the sort of scoreboard that has some fixed parameters to it.

49:06Mike Morris:Mike, this is always so much fun for me. We only have an hour on Nessun. I think I got to increase this to two hours. But I'm going to try to put words in your mouth and make sure that I've understood what you said. in terms of the receipts. It sounds to me that you would be surprised if the NFL doesn't renew ultimately with all of its broadcast partners the way things stand today.

49:42I think just to be clear, I said I am taking the under on all of the deals being recut before the start of the 26th season and that the broadcast partners, the existing group of partners continue to offer a lot of incremental value to the league and the league continues to offer a lot of incremental value to those partners. But the one thing I would say, just to be clear, is I do think there is potential for some disruption. I do think that there's potential that perhaps an existing partner with an existing plan may not have that particular plan anymore, may not have a plan at all at the next renewals.

50:23And in order for the NFL to create a situation that has sort of a bidding process for those most valuable rights, they likely will have to play out to the end of the 29-30 season. Or maybe even because of the sort of strangeness with ESPN, maybe they offer a one-year option so that they can get all of the rights aligned. So I think there's opportunity for some change, but that change will not happen if it's an early renewal cycle.

50:50Mike Morris:And a lot of the growth, like you talked about, is the potential for the 18th game coming on or the potential of taking a game or two from the Sunday night and then selling that over to the streamers. Mike Morris, can't thank you enough for joining the Varsity again. If you don't mind, I'm going to have you back on in a few more months just to see where we stand. but it's a super fun interview for me. And I can't thank you enough. Absolutely. It's my pleasure. Enjoy it very much. And I love how much there is to talk about. So happy to come back and join you anytime.

51:31Mike Morris:Well, that was instructive for me. There's so little movement right now in the NFL media talks, but so much movement. And there's so many questions. And what happens over the next several months with these NFL media rights? is going to dictate everything from the strength of the broadcasters to the strength of other leagues to even entertainment programming. Such a fascinating story to cover. So I want to thank Mike Morris for joining the pod this week. But more importantly, I want to thank you for listening to The Varsity, an Odyssey podcast in partnership with Puck. I also want to shout out the executive editors from Puck.

52:07Mike Morris:That's Gabby Grossman, Ben Landy, John Kelly, and the great Bob Tabador from the Odyssey. and of course our partners at Ness and Matt Colpitts and Gray Poth. If you like this podcast, make sure to sign up for my newsletter. It's also called The Varsity. Head over to puck.news and use the code word The Varsity, all one word, for a 20 % discount. And I will see you on Sunday.

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