I love when a weekly column like this ends up having a “theme”. This week, that’s the difference between “actual” and “potential” news stories. The former are things that happen: a movie opens, a company launches a new product, or a studio head steps down. “Potential” news stories are all the things in the news that may happen: a company may be putting itself up for sale, a studio head is considering leaving or, most commonly and consequently, two companies are negotiating and are close to announcing a deal.
In the last few weeks, we’ve seen the difference between actual and potential stories play out with sports rights in particular. The NFL had quite a few “potential” stories, from a potential deal with Amazon (still not finalized) to potentially poor negotiations with Disney for Monday Night Football (also not finalized as of this Monday morning the 15th of March). Then, in the middle of last week, with no forewarning–that I saw–Disney and associated sports entities (ESPN, ABC, Hulu and ESPN+) and the NHL announced a seven-year, $2.8 billion sports rights deal with the NHL. That’s actual news! And it’s our…
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Most Important Story of the Week – ESPN Grabs NHL Rights for Pay TV and Digital
Gosh I love this story. It combines sports with almost every part of the “digital video value chain”. First, I’ll go over the basics–if you missed them–and then the ramifications, from the most disrupting digital to the most disrupted linear.
First, Andrew Marchand delivered the basic facts in a tweet:
ESPN & NHL details
* ABC/ESPN will have four of the next 7 Stanley Cup Finals
* ABC/ESPN will have one conference final each year
* 25 regular season games on ABC or ESPN
* ESPN+ will stream more than 1,100 games
* ESPN+/Hulu will exclusively stream 75 national games— Andrew Marchand (@AndrewMarchand) March 10, 2021
Marchand later adds that Disney is going to raise the price of their bundle from $13 per month to $14 upcoming, partially my guess is to pay for this deal. As John Ourand points out, this deal only covers some of the NHL’s content output. Potentially up for grabs are the NHL Network, NHL.TV, their digital OTT service, more national games for broadcast (about 20) and whatever happens to regional sports networks (RSNs).
The remarkable thing, overall, is how close this deal is to what I expected for the next round of sports rights. The rights are shared between linear and digital. And the deal is with a partner who can offer both linear and digital distribution, Disney. Some games will air exclusively on digital, but the crown jewel playoffs will air on ABC (and maybe simulcast ESPN+). Moreover, the rights aren’t on a league-owned platform, but part of the Disney bundle.
I can imagine that some of you won’t think the NHL is that big of a deal. But frankly, it’s one of the four major sports leagues in the U.S., even if it is clearly fourth. Or fifth if you put college football ahead of it, which is barely amateurism anyways. (Commentary!)
Let’s review the impact on each part of the value chain and speculate about what this deal may say about the future of sports rights.
Digital Streamers – ESPN+ is the first third-party streamer to grab sports rights for a major professional sports league.
The non-NFL professional sports leagues had dabbled with owning their own streaming sports applications and channels “over the top”. Indeed, an MLB subsidiary, MLBAM, created the application for baseball. The MLB then spun off this into BAMTech, which Disney bought to become the backbone for Disney’s streaming business. However, most of those league-owned applications are niche streamers at best. Because the true power of sports is in a bundle of sports in a bundle of content.
Clearly, ESPN wants to deliver that sports bundle in the 21st century, the way they delivered that content for linear cable in the 2000s. I expect this trend to continue; most league-owned streamers will eventually fold or get purchased by larger sports streamers, as ESPN and Peacock have already done.
Traditional Broadcast – Still Not Dead…Yet.
I thought the sports leagues would avoid going “digital only” because the risk is that you lose quite a bit of eyeballs in the process of collecting extra revenue. As I wrote when Peacock secured the WWE streaming network, the risk of any league is that if only the hardcore fans follow you to a very small channel, your brand suffers as casual fans drop out.
Hence, most leagues are looking for a partner who can offer both digital natives and traditional viewers content. As big as cord cutting is–a point I’ll make repeatedly–more folks have traditional cable than do not have cable in America. (See below.) As a result, the traditional players still seem best positioned to secure sports rights for this round of negotiations.
A traditional player and Big Tech company could partner to offer both digital and linear rights. But given that Comcast, CBS, AT&T and Disney all own streaming platforms, they won’t partner with a tech platform. That leaves Fox. The challenge then is “exclusivity”. Since having exclusive content drives so much of the value, splitting rights doesn’t traditionally work. Even then, it would make more sense for DAZN or Amazon to buy a linear channel than vice versa.
By the end of the decade, this could change. For now? I’d keep betting on most major sports deals to happen with the traditional players, but with digital rights included.
Traditional Cable – ESPN is still the behemoth.
ESPN was a must-carry channel in the cable ecosystem. As such, it commanded the highest prices for customers in the traditional bundle. When it added the SEC Network and Longhorn Network, it only entrenched this position further.
Traditionally, the focus is on the value of games. What is more fascinating is how ESPN did and does drive coverage outside of games. Frankly, with the NHL owned fully by NBC, ESPN downplayed its coverage of hockey. It covered Stanley Cups and the playoffs, but highlights took a backseat to the other sports. Some have speculated that this hurt the NHL’s brand and I agree. Will ESPN’s coverage of hockey increase after this deal? Probably.
As a result, any league, professional or amateur, needs to have some presence on ESPN. To have that share of voice. That said, I like having a second partner as well to keep prices honest. Take the NHL on NBC. That still gets a ton of publicity from NBC to drive the coverage. If I were advising a sports league, I’d say your best bet is to be on ESPN in some capacity, but have a backup partner who is incentivized to drive your product, like either NBC/Peacock or TNT/HBO Max.
The NHL Network – At risk.
John Ourand covered this best, so I don’t want to steal his point and will just quote him:
“…if you read between the lines, the future of that network does not look so rosy, especially since Disney’s high-respected affiliate team no longer will be handling its carriage deals.”
Meaning it could go away. Speaking of disappearing cable channels…
Regional Sports Networks – Unclear, but potentially very bad.
A big wild card is what happens to the regional sports networks now. Most NHL, NBA and MLB teams own their local viewership rights. (The NFL controls national broadcasts since their supply is much more limited.) Regional sports networks first disrupted local broadcast channels by buying these rights, with some college sports TV rights, throughout the 2000s. Ultimately, several teams disrupted the RSN disruptors and launched their own channels. (The Yankees and Lakers being arguably the two biggest.) As the bundle starts to collapse, RSNs will likely be one of the first casualties. (Though don’t guess when. Predicting the future can be easy; predicting when is very, very hard.)
My question about this deal is how many of these ESPN+ games are inventory previously dedicated to RSNs. If the answer is “all of them”, that’s a lot of lost content for RSNs to lose. My guess is that ESPN+ will have out-of-market rights. That obviously dampens a lot of the value for customers, since most fans still care about their local team first and foremost.
Was this a good price?
Uh, I don’t know? It was definitely a jump in price, the way all multi-year deals are. Specifically, the deal from 2013 with NBC was for about $200 million per year for seven years. This price alone doubles that price, and the NHL still has more games to sell. Overall, though, I’d say this is inline with past price increases. As for whether ESPN+ can make that back for Disney, maybe, but not by itself. Meaning this is a stepping stone deal in some ways.
What’s next?
First, ESPN+ has a head start on everyone, including DAZN. They’ve managed to leverage their power position as ESPN to start securing OTT rights. That’s a big deal. But they can’t and likely won’t stop here.
Second, all eyes turn back to the NFL. Seriously guys, make a deal for something! My best guess is Disney and the NFL do a similar deal for Monday Night Football, and it likely mimics the key components of this deal, with digital and linear rights. Though don’t put it past Disney and friends to do something crazy with NFL Sunday Ticket.
Third, Amazon still wants NFL rights. The most likely outcome is they get more Thursday Night Football, but they could be the first digital only deal. But I doubt it. The NFL Network is more valuable than the NHL Network, and the NFL doesn’t want to hurt that value prematurely. Likely, a split-deal (not exclusive to digital) is still the most probable outcome.
Fourth, since most biz executives are naturally conservative–in temperament, not political leaning–I expect most leagues will copy the NHL and NFL deals in their own rights deals. However, between Disney, Comcast, AT&T, ViacomCBS, DAZN, Amazon and any wildcards I may have missed, the leagues should all drive higher prices for their content.
Lastly, customers will see all this in their digital streaming bills. As Andrew Marchand pointed out, the Disney bundle will be up to $14 a month after this deal is done, for Hulu with ads. In other words, as Disney bundles sports, some of that cost will be passed along to customers.
Entertainment Strategy Guy Update – Should Netflix License Its Content?
If you want a perfect example for why I wait to call a story news until it actually happens, here’s a headline from this very website last May I stumbled upon this week as I was updating my website:
But you’ll notice, since I wrote that headline, that Apple hasn’t actually bought a library. I jumped the gun. The premise was so sexy, I wrote an entire column on it. But I was wrong! (The strategic logic, though, is still spot on.)
I feel the same way for the huge headline dropped by The Information this week:
First, The Information is definitely filling the void by the general move of the trades away from breaking stories. Since The Information is subscription-driven, not FYC-advertising-driven, they can drop a few bigger tidbits every so often. Credit to them for this scoop in a series of scoops.
That said, I don’t want to go too far in calling this actual news, since, notably, we haven’t actually seen the goods. Netflix may ultimately license their wholly-owned series into second windows, or they may not. Or this story may be something less groundbreaking, but still interesting. Until we see a big series arrive on another streamer and/or linear channel, this is just a “potential” story.
But I had some quick thoughts.
– This may be cover to explain why some “Netflix Originals” will end up on other services/channels. For example, Orange is the New Black. That’s a show owned by Lionsgate. Essentially, Netflix has to pay to keep it streaming after a certain number of years pass. (We don’t know specifically.) Earlier shows like OiTNB had shorter holdback than some recent series, so it’s a show I’m keeping my eye on. Netflix could have leaked this story to help explain why more and more licensed shows end up elsewhere.
– The math here is pretty simple. If a show is worth more to someone else than it is to you, you sell it to them. Netflix benefitted from this for years; it was worth more to Netflix to license big movies to its service than it was for movie studios to keep them in the vault or on cable/home entertainment.
– The converse could also be true now. Some linear channels or streamers could benefit more than Netflix by leveraging the buzz/awareness Netflix built for a show like Grace and Frankie or OiTNB to get some subscribers. Given the volume of new releases on Netflix and how most shows seem to disappear into their morass of library content, I could see content being more valuable off Netflix.
– The Marvel angle. Does everything revolve around Marvel? Maybe. The story to monitor here is, “When do all of these series with “Marvel” in front of them return to Disney, who owns them outright?” Do they end up in the Marvel tab in Disney+? That’d help flesh out the Disney+ offering. I’d have said Disney wouldn’t do this, since they could want a coherent MCU offering, but then they put the X-Men films onto Disney+, and even a Fox X-Men films’ character–spoiler alert–in WandaVision. Given the commanding negotiating position of Disney in all negotiations, these Marvel shows could leave Netflix sooner than you’d guess.
– This article only referenced selling subsequent windows of content, but you have to wonder how far a revamped theatrical window is. Given that all the streamers have different windows, something could be worked out with one of the theater chains for some content.
If this happens, I’d call it both a big deal and the right strategy by Netflix. Clearly, this is a firm focused on cash flow positivity from here on out. Nothing is more cash-flow-generating than joining the content licensing biz. We’ll see if it happens.
Other Contenders for Most Important Story
Disney Investor Day: Disney Passes 100+ Million Subscribers; Will Close Some Retail Stores
The Disney streaming business chugs along, and they announced that they passed 100 million subscribers. I don’t have a lot of strategic takes on that big news, but Disney is also shutting some of their Disney stores across America. Likely, the explanation is what you think: Covid-19 crushed retail stores, especially malls. Lastly, Disney is planning to reopen Disneyland in California in April as California emerges from lockdowns. Taking the balance of these two stories, theme parks have a higher upside than merchandise going forward.
Peacock Joins Hulu and Netflix in Losing Money
What if no one can actually make money in streaming? We know that Netflix lost money for a decade plus, that Hulu lost money for all its owners, and all streaming is losing money for Disney. Now, we know that Peacock has joined the money-losing streaming crowd.
Listen: all new businesses lose money at the start as they gain customers. But the key to valuations is accurately estimating how much money a business will make at full-strength. There’s still the chance that streaming video is just much less lucrative than traditional cable. The sooner everyone can make money–and for Netflix, go beyond just breaking even–the better for industry valuations.
Pay TV Continues Its Losses, According to Moffett Nathanson
Every year, Moffett Nathanson produced one of the definitive estimates of cable subscribers in the U.S., and recently it has highlighted the trend in cord cutting. 2020 was no different, though I will note that the potential acceleration of cord cutting presaged by Covid-19 didn’t really come to pass, as customer losses were about the same as 2019, a non-pandemic year.
AT&T Investor Day
AT&T announced they are expecting 120-150 million subscribers by 2025, and HBO Max’s AVOD option will come in the summer. The AVOD news interests me more, as it really seems like it will complicate their offering for customers. Previously, HBO Max had an easy value proposition to communicate. Well, actually they didn’t. Customers didn’t know if they had it, or if they had to pay and how. Now, customers may end up seeing a bunch of ads. So I’m hesitant to call this a good idea.
M&A Updates – Roku Acquiring Nielsen TV Advertising Biz
This is a small, but fascinating deal. Roku is acquiring Nielsen’s smallish smart advertising business. But in the acquisition, they’re also incorporating Nielsen into their TV measurement, which should make Nielsen numbers more accurate in the future. Axios has the details.
