27 January 2012
U.S. MEDIAWho Bears the Burden of Higher SportsRights Costs?
Recent headlines about increasing NFL rights fees have raised questions about whichparties in the cable ecosystem—programmers, distributors, or consumers—will bearthe costs. With unparalleled ratings, we believe NFL programming is by far the mostvaluable on air, maintaining “essential” status for many cable subscribers. As a result,we believe sports programmers have the most leverage in discussions with the MultipleSystems Operators (MSOs) about securing higher subscription fees to offset their risingcontent costs, although we expect temporary margin compression at ESPN in FY 2015.If the MSOs agree to higher affiliate fees for the sports programmers, we believe thenon-sports programmers could be at a disadvantage in competing for affiliate feeincreases in what is increasingly a zero-sum game. Three key points:
NFL rights fees reach new highs
– In the last several months, ESPN and broadcastnetworks CBS, Fox, and NBC all re-signed their respective rights deals with the NFL,locking in significant, total price hikes of ~50-70% through 2022 (and 2021 for ESPN).We believe the value of NFL content has increased substantially in recent years, as amore engaged fan base, captivated by fantasy football interests, has helped NFLprogramming consistently achieve the highest ratings on television. Given theunmatched value of the NFL, we believe the networks had little choice but to renewtheir deals, since outsized NFL ratings are crucial for promoting other networkprogramming and justifying higher retrans/affiliate fees from the MSOs.
MSOs and consumers will likely shoulder higher sports rights costs
– To offset therights cost increases, we believe the sports programmers will actively seek subscriptionand retransmission consent fee price hikes at least commensurate with their added costburden. Since NFL content is considered “essential” viewing for many subscribers, webelieve the MSOs will ultimately acquiesce to the demands of the programmers and willattempt to pass on the costs to the consumer. But if a subsequent consumer backlashleads to subscriber declines, we believe the MSOs may end up absorbing some of theprogramming cost increases themselves.
Non-sports programmers may be struggle to secure desired affiliate rates
– Giventhe more difficult revenue environment for the MSO’s—flattish subscriber growth andconsumer discontent over rising cable bills—we believe non-sports programmers(DISCA, SNI, and VIAB) may have a more difficult time securing affiliate fee increases if sports programmers are already pressuring the MSOs for substantial rate hikes. Shoulda consumer backlash over video subscription costs gains traction, we believe that non-sports programmers would be the group most adversely affected, a risk we believe isnot fully appreciated by the market, and certainly not priced into the stocks.
Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE11.
INDUSTRY UPDATEU.S. Media2-NEUTRAL
U.S. MediaAnthony J. DiClemente, CFA
email@example.comBCI, New YorkChris Merwin1.firstname.lastname@example.orgBCI, New York