EQUITY RESEARCH
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
Unchanged
U.S. MediaAnthony J. DiClemente, CFA
1.212.526.1341anthony.diclemente@barcap.comBCI, New YorkChris Merwin1.212.526.7778chris.merwin@barcap.comBCI, New York
 
Barclays Capital | U.S. Media
27 January 2012
 
2
 
NFL Rights Fees Skyrocket to New Highs
ESPN pays up for
Monday Night Football 
rights through 2021
In September 2011, ESPN extended its
Monday Night Football 
rights deal with the NFLthrough 2021 at a total cost of $15.2 billion. Starting in 2014, ESPN will pay the Leagueroughly $1.9 billion per season, an increase of ~70% from the $1.1 billion average annualcost under the previous agreement. Included in the deal, ESPN will have the rights to air 500new hours of NFL-branded programs—content that could help drive total day ratingsbeyond the predictable lift from the flagship broadcast on Monday night. Also, ESPN willretain authentication rights on non-linear platforms, allowing ESPN subscribers to view NFL-licensed programming through both linear and over-the-top formats—potentiallyexpanding the network’s addressable audience and allowing for incremental ad sales onstreaming video platforms. Lastly, ESPN secured an enhanced package for internationalterritories, including rights to air games in 144 counties.
1
 
Figure 1: Selected NFL Rights Deal Increases
$8.8$5.8$5.0$4.8$15.2$8.8$8.0$7.6$0$2$4$6$8$10$12$14$16ESPN Fox CBS NBCOld Deal New Deal
 
Source: Sports Business Daily.
Broadcasters follow suit, re-up with NFL at increases of ~60%
Not long after the ESPN deal, the broadcasters followed suit, each signing contractextensions through 2022 at average price increases of just below 60%. According to CBSCEO Les Moonves, “No other franchise delivers ratings the way an NFL game does,” offeringsome insight into the media companies’ appetite for what appear to be excessive priceincreases.
2
To be sure, the NFL provides broadcasters with unparalleled ratings, elevated adrevenues, and the ability to promote other programming in front of the largest possibleaudience. Also, by maintaining rights to NFL content, the broadcasters have a muchstronger case to make with the MSOs about securing higher retransmission content fees,revenue streams that are crucial in moving toward the cable network model of higher-quality subscription revenues, augmented by cyclically-driven advertising revenues.
1
 
ESPN 
, “ESPN, NFL agree to eight-year deal,” 9/8/11
2
 
Los Angeles Times
, “NFL signs TV rights deals with Fox, NBC, and CBS,” 12/15/11
 
Barclays Capital | U.S. Media
27 January 2012
 
3
 
Figure 2: NFL Rights Deals by Network
Avg. Annual % IncreaseContract Total Amount Amount per vs. PreviousNetworks Years Term ($B) Year ($B) Contract
ESPN 2014-2021 8 years $15.20 $1.90 73%Fox 2014-2022 9 years $8.80 $0.98 53%CBS 2014-2022 9 years $8.00 $0.89 61%NBC 2014-2022 9 years $7.60 $0.84 58%
 
Source: Sports Business Daily.
While there are certainly many benefits to these deals, enough that the networks agreed tolofty 53-73% increase in rights fees, there are plenty of questions about how good thesedeals really are—in particular, how they will be paid for, given a backdrop of flat-to-downvideo subscribers.
Video Subscriber Growth Has Fallen in Recent Quarters
According to our industry database, video subscribers posted a net decline of 79k in the3Q11, the second consecutive quarter of sub losses. We believe recent sub declines areevidence of a mature multichannel market and also easing consumer demand, as risingcable bills and the proliferation of online content aggregators like NFLX and Hulu may havesteered some consumers away from Pay TV. While the multichannel industry couldeventually benefit from a turnaround in the housing market—we’re not holding ourbreath—all signs point to flattish subscriber growth for the foreseeable future. Withoutmore subs to drive top line growth, we believe the MSOs instead will attempt to force priceincreases on their customers, only adding to a growing sense of discontent.
Figure 3: Multichannel Subscribers Net Adds (1Q10A-3Q11A)
Source: Company Reports, Barclays Capital estimates.
Facing a potential consumer backlash, we expect the MSOs will be in a difficult revenueenvironment going forward, and therefore will be looking to save on programming costs,rather than increase them—directly at odds with what the content owners are trying toaccomplish. While some are concerned about the emergence of non-sports tiers, adisaggregation of the bundle that would reduce the earnings power of the sports
(200)(100)01002003004001Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A12 month rolling average for multichannel subscriber net adds (000s)
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