TV Deals with ABC/ESPN, FOX “Magnify the Risk of Failure” for XFL

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The XFL has announced a pair of three-year deals with The Walt Disney Company and Fox Corp. The high-profile agreements ensure all 43 league games of the 2020 season will air on network or cable television. More than half are slated to be split between the ABC network and Fox network with the remainder set to air on ESPN or Fox Sports 1. While most tend to believe that wall-to-wall coverage increases the league’s chances of success, former CBS Sports president (and current television consultant, Pilson Communications) Neal Pilson suggested that it also “magnifies the risk of failure.”

Howie Long-Short: There’s no doubt that with more than half of the league’s games set to air on network television that the XFL will have the chance to showcase their product (i.e. fans will find it), but Pilson warns that widespread exposure puts a bullseye on the league’s back. “Television can be as damaging as it is beneficial. If there aren’t enough viewers to spread across all of these networks – which I wonder about – or if the networks fail to show viewership growth, there won’t be an excuse for the lack of interest.”

Pilson’s skepticism stems from his concern that “the league will now be under the spotlight – from a ratings standpoint – from day one” and his belief that having games on “so many competing networks will dilute viewership numbers. The assumption is that being on two or three networks will double or triple the number of people watching and that’s simply not true – unless people are going to watch three, four, five games every weekend, which seems unlikely.” That doesn’t mean he would have advised Oliver Luck & Co. otherwise. “When you have the opportunity to gain this type of exposure, you take it and accept the risks that I’ve been talking about.

Unlike the AAF’s deal with CBS, the XFL isn’t buying network time. Disney and Fox will cover the costs of production and handle game production; they’ll also retain all of the in-game ad inventory. While that should ensure NFL-like broadcast quality and save the league hundreds of thousands of dollars on a per-game basis, it also means they’ve lost 1 of 4 revenue streams and “ultimately you need to have revenue to survive.”

In addition to broadcast rights fees, pro sports leagues generate revenues through sponsorship & advertising, merchandising & licensing and ticket sales. Pilson expects the league to have “some sponsorship & advertising partners” on board for the 2020 season and believes it will collect a “limited amount of merchandising & licensing revenue” in year 1. As for ticket sales, he said, “playing football in cities like New York or Washington in February is a high-risk proposition and given that ticket prices are expected to cost significantly less than NFL seats, even if they do sell well, I don’t believe ticketing is going to drive league revenues. I have a hard time seeing the league realize any significant revenue streams in year 1.

Vince McMahon has earmarked $500 million for the XFL’s rebirth, so he can float the league for a while, but for it to succeed long-term they’ll need to build “fan loyalty and enthusiasm on the local level” and Pilson doesn’t believe that’s going to be easy. “The cities that they’re putting teams in – New York, Washington, Dallas, Seattle – are all strong NFL markets. How many fans in those locales are going to be truly committed to another professional football league?”

Fan Marino: Sports-media consultant Marc Ganis told the WSJ that the league’s only “real competition” between February and May is March Madness, but that’s patently false. The XFL season is 13 weeks long (10 regular season, 3 post-season) and there are very few “off weekends” on the sports calendar during that time. Pilson reminded me that “they’re up against some tent pole events that generate serious ratings year after year; March Madness, the Kentucky Derby, the Daytona 500, The Masters, the NFL draft, the NBA and NHL Playoffs.

There’s also the start of the MLB season and the XFL has planted teams in cities where baseball has strong tradition (think: New York, Boston, Los Angeles, St. Louis). You can say baseball doesn’t draw well on ESPN, but “look at the local ratings on [an RSN like] YES on a Sunday afternoon.”

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Fox Aligns with The Stars Group, Plans to Facilitate Sports Betting Through Fox Bet App

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Fox Sports and The Stars Group (TSG, dba BetStars in N.J.) have announced the formation of a JV (entitled Fox Bet) that will “create apps for both real-money sports wagering and free-to-play contests.” The 10-year agreement (which includes an option for an additional 15 years) positions Fox as the first legacy media company to put their name on an entity facilitating sports gambling transactions in the U.S. As part of the deal, Fox will pay $236 million for a 4.99% stake in TSG; Murdoch’s empire will have the opportunity to increase its interest in the Canadian gaming and online gambling company – up to 50% – prior to the completion of the partnership’s initial 10-year term. Fox Bet’s debut products are expected to be available “by this football season.”

Howie Long-Short: If your finger is on the pulse of the legalized sports betting industry, Wednesday’s announcement wasn’t a surprise. Eric Ramsey (LegalSportsReport.com) said “this sort of union was the natural next step in the overlap between sports media and sports gambling and it’s likely to be the first of many deals we’ll see like it.”

The entities involved have also long been on the radar of industry insiders. Alun Bowden (senior consultant, Eilers & Krejcek Gaming) wrote “a major media deal was trailed heavily by TSG. [The possibility] was mentioned in the last couple of [quarterly earnings calls and] there were only 3 companies it could have been.” JohnWallStreet pegged Fox to be one of them back in late January (Early Entrants Vol. II), when it reported that while talks were preliminary it appeared there would be a future where New Fox married live rights with sports betting.

TSG is the most valuable publicly traded online gambling company in the world (worth +/- $5.5 billion, shares spiked +22.5% on the news), but they’ve struggled to gain traction with sports betting here in the States (their poker and casino products have been relatively successful). A limited footprint (they’re currently only licensed to operate in NJ, though they do have access to the 13 states where Eldorado Resorts maintains licensure) and the inability to make their product “American friendly” have prevented the company from take a stronghold in this market. While Fox can’t solve either of those issues, they’ll certainly help with brand recognition (Fan has more on this below); critical when going up against household names like DraftKings and FanDuel.

The Stars Group has “a proven media strategy with Sky Sports in the U.K.”, so that’s the model they’ll be looking to replicate here with Fox Bet (in terms of pricing, marketing & advertising), but there are significant differences in the two markets (aside from consumer habits and gaming regulations); most notably “Sky Sports was the exclusive broadcast provider of the Premier League and Fox doesn’t have that kind of captive audience for any American sport.” That doesn’t mean Fox Bet is bound to fail, but it will have to work harder to capture the attention and earn the loyalty of the American sports fan.

One component of Sky Bet that should resonate with the American audience is their free-to-play Super 6 (pick 6 EPL games) contest. Ramsey said, “it’s not difficult to imagine a free-to-play NFL pick’em contest with a $250,000 or $500,000 prize pool. That type of product would be very appealing to the casual sports fan and a big asset for them as an operator.” The Fox Bet plan is simple – build an extensive database of prospective customers nationwide so that as states pass sports betting legislation, they can transition those playing free games over to the paid app.

Fan Marino: While Fox will be the first legacy media company to act as an operator, lottery suppliers, social gaming companies and digital media players have been flocking to the space in numbers. Fox has a leg up on all of them with a brand awareness amongst U.S. sports fans that Ramsey says exceeds “even the largest of gaming companies”; and perhaps even more importantly, it has “the distribution channels to get Fox Bet products in front of potential bettors.” As other outlets are forced to “purchase ad space if they want to be on television and radio, Fox has those native channels available to it.”

If you take the premise that Fox is positioned to succeed because they own the requisite distribution channels to reach the target consumer, it’s logical to reason that the 22 RSNs they sold to Disney would have been valuable assets to Fox Bet; “particularly those networks in the Carolinas, Tennessee and Indiana, states on the cusp of legalizing [or offering] sports betting.” Sure, they’ll be able to leverage their national platforms, but as Ramsey explained, RSNs “cater to a hardcore, dedicated, localized group of fans – the ones most likely to wager on games” – a valuable demographic to a sports betting company.

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Early Entrants: Vol. VI – NFL Leaning In To Amazon’s Pitch

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Early Entrantsa bi-weekly series of sports business “rumblings” before the news breaks.

NFL Leaning In To Amazon’s Pitch

The NFL appears ready to split its out of market broadcast rights package between a satellite provider (DirecTV) and an online streaming service. Commissioner Roger Goodell recently told Bloomberg that the league plans to deliver its NFL Sunday Ticket “on several different platforms.” While it’s reasonable to assume DirectTV Now would be the front-runner to acquire the streaming rights, multiple sources tell JohnWallStreet that the NFL “is leaning in to Amazon’s pitch.” Prime Video can provide the league with the widest reach (relative to DirecTV Now, DAZN) and the NFL sees value in the e-commerce giant’s ability to facilitate merchandise and ticket sales.

Turner Sports Can’t Get Enough of the AAF

Back on March 5th, Turner Sports announced that TNT would exclusively televise 2 additional regular season Alliance of American Football games – they’d initially agreed to place just a single regular season game and one playoff game on the cable network (B/R Live carries 1 game/week). But the AT&T/WarnerMedia subsidiary was pleased with viewership for its March 9th contest – it was the 2nd most watched show on the network that day – and sources tell JohnWallStreet that the company is looking to add additional broadcasts as the league’s season winds down (3 regular season, 2 post-season games remain). It’s worth mentioning that CBS has also decided to move 2 games from the CBS Sports Network to the CBS broadcast network; a regular season contest on April 6th and one of the Conference Championship games on April 27th.

Digital-Only Service Set to Buy Linear Network

There are rumors floating that DAZN is “set to buy” Fox Sports (Brazil), an acquisition that would accelerate the company’s rise in the country given the “premium rights” that would come along with it. The purchase would certainly run contrary to the company’s digital-only strategy, but in a market where TV is the preferred viewing platform and digital consumption remains an afterthought (particularly relative to the U.S. or Japan) it makes sense.

Vivid Seats Sniffing Around StubHub Acquisition

We mentioned in Early Entrants Vol. V that eBay was exploring the sale or spinoff of StubHub. Questions surrounding inclusion of the company’s foreign offices (via Ticketbis) had insiders doubting within the last week whether the company would move forward with the split, but we’re hearing separation of the 2 companies is now considered “almost a near certainty”; the “eBay elite” have tired of the fluctuations caused by StubHub in their quarterly earnings reports. Vivid Seats is said to be sniffing around a potential acquisition.

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Early Entrants Vol. 2 – Formula One For Sale, Again

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Formula One For Sale, Again

Less than 3 years after Liberty Media acquired Formula One, the company is reportedly exploring scenarios that would decrease their stake in the international racing circuit; everything from an exit to the introduction of new equity partners in on the table. Liberty has failed to add races (see: Miami) and/or major sponsors, attract younger fans (fact: just 14% are < 25 years old) or drive digital revenues (.06% of total revenue in ‘18); issues that collectively indicate the C-suite is in over their heads and taking direction from the wrong places. Keep an eye on former owner Bernie Ecclestone, the British business magnate has the capital, know-how and can likely reclaim the asset back for a fraction of the $8 billion he sold it for. 

DAZN Looking to Unload Perform Content

Sources indicate that UK-based DAZN Group, rich in fight sports broadcasts rights (in U.S.), is piling up the losses on its P&L and is considering selling off the company’s B2B play – Perform Content (think: data, news, game prod.) – to fund additional rights acquisitions. The initial plan was to use Perform Content’s cash flow to cross-finance the company’s D2C sports-centric streaming service, but skyrocketing rights fees for live sports content (see: $1 billion commitment for Matchroom Boxing, $350 million for Canelo Alvarez, $300 million for MLB) has created the need for some short-term financing; look for the company to add some long-tail content in the near-term to complement the cyclical nature of its live MMA/boxing events.

Ticketmaster on the Market

A decade after acquiring the ticketing giant, there are rumors that Live Nation could be looking to shed Ticketmaster at a profit. Ticketmaster wants to be in the marketplace business, but a decision by eBay to spinoff Stubhub (see: activist investors urging split) would force the company to become a market maker. By cutting ties with Ticketmaster, Live Nation – a content rights holder – would be able to take advantage of a more robust ticketing engine (note: TM technology is dated) and open distribution (see: sell as many as many tickets as possible); Ticketmaster wants all sales to go through Ticketmaster.

Fox Sports’ Home for Gambling Content

5 years after the launch of FS2, Fox Sports may finally have a programming solution (besides NASCAR and UFC repeats) for the supplemental cable sports channel; gambling content. The talk is certainly preliminary, but it’s not difficult to imagine a future where New Fox looks to marry live rights with sports betting; the company has already introduced its first daily gambling show – “Lock It In” with Rachel Bonnetta, Cousin Sal and Clay Travis (on FS1). Could ESPN (with ESPN2) be far behind?

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DOJ Changes Tune on Sports Broadcasting Monopoly

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Josh Kosman and Richard Morgan (NY Post) are reporting that the U.S. Justice Department has altered its position on The Walt Disney Company’s (DIS) acquisition of the 22 Fox regional sports networks and are said to be considering a scenario that would allow DIS to spin-off the cable networks; the company would cede operational control of the RSNs. The DOJ had initially mandated that Disney sell-off the sports networks within 90 days of the Fox entertainment deal closing to prevent a sports broadcasting monopoly, with subsidiary ESPN already owning the rights to more sports content than any other broadcaster. The news comes just days after New Fox – the perceived front-runner to take down the lot of cable assets – confirmed in an SEC filing that it would not be bidding on any of the networks. DIS reportedly remains committed to a sale before the end of February.

Howie Long-Short: The DOJ initially felt that if DIS were to add the broadcast rights to 44 pro sports teams to ESPN’s existing portfolio, that the company would be positioned to squeeze carriers in carriage negotiations; further driving up the cost of the cable bundle. While I don’t want to speculate as to why the DOJ is reportedly willing to reverse direction, there is a belief in industry circles that without DIS (or Fox) backing the RSNs (and the leverage that they hold), cable companies could/would opt to leave the costly networks off their basic tiers.

The Justice Department’s change of heart could end up saving Disney billions. New Fox’s decision to pass on what they perceive to be slow growth assets, leaves Sinclair Broadcast Group (with P.E. backing) as the last viable legacy media company capable of buying all 22 RSNs. The NY Post article said Fox’s decision to drop out of the bidding lowered the value of the sports networks to between “$9 billion and $11 billion” (or 5-6x EBITDA). If that’s true and DIS’ theoretical RSN pure play were to trade at the same 8.7x multiple ($16 billion) that MSGN does, a spin-off could net DIS $5 billion to $7 billion more (+60%) than an auction would.

That won’t be the case though. As Dan Cohen, Octagon SVP, Global Media Rights Consulting Division told me, “it’s quite different to compare a single RSN in the U.S.’ largest media market to a set of RSNs. There are factors beyond the viewership differences such as the costs, sets of rights, programming opportunities, etc. Remember, MSG owns the Knicks and Rangers. That dynamic creates stability and a guaranteed cash flow. It’s not the same as 22 RSNs whose rights are varied, where competition exists and higher costs play factors.”  

Disney paid +/-$20 billion for the RSNs as part of their $71.3 billion acquisition of Fox entertainment assets, so spinning off the networks would seem like a more attractive option than taking a +/- $10 billion loss, but if the rest of the legacy media companies are suggesting that RSNs are “slow growth” businesses – “at best” – I wondered why DIS would have interest in keeping them. Dan explained that moving forward the RSN business will be “slower growth, not slow. For the past decade+ the RSN business has been booming, a meteoric rise of the like cannot continue at that speed without slowing a bit for some time. However, growth on a RSN level will still move forward and the smart ones will develop business propositions around legalized in game betting and new interactive viewer technologies, and most certainly will need to further exploit the local digital rights as they play out.” For those who read “Early Entrants” (Vol. 1) on Sunday morning, you know that Disney is exploring entrance into the sports betting space.

Fan Marino: New Fox supposedly has a renewed focus on sports, but in the same week the company declared it was out of the regional sports networks business, it declined an option to carry the Big-12 championship game in ’19, ’21 and ’23. SBJ reported that the decision had to do with scheduling (see: they didn’t want it up against the SEC and ACC championship games), but I’m hearing that Murdoch’s company is preparing to go “all-in” on the Big 10 conference. ESPN, which aired the game in ’18 and has the rights in ’20, ’22 and ’24, is likely to pick up the 3 “odd-year” games.

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New Fox Out of Bidding for RSNs, Sinclair the Front-Runner

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New Fox has confirmed in an SEC filing that it will not be bidding on any of the 22 regional sports networks that were sold to Disney (see: $71.3 billion sale of entertainment assets), viewing the RSNs as slow-growth (or no-growth) assets. The perception that Disney has “overexposed” the RSNs has also tempered Fox’s interest. With countless teams and distributors privy to their detailed financials, there’s now a belief that future broadcast rights will become costlier and that carriage rate increases will be more difficult to come by (both of which would further slow growth). Sinclair Broadcast Group (with the financial assistance of a P.E. firm) is now widely considered to be the front-runner (and the last viable option) to take down the entire lot (vs. piecemeal) of cable networks – estimated to be worth between $15 billion and $20 billion. Final bids are due before the end of January.

Howie Long-Short: Remember, the Justice Department is requiring that Disney (DIS) sell-off the RSNs to prevent the company from maintaining a sports broadcasting monopoly. With ESPN under the company umbrella, DIS already owns the rights to more sports content than any other broadcaster.

Many assumed that Fox would buy back the RSNs because of their renewed focus on sports programming, but Chris Lencheski (an experienced global sports, media, and private equity executive; and an adjunct professor at Columbia University) first told you in our November 19th newsletter that not only was Murdoch’s company unlikely to re-acquire the regional sports networks, but Sinclair Broadcast Group (SBGI) was “uniquely positioned to take them down because of their owned and operated channels”; and that “they (SBGI) could perform well, have invested in and have wanted to further acquire sports rights but on a truly scalable format.”  You heard it here first, folks.

Sinclair’s ownership stake in Stadium – a 24/7 multi-platform sports network with the broadcast rights to several Group of 5 conferences – makes the RSNs more attractive to SBGI than they might be to other prospective bidders. As Chris told me, Stadium already has a name amongst “early adopters” and “cord nevers”, the technology and the existing agreements with OTT providers like Sling and Pluto; which makes the addition of the broadcast rights to the 44 pro sports teams “plug and play”.

Amazon is said to be participating in discussions surrounding the YES Network (estimated value: $5 billion – $6 billion), but it’s unlikely they (or any other tech giant) will pursue the entire lot; RSN coverage is restricted by the leagues to a defined local footprint (see: YES Network only available within metro NYC) which limits their value to a global enterprise. While 40+ companies were said to be involved in the first round of bidding, without the tech companies (+ Comcast, Charter and now Fox) DIS is unlikely to pull in offers anywhere near the $25 billion Guggenheim Securities originally pegged the RSNs at.

Fan Marino: The Sinclair sports portfolio includes the Tennis Channel, the “fastest growing” network in television; now in 61 million homes (+ 41% over last 2 years) after gaining 5 million subscribers (more than any other Nielsen-measured cable network, just 1/13 to add subscribers) in December ’18. If you’re a fan of the sport, you need the channel; it aired more live coverage than any single-sport network last year (2,300+ hours of matches).

ICYMI: It was recently revealed that the Cubs would be launching their own sports network come 2020 in partnership with SBGI. That’s a wise decision. Sinclair can offer widespread distribution and brings much-needed experience in both carriage negotiations and game production to the venture; issues that have plagued other start-up sports networks (see: Pac-12 Network).

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“new Fox” Extends MLB Deal, No Longer Favorite to Re-Acquire RSNs

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MLB has extended its media rights partnership with Fox Sports through the ’28 season, signing a new 7-year deal worth +39% more ($728.6 million/year) than they’re currently receiving ($525 million/year). The new pact ensures “new Fox” will continue to broadcast the World Series, the MLB All-Star Game, 2 Playoff Series (1 LDS, 1 LCS), Saturday Game(s) of the Week and Spanish-language broadcasts (on Fox Deportes) for the next decade; Rupert Murdoch’s company also picked up the rights to produce more games (think: for possible primetime, mid-week broadcast on Fox) and to air games on the social live streaming platform Caffeine. The new $5.1 billion new pact will take effect in ’22, following completion of the current 8-year agreement.

Howie Long-Short: Opting to extend the existing deal with 3 years remaining was logical on both sides. MLB got a substantial increase on the packages’ valuation, while “new Fox” retains cornerstone programming for its revamped broadcast strategy (sports/news focused).

Back on November 1st, it appeared (and we wrote) that “new Fox” was the “front-runner” to buy back the RSNs sold in their $71.3 billion deal with Disney, but that no longer appears to be the case. Comcast, another logical destination, has also said it would not be pursuing the highly-rated cable networks; but that doesn’t mean there’s a lack of interest, as of Nov. 8th more than 40 bids had been submitted.

Chris Lencheski is an experienced global sports, media, and private equity executive with c-suite stops at Comcast-Spectacor, TPG Specialty Lending, IRG Sports and Entertainment, SKI & Company and currently an adjunct professor at Columbia University. I asked Chris, name a couple of under the radar companies that would make sense as potential landing spots?

Chris: I understand that Liberty (Media) is looking at it and Guggenheim is lurking in the background, but Sinclair is uniquely positioned because of their owned and operated channels; (in fact the largest television station operator in the US by number of stations) – they could perform well, have invested in and have wanted to further acquire sports rights but on a truly scalable format – this one such opportunity.

Another company unreported in all of this is beIN Media Group, but their acquisition of the RSNs would enable the company to do something they haven’t been able to do date (i.e. move up on the dial) even though they’ve spent an enormous sum of money over the last several years. They have access to the capital needed to buy the lot and they have access to programming capital, plus some very smart aggressive executives that have the grit for a deal like this.

As a prospective buyer, what would give you hesitation about buying the lot of Fox RSNs?

Chris: Companies with less broadcast centric strategies (think: Amazon, Facebook, even a outlier like Weibo) are pushing down the value of RSNs, but the bigger concern depends on where you think regionalization is going in a macro on-demand world. Most of the viewing public can capture just about every single item in sports in either real-time or near real-time, so the RSN specific rights to develop the Detroit market are important, but it’s more important, almost exclusively, to just that market; and the re-licensing rights of the Detroit Tigers to a 3-hour baseball game are less important than a live cutaway or access when something happens (see: DAZN’s new deal with MLB).

Fox’s most valuable RSN, YES Network (+/- $4 billion), won’t be sold as part of the lot; it’s a “foregone conclusion” the Yankees will exercise their right to re-purchase the remaining 80% of the network. I asked Chris, would any other teams look to acquire/re-acquire their own broadcast rights?

Chris: “If the Yankees re-purchase theirs, I’m certain Ilitch (Detroit Tigers) may take a serious run at purchasing their market. It would also make sense for the Southern California teams (think: Dodgers, Angels) and I would suggest a Tampa Bay Rays organization would be better off selling thru their Rays rights and creating a network for everything Tampa Bay Regional sports (than selling only their local broadcast rights).”

Fan Marino: The reason Fox sought the rights to broadcast games on Caffeine, a platform best known for the its gaming, entertainment and creative arts (think: Live Nation music concerts) content, is because they’re investors. Back in September, “new Fox” made a $100 million investment into the company and the newly formed co-owned JV Caffeine Studios; a content studio that will “create exclusive esports, video game, sports and live entertainment” programming for Caffeine. I asked Chris, why would a company focused on broadcasting live sports (and news) on linear television invest in a social live streaming platform?

Chris: That’s (social live streaming is) going to become the new normal as consumer’s age out of watching sports in certain formats and even more potential consumers age into always having a secondary screen or multitasking while you’re watching. You can call it gamification, but fundamentally a platform like Caffeine puts pressure on all the partners to expand streaming with insights across fantasy and betting (see: games blacked out) and the total value of viewership (think: stats for fantasy, betting, plus a future of snapchat/amazon style “lens” merchandising sales).

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Next Generation Record Label to Provide Soundtrack to NBA’s Top Plays

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UnitedMasters and the National Basketball Association have announced a deal that will give the league authorization to use the music published by UnitedMasters artists in highlight videos across all “digital properties and (its) social community of 1.5 billion”; the songs may also be used within in-arena highlights packages. The NBA’s partnership with the music distribution service will provide fans with “a new way to discover music”, as posts on social media will document the artist’s name and song title and provide a link back to the song and artist. UnitedMasters was founded by former Interscope EVP Steve Stoute, who envisioned the platform serving as the “next iteration of what a record label should be”; one that enables artists to connect more directly with their fans while maintaining ownership of their music.

Howie Long-Short: UnitedMasters, which offers up and coming artists a platform for distribution, wants their music placed on a variety of platforms (think: video games, influencer videos) that together will meet or exceed terrestrial radio’s reach; and this deal furthers that mission (even if the NBA isn’t paying for spins). The company’s standard business model entitles artists keep 90% of the revenue generated in royalties, while the company retains 10% as a distribution fee.

UnitedMasters’ up-and-coming independent artists are big winners in this deal (again, even if they’re not being paid each time their song is played). The league’s social channels offer “a global digital stage” (see: NBA highlights receive 19 billion impressions/year) that can be used to build a fan base; and once they do, they can begin to establish lucrative brand partnerships. They’ll also be able to sell both concert tickets and merchandise directly to their new fans.

As for the league, they’ll save on major label licensing rights. It would be reasonable to assume they’re also entitled to a portion of any sales originating through their channels, though no financial details were released.

There are 2 ways to play UnitedMasters; Alphabet (GOOGL) led the company’s $70 million Series A round back in November ’17 and 20th Century Fox (FOXA) invested alongside them.

Fan Marino: While we’re discussing NBA news, Golden State introduced a new monthly ticket offering that will provide fans with entry to all home games (and the right to team giveaways) for just $100. There’s just one catch, the ticket does not actually come with a view of the court. The Warriors “In the Building Pass” simply gives the holder the right to convene in one of the arena’s bars/restaurants, overpay for a few beers and catch the game on television; which is delayed relative to the crowd cheering/booing. Howie seems to think everyone won in the NBA’s deal with UnitedMasters, but there are going to be clear losers with this arrangement and they’re going to be Warriors fans.

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“New Fox” Front-Runner for “Old Fox” Regional Sports Networks

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Earlier this month, The Walt Disney Company (DIS) sent out official bid books to potential buyers for the 22 regional sports networks they’ll acquire (and then sell-off) as part of the $71.3 billion deal for 21st Century Fox film and TV assets (to close H1 ’19). “New Fox”, focused on live sports and news programming, is believed to be the “front-runner” for the lot of “Old Fox” RSNs. A deal with Rupert Murdoch would allow Disney to unload the RSNs in a single transaction, as opposed to selling them off “piecemeal” (more timely, difficult), and would give “New Fox” the opportunity to reclaim the cable assets at a discount worth billions. Initial bids are due one week from today (Nov. 8).

Howie Long-Short: The Justice Department is requiring that DIS sell-off the RSNs to prevent the company from having too much control within the sports broadcasting space. With ESPN under its umbrella, DIS already owns the rights to more sports content than any other broadcaster.

Disney paid a premium to acquire the package of RSNs after a bidding war with Comcast drove the price tag up +/- $20 billion, but as stand-alone properties it appears the cable sports channels are worth less than the premium DIS paid. Why? “There is doubt about the long-term future of regional sports networks in their current form.” High carriage rates and declining ratings could eventually lead distributors to drop the channels. (see: DirectTV/SportsNetLA, Home of the Dodgers).

I asked Octagon SVP Global Media Rights Consulting, Dan Cohen if he thought RSNs were a risky acquisition given the current sports media landscape?

Dan: Yes, the traditional media business is under intense pressure and consumption habits have shifted and will continue to shift. However, live sports rights are still of high demand. In our current world of unbundling, I’m not sure you need as much linear distribution as once required. I can envision a world in which a RSN goes direct to consumer, technology now affords that option. The same goes for carving up multiple Virtual Multichannel Video Programming Distributor distribution deals; YouTube TV has already shown this with MLS and there’s more to come.  

Specific to RSNs, their benefit is their locality. Sports are incredibly tribal and community driven and such, local premium sports content will remain a highly valuable asset. The bigger challenge I’d pose to the new RSNs owner(s) is how will they push the envelope to connect with the next generation of consumers? What contractual obligations will they negotiate with their local teams (think: access and content exclusivity)?  What technologies will they invest in to increase interactivity with the content? How will they empower the consumer to customize their viewing options? How much will they invest to meet the demand of a consumer who now expects to be able to watch their content whenever, wherever, and across many platforms? There’s a lot of questions to be answered. 

Guggenheim valued the 22 RSNs (which collectively control broadcast rights to 44 MLB, NBA & NHL teams) at $25 billion, but expect the lot to draw offers between $16-$20 billion. Fox (FOXA) would offer DIS the cleanest transaction, but it’s been reported that P.E. firms (see: Apollo Global Management, Blackstone Group, KKR, Providence Equity Partners and Silver Lake Partners), tech companies (see: Google, Amazon, Facebook) and broadcasters (see: Sinclair Broadcast Group) are also all kicking tires on the cable networks.

Howie: Why is Guggenheim’s estimate so much higher than the projected winning bid? Who ultimately takes down the lot?

Dan: Initially, when news first broke and I expected Comcast to bid aggressively, I thought the valuation was between $23-$25 billion; with the potential to reach $28 billion if an aggressive bidding war broke out. However, with Comcast seemingly not bidding on the RSNs, I would lower my expectations and estimate that they’ll be valued between $18–$22 billion with a high watermark of $25 billion.

As for who takes the lot down, Fox is certainly the lead horse. That said, there’s still a few more laps to run and I expect Charter, Liberty and even Sinclair with PE backing to make a pitch. I also wouldn’t discount a surprise challenger bid from lesser widely publicized media co.

While it’s been surmised for some time, that the Yankees (which control 20%) would buy back the YES Network (they have first right to do so), prospective bidders have been asked to include YES in their offers; that’s because DIS is reportedly seeking $5-6 billion for YES, a significant premium to its $4 billion valuation. Of course, YES is the most valuable RSN among the group. It’s been estimated that collectively, the RSNs generate $2 billion/year in EBITDA; YES (2nd most expensive cable channel, ESPN 1st) is responsible for bringing in +/- 25% of that total.

Fan Marino: Sure, subscriptions (to RSNs) and ratings (to the games on the RSNs) are down, but RSNs continue to warrant high carriage prices and relative to the remainder of the networks in your cable package, they continue to perform well ratings wise. In fact, the 29 RSNs that own MLB rights saw ratings rise +2% YoY during the ’18 season, league games were the most watched programming in primetime on cable television in 28 of 29 markets (Miami is the exception) and 12 of the RSNs were tops in their market in primetime, amongst all programmers.

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Comcast Takes Control Sky PLC, to Challenge Netflix, Amazon Overseas

SKY

Comcast emerged triumphant in its effort to take over Sky PLC (Europe’s largest pay TV provider) after outbidding Twenty-First Century Fox (on behalf of Disney), by +/- $3.6 billion, in a rare settlement auction; Comcast’s bid valued the company at +/- $39 billion. Disney, which will take over most of Fox’s film and TV assets, subsequently announced it would sell Comcast Fox’s existing 39% stake in Sky at the auction-winning bid price of $22.54/share. The addition of Sky expands Comcast’s distribution outside of the U.S. (to UK, Ireland, Germany Austria, Italy, Spain and Switzerland) and increases their global footprint to +/- 53 million customers; existing infrastructure that puts the company in position to effectively compete with Netflix (+/- 29 million subscribers across Europe in 2017) and Amazon outside of North America.

Howie Long-Short: Selling its 39% stake in Sky PLC (SKYAY) at $22.54/share ($15.6 billion) must be considered a win for DIS considering it valued control in the company at just $20.44/share during the blind auction and Comcast didn’t need their stake (i.e. little leverage) to gain control over the British pay-TV group.

The +/- $15.6 billion price tag greatly reduces the financial leverage DIS needs to close the $71.3 billion Fox (FOXA) acquisition and when you consider the revenue that’s expected to be generated from the sale of FOXA’s 22 RSNs (valued at +/- $15 billion-22 billion), it’s feasible net acquisition costs could drop all the way down to +/- $35 billion. Significantly reducing the financial debt load is important to Disney with costly broadcast rights renewals on the horizon (see: NFL 2021, MLB 2021, NBA 2025) and the company undergoing the capital-intensive transition from legacy wholesale model to a direct-to-consumer business model (Disneyflix). Disney shareholders seem to be on board with the decision, shares are up +/- 6% from the morning of the tender announcement (9.26); they’ll open at $116.94 on Monday 10.1.

Fan Marino: While some might believe that Comcast’s acquisition of Sky (EPL’s most valued media partner in U.K.) would ensure NBC remains the Premier League’s U.S. broadcast partner beyond the ’21-’22 season, historically, the EPL has ignored affiliation between rights holders and taken the highest offer; back in ’16, Sky in Germany lost EPL rights to then-newcomer DAZN (unproven, yet deep pocketed), despite have the rights of 126/128 games in the U.K.

Across the pond, U.K. soccer fans must be wondering if there will be any changes coming to Sky’s broadcast coverage in the wake of the ownership change. English futbol fans aren’t going to want NBC’s “Americanized” version, so Comcast would be wise to let Sky run their EPL coverage autonomously; focusing on the distribution of non-sports entertainment assets instead (see: Universal Pictures).

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