Skyrocketing Media Rights Fees May Force Consolidation

Skyrocketing Media Rights Fees May Force Consolidation

The ongoing customer attrition occurring within the pay TV ecosystem has yet to negatively influence national sports media rights negotiations. The NBA (and WNBA), NASCAR, and the College Football Playoff all received new deals with large average annual value increases in recent months.

Sports are “what people want to see in the pay TV bundle,” media consultant Patrick Crakes said. So, the established networks “haven’t had any choice but to go along with these leagues’ demands.”

While tier one media partners have paid up to date (save WBD with the NBA), the expectation is growing rights fee obligations will eventually break a model already under pressure and force at least some to consolidate. 

“There is going to be a lot of M&A,” Crakes said. “If federal government regulatory authorities become more accepting to it, you could see there being only two or three established media companies when all is said and done.”

If that ends up being the case, there will likely be fewer bidders competing for rights during the ‘next’ negotiation cycle. It’s logical to wonder how that might impact future league deals—and by proxy their teams’ revenue models and valuations.

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The are several reasons to believe that a disruptive consolidation phase may be on the horizon. It’s not just the skyrocketing rights fees in the recently inked deals.

“Take a look at Paramount and Warner Bros,” Crakes said. “We’re in a place now where leadership is trying to get creative with how they structure these companies in an effort to create something stronger than what they can currently offer.”

The ongoing migration of tier one sports content to station groups could end up being another catalyst (think: NASCAR Xfinity Series/Nexstar).

The few big owners of broadcast stations, ‘station groups’ like Gray, Nexstar, and Scripps, “were originally designed to create large quasi-national footprints that would maximize retransmission fees in negotiations with pay TV distributors and reverse compensation percentages with broadcast network partners,” Crakes explained. 

The premise was that these groups, with hundreds of stations across the country, would have more leverage than a single network in a third or fourth tier market. And they have.

But if/when retransmission fees go sideways or taper off, these large station groups are likely to end up struggling to pay for the sports programming. 

“What’s going on with the RSNs and their restructuring could be a prelude to the station groups’ future because they too are heavily connected to the pay TV bundle,” Crakes said.

That may help explain why Sinclair Broadcast Group is working to sell roughly 1/3 of its stations alongside the Tennis Channel.

Station groups aside, sports rights still pay the bills for the established networks. But many will likely struggle to cover the cost of them in the years ahead as deal values climb and the pay TV universe continues to dwindle.

Fox and CBS are among the companies seemingly ripe for consolidation–even as both actively continue to pursue the most valuable sports programming.

The former is “strongly tied to the pay TV bundle,” Crakes said. “So, while its revenues continue to climb today thanks to contractual increases in sub fees, eventually there will be no escaping the economic impact of a smaller Pay TV universe. At some point, the internal conversation probably shifts from how to maximize the company’s current assets in a declining environment to either acquiring new assets to strengthen its portfolio or selling assets to strengthen another company’s.”

Timing will be determined by when their ability to pay for content is materially impaired by declining Pay TV revenues.

Logic suggests the company will pursue one avenue or the other before its income falls beneath that threshold.

Paramount has the same exposure to Pay TV’s secular decline as Fox via CBS and CBSN. However, it has a streaming platform in Paramount+ that gives it direct-to-consumer capabilities. 

Unfortunately, despite its 71mm subscribers, Paramount+ has all the same issues other streamers face; including the high cost of content needed to acquire and retain subscribers.

In the end, a merger with another media company could help it balance out those problems by giving both entities a longer horizon to milk declining, but still profitable, Pay TV and broadcast assets while investing in and working towards a high margin streaming model. 

Of course, it won’t be easy to settle on any established media company’s value before the Pay TV bundle stabilizes.

So, who is most likely to serve as a life raft for the established media properties? 

One would assume the tech giants might value their sports portfolios. But Netflix is not going to be able to absorb everybody–at least not at its current share price (~$640).

“They already have a lot of debt and would really have to load up on it further, or find a partner, to be an aggressive acquirer,” Crakes said. “I don’t know that they could make a $20-$30bn purchase without help.”

$25bn is a rough estimate of what it would cost to buy Fox.

And Apple may not be a potential buyer either. The company recently stated it intends to reduce spending on original Apple TV+ programming.

The platform receives just .2% of U.S. TV viewership.

Amazon and Alphabet (YouTube TV) could be possibilities. 

“But any and all of these tech companies could say look, we're going to have plenty of money in the future because we generate revenues off businesses that don't have anything to do with media rights, and just wait for the whole system to blow up and then scoop up rights of all types at a discount to future values,” Crakes said.

While not likely, it’s not out of the realm of possibility, either.

As for the established companies, it’s hard to say which is best positioned to survive.

“At the current moment, they all look challenged on a stand-alone basis,” Crakes said. “It's going to be a matter of aligning, partnering and merging so that collectively they have more negotiating power with content owners and services providers.”

While the remaining media entity/entities will still be navigating a declining marketplace, there will be fewer of them to compete with. 

“The rights fee marketplace is still growing because more partners are jumping in,” Crakes said. “If you didn’t have new partners in some of these deals, there are questions about where the numbers would be” (see: NBA negotiations).

That doesn’t mean every league is in for a haircut in the years ahead. Sports rights are going to remain the most valuable content on television and the most valuable properties should continue to be paid handsomely.

“But it could put lids on some renewals,” Crakes said. “If there’s nothing driving a reason for those remaining broadcasters to pay more, like more money to be made in whatever distribution mix we currently have, then there is no incentive for a smaller number of players to outbid one another. Those remaining can just sit on their hands and offer nominal bumps for most properties.”

It’s going to be a few years before we find out for certain. UFC aside (which is a different kind of asset because of its PPV component), few leagues will hit the market again before MLB does later this decade. 

But “no one should expect the success of the past to go on forever,” Crakes said. While “you don’t know when the fallout will occur, there are a lot of signs it’s coming.”

And when it does, some properties will have to begin looking beyond media rights for future growth.

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