Has the Sports Bubble Burst?

Leo Kirch has always relished secrecy. His eponymous media empire — now crumbling under the weight of up to $10 billion in debt and other financial obligations — is so complicated that even seasoned observers are unsure of what is pledged to whom. His network of political and banking connections seems virtually impenetrable. He rarely gives interviews. He will not even say publicly which football team he supports. It’s an interesting stance for a man who built his company in part on the loyalty of sports fans.

In an attempt to draw viewers to Premiere, his pay-TV service, Kirch has in the past two years paid more than $2.5 billion for a slice of Formula One racing and the rights to screen live German football matches from Berlin to Munich. But the audiences have failed to appear — big time. The service is currently losing up to $2 million a day. Now, as his empire founders, Kirch has put his Formula One stake up for sale, with pundits predicting he will be lucky to get half his original outlay. Although the rights for soccer World Cups 2002 and 2006 are bringing in some income, rumors continue to swirl that Premiere will soon seek to renegotiate its $330 million annual deal with Germany’s domestic league — double the amount of the previous contract. “We have to bring our agreements into line with reality,” Georg Kofler, the head of KirchPayTV, told the German newspaper Süddeutsche Zeitung. That reality: 2.4 million subscribers for the station, less than half the 6 million once projected. Says Kofler: “We can’t continue to pay for subscribers who aren’t there.”

Though the prices for sports broadcasting rights have soared, audiences and advertising dollars have failed to keep pace. Kirch is not the only one to have been caught in the squeeze play. Last year, the Swiss-based sports-rights agency ISL collapsed after overpaying for the commercial rights — mainly for broadcasting and sponsorship — to a wide range of sports, including $1.2 billion over 10 years for men’s professional tennis. Last month Rupert Murdoch’s News Corp. wrote off $909 million on contracts to broadcast such sports as Major League baseball. Murdoch’s BSkyB also wrote off the value of its investment in KirchPayTV — to the tune of a whopping $1.4 billion. This week in Britain, broadcaster ITV Digital is expected to conduct frantic talks with the English Football League, to renegotiate a $446 million rights contract that is now threatening the financial health of the strapped service, co-owned by Granada and Carlton. “The market’s been plagued by excessive optimism,” says Bill Gerrard, a specialist in sports finance at Leeds University Business School. “It’s coming back to earth.”

The situation is traumatic enough for those networks that put too much faith — and cash — in the ability of football striker Michael Owen or Formula One champion Michael Schumacher to draw viewers. But it’s likely to be just as bad for the football clubs, car-racing teams and other sports organizations that have become overdependent on the broadcasting cash. Their costs are going up; their revenue … well, that’s the problem. And in the long run, as pay-TV networks consolidate — they will have no other choice — a two-tier rights hierarchy could develop, even in the same sport, in which marquee events draw the big television money while the routine competitions have to make do with the broadcasting crumbs, aided mainly by income from tickets and merchandise sales.

That’s not to say those who have been burned will stay away from the fire for good. Even as Rupert Murdoch rebalances his books, he is keeping his eye on the long-term ball. The media mogul may have written down his KirchPayTV stake, but he still holds a $1.5 billion “put” option — a risk-averse instrument that gives one the right to sell an asset at a pre-determined price — in the business that he could use as leverage to get his hands on any part of the Kirch empire that interests him. Including Formula One.

It seems fitting that Murdoch could be the last man standing in the current sports-broadcasting dilemma. He was, after all, present at the creation. Before the 1990s, Europe’s airwaves were ruled mainly by public terrestrial television stations, which paid, by today’s standards, mere pocket money for the rights to screen football and other sports. But with the advent of private and pay-TV networks came the search for content that would not only attract viewers, but also build the kind of loyal subscriber bases and demographics that advertisers love. The answer? Sport, once famously described by Murdoch as pay-TV’s “battering ram.” Broadcasters piled in, sparking a bidding war for sporting content that drove the price of rights for many major events through the stadium roof.

These ever-inflating prices created a sports-rights bubble that grew ever bigger. Case in point: FIFA, the body that governs global football, says it got $79 million for the broadcasting rights for the 1998 World Cup. Would you like to wager a guess on the same rights for the 2002 World Cup? How about $761 million, a tenfold jump.

Such sharp increases over a short period are unlikely to be repeated, say analysts. Their consensus is for a nasty short-to-medium-term correction and maybe even a dip in prices, followed by a slow, steady return to growth. A Merrill Lynch report released last year suggested that if the most recent English Premier League contract — which involved a number of broadcasters including BSkyB and ITV and was valued at $2.35 billion over three seasons — were to be renegotiated, it would be worth only about 60% of current levels. Figures from across the sports world joined in the chorus of doom. Daniel Beauvois, the ex-ceo of ISL, issued a harsh warning that the same revenue-reduction fate could befall other sports-rights agencies. In Formula One, the fans seem to have sped away: viewing numbers for the motor sport have dropped about 5% since 1999. And both Greg Dyke, head of Britain’s bbc, and Gerhard Aigner of uefa, which runs pan-European football competitions like the Champions’ League, wondered whether the audience appetite for televised football had peaked. Is there any way out of this mess? Clearly broadcasters must realize that fans don’t necessarily want such a steady diet of football. Even in France. In a recent survey in the magazine France Football, 49% of 1,054 fans polled said they thought there was too much soccer on television. In addition, a Médiamétrie-Eurodata TV survey revealed that French audience levels for matches aired live on free TV dropped from 16.2% in 1997-98 to 11.8% in 2001-02. But loyalty counts. Viewers will watch their favorite club and support their country (just wait for the World Cup TV ratings, even though many of the matches will be broadcast very early in the European morning). Broadcasters who snap up rights indiscriminately have to learn that football fans will not tune in to just any kind of football. “I only watch [English Premier League side] Leeds,” says Steve Hoddinott, 38, a computer-software salesman. As for Andy Marples, a Chelsea fan: “I’m a one-club man.”

In the future, experts say, TV networks are likely to demand more flexible contracts: if new programming doesn’t deliver the expected audience, the price should be renegotiable. “There’s the likelihood of some restructuring in the way in which these things are organized,” says Stefan Szymanski, a sports economist at Imperial College, London. Speculation abounds as to how the market might change in the future, and ideas include a sliding pay scale linked to the number of viewers any given game or league attracts. What Kirch wouldn’t give for some of that flexibility now. His media empire is committed to paying as much as $2.3 billion over the next seven years to fulfill sports rights obligations.

If Kirch’s troubled company is begging for mercy, some of those who might alleviate his debt burden don’t seem disposed to show any. Bernie Ecclestone, Kirch adversary and Formula One’s diminutive Svengali, did not make his fortune by being a soft touch. Let’s not forget: although Formula One might not be worth what Kirch paid for it, it is nevertheless the world’s premier racing circuit. Should Ecclestone buy back Kirch’s stake — and he may find himself fighting over it with either Murdoch or Kirch creditor Deutsche Bank, which is believed to want Formula One because it would be synergistic with the bank’s holdings in automakers — he is unlikely to pay one penny more than he needs to. Publicly, Germany’s football administrators are also holding Kirch to his promises. “Our partner has always complied with his obligations,” says Werner Hackmann, chairman of the German Football League. “We assume that this will also apply for the term of the full contract up until 2004.”

Privately, though, football leagues and clubs are conceding that now and in the future, flexibility is the key. Although income from broadcasting has spiraled over the past decade, so — and not coincidentally — have players’ wages and agents’ fees, as all those involved have thrown financial elbows to get a piece of the pie. On average in 2001, wages of all the staff in English Premier League clubs accounted for 63% of total turnover — up from 58% the year before. Consider Manchester United. It has just re-signed manager Sir Alex Ferguson for another three years for a reported $15 million. Star player David Beckham is also negotiating a new contract — with his demands reported to be as high as $113,000 a week, up from his current reported $34,000. Even for a club as big as Man U, a lack of sporting increases for Premier League broadcast rights could spell trouble. “Clubs are going to hit a financing problem,” says Szymanski, “short-term cash flow.”

In the long term, broadcasters are unlikely to lose their faith in sport — what else is there that is as compelling, as unifying (also divisive) and as much fun to watch? Pay-TV networks in Italy and Spain are ever-watchful of their alliances with football clubs. And French pay television? Network Canal Plus, unperturbed by the notion of saturation, is in the process of devising a channel entirely devoted to sports, to be launched toward the end of this year. After all, and even after Kirch, television needs sport — and sport needs television.