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Thrown for a Loss by the NFL

6 minute read
Stacy Perman

When it’s late in the football game and you’re falling behind, the best strategy is often to go deep and hope something good happens. And that’s exactly what three television networks did last week, reaching deep into their pockets to pay $17.6 billion for the right to broadcast National Football League games until 2005. Says Robert Iger, president of ABC Inc., the Walt Disney Co.-owned media firm, which spent $9.2 billion on both network and cable-television rights: “Losing would have been devastating.”

Winning might not be much better. Although the entertainment business often makes deals that seem right out of Fantasyland, the money that ABC, CBS and Fox are paying demonstrates just how desperate the network-television business has become. CBS paid $4 billion to get back in the game, intercepting rights to the American Football Conference previously held by NBC. A day later ABC, the No. 3 network, outbid NBC with a $4.4 billion deal to retain Monday Night Football. Its cable unit, ESPN (which shared Sunday-night games with Turner Broadcasting’s TNT for eight years), dropped $4.8 billion to acquire the entire NFL cable-television package through the 2005 season, giving Team Mouse a sweep. Not to be outrun, News Corp.’s Fox Broadcasting extended its National Football Conference deal with a $4.4 billion contract, a 39% increase over its current one.

The networks essentially paid double the previous contract for programming that is steadily losing viewership. NFL ratings have tumbled about 33% since their peak in the early 1980s. And overall network viewership continues to dwindle: the prime-time ratings on ABC, CBS and NBC have fallen 47% over the same period. “What this shows you is that it’s not football that is the draw,” says Porter Bibb, a media analyst with Ladenburg, Thalmann & Co., “but that the networks are struggling for survival.”

NBC, sent to the bench as a result of CBS’s acquisition of its AFC rights, had to resort to claiming rational behavior to explain coming up empty-handed. Executives at the unit of giant General Electric called the contract bids “reckless,” saying it wasn’t worth more than $340 million a year to keep the AFC rights, the weakest in the package, or more than $500 million a year to obtain Monday Night, considered the strongest. “There was no chance of making money in this deal,” said Dick Ebersol, president of NBC Sports, after the announcements. “I’ll guess [it’s] a loss of $150 million to $175 million a year. We simply don’t believe in being associated with that kind of loss.” The Peacock will have to console itself with other sports, such as the Olympic Games. Not to be outdone in the spending department, the company renewed its top-rated show, ER, for three years at an astonishing $13 million an episode, up from almost $2 million.

For the NFL, whose owners routinely hold up municipalities for new stadium deals–or bolt town in the middle of the night for more remunerative burgs–the $17.6 billion is just another example of its ability to play hardball. Each team will get a windfall of about $75 million a team per season, although much of that will go into players’ salaries. After five years the NFL can renegotiate for even higher payoffs.

None of this money would have been forthcoming had it not been for that gridiron great (at least in the eyes of NFL owners) Rupert Murdoch. The Australian-born boss of News Corp. has reordered the economics of sports. Murdoch views sports not as mere programming but as the foundation for establishing entire television (Fox) and satellite (British Sky Broadcasting) networks. From this perspective, it makes sense to pay more for the NFL than you can get back in advertising revenues. Murdoch fired that thunderbolt in 1994, paying $1.58 billion for the NFC package, 49% more than CBS had been paying. News Corp. wrote off some $350 million after the swipe, but the strategy helped the Fox Network reach parity with the Big Three.

The logic that compelled ABC to pay so much for Monday Night Football is also expansive. Without its “crown jewel,” ABC would have a serious programming hole on Monday night–try coming up with half a dozen new shows. And even with diminished ratings, football still delivers eyeballs, particularly those of the young male viewers whom advertisers of cars, beer and other guy stuff want to reach. Although Monday Night’s ratings are at an all-time low, the program ranked fifth among prime-time shows in 1997.

ABC is betting that owning all the Sunday-night and Monday-night games will make Disney a more powerful viewing and advertising force. The new contract will allow for additional 30-second spots during the games. And since ABC owns and operates 10 stations (O&Os, in the jargon) it can recoup some of its money in big markets like Chicago.

Still, ABC will have to tap other revenue sources. The company laterals its present affiliates about $175 million a year to air network programs in agreed-upon time slots. Iger is calling for a reverse. He wants the affiliates to kick in for their pigskin privileges. “We expect owners to step up and help us pay for it,” he says. Iger might be asking you for a couple of nickels too. ESPN, which charges cable operators a program fee for each subscriber, will probably raise rates. The cable operators will hand off those increases to you know who.

CBS’s experience demonstrates that if having the NFL is expensive, not having it is even more so. After CBS lost football, several of its affiliates jumped ship, weakening the network’s local-station base. And building a new series into a hit became more difficult because the networks use sports to flog their other shows endlessly. Without a football lead-in, 60 Minutes’ audience share shrank from 30% to 22%. CBS eventually sank to third place. With football, the network, which owns stations in seven AFC markets, insisted it would break even by selling more ads.

Companies generally don’t risk $4 billion to break even. But CBS, now No. 2 in the ratings, is in serious need of programming events, young viewers and more male viewers. Even if CBS takes a loss, football becomes part of an overall strategy to regain the top spot on the network heap. “This is a building block,” says Neal Pilson, a sports-television consultant and former president of CBS Sports. “An expensive building block.” If football can increase prime-time ratings by 1 point, “That could throw $50 million to the bottom line for a full season,” says Pilson. For the stations, that can mean an additional $100 million a year. That’s good enough even for a bottom-line zealot like Mel Karmazin, chairman of the CBS Station Group. Said he: “We know better than anybody else what it’s like to have the NFL and what it’s like not to have the NFL. And it sure as hell is a whole lot better to have the NFL.”

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