Barclays Capital analyst Anthony DiClemente has taken note of the recent announcements of new sports rights deals, with broadcasters and cable networks paying mega-bucks for the Olympics, NFL, World Cup and other major sports. But somebody has to ultimately pay the bill – and the analyst has some thoughts on just who will really be picking up the tab.
“Recent headlines about increasing NFL rights fees have raised questions about which parties in the cable ecosystem — programmers, distributors, or consumers — will bear the costs. With unparalleled ratings, we believe NFL programming is by far the most valuable on air, maintaining “essential” status for many cable subscribers. As a result, we believe sports programmers have the most leverage in discussions with the Multiple Systems Operators (MSOs) about securing higher subscription fees to offset their rising content costs, although we expect temporary margin compression at ESPN in FY 2015,” DiClemente wrote in a recent research piece.
So, if the cable/satellite companies agree to pay more for channels with “must have” sports content, does that just get passed on to consumers? DiClemente thinks not.
“If the MSOs agree to higher affiliate fees for the sports programmers, we believe the non-sports programmers could be at a disadvantage in competing for affiliate fee increases in what is increasingly a zero-sum game,” the analyst said.
The Barclays analysis noted three key points:
1) NFL rights fees reach new highs – In the last several mo
nths, ESPN and broadcast networks 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 a more engaged fan base, captivated by fantasy football interests, has helped NFL programming consistently achieve the highest ratings on television. Given the unmatched value of the NFL, we believe the networks had little choice but to renew their deals, since outsized NFL ratings are crucial for promoting other network programming and justifying higher retrans/affiliate fees from the MSOs.
2) MSOs and consumers will likely shoulder higher sports rights costs – To offset the rights cost increases, we believe the sports programmers will actively seek subscription and retransmission consent fee price hikes at least commensurate with their added cost burden. Since NFL content is considered “essential” viewing for many subscribers, we believe the MSOs will ultimately acquiesce to the demands of the programmers and will attempt to pass on the costs to the consumer. But if a subsequent consumer backlash leads to subscriber declines, we believe the MSOs may end up absorbing some of the programming cost increases themselves.
3) Non-sports programmers may be struggle to secure desired affiliate rates – Given the more difficult revenue environment for the MSO’s — flattish subscriber growth and consumer 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. Should a 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 is not fully appreciated by the market, and certainly not priced into the stocks.
RBR-TVBR observation: If DiClemente is right, the MSOs may be reaching the point where consumers stop complaining about rising prices and actually refuse to pay them – and in significant numbers. If the pool of money available for paying retrans and programming fees stops growing by more than the inflation rate we could see the MSOs being able to adopt a take-it-or-leave-it negotiating stance with cable channels and even local TV stations who don’t have content seen as essential.