The Sports TV Landscape

January 20, 2011

Television is inherently competitive. There are a limited number of viewers and nearly limitless viewing options. Those that succeed do so on the basis of consistent and engaging content that drives viewership. Thus, the latest shift in the industry towards dual revenue (advertising and carriage fees) is born as much out of a necessity to fund the acquisition of premium content as it is to hedge against the volatility of advertising revenues.

If the business objectives of these networks are to increase ad revenue, increase households, and increase the fee per household, then sports properties may help them achieve success. The last few years have seen ratings increases across several sports properties and many of these broadcasts are even setting records of one kind or another (e.g., Superbowl XLIV, NBA Finals, or Olympic hockey). This is why NBC paid $820 million for the 2010 Winter Olympics, why ESPN just paid $2 billion for a single season of MNF, and why the rights fees will continue to escalate over the next few years.

Where does UFC fit into all of this? The UFC offers a relatively inexpensive product, but delivers a somewhat comparable audience in the key demographics. Yes, there are concerns about the violence of the sport and general brand alignment between any of the networks and the UFC. However, the potential value the UFC could provide to a network is going to be hard to pass up. This is especially true if one or more of the big leagues goes to a lockout next year (the NBA being most likely) and networks are left scrambling for sports content.

Hence, I’d like to take a look at the potential candidates for the UFC’s next television network (once its deal expires with Spike at the end of 2011):

ABC/ESPN

The UFC and ESPN have engaged in talks before. In fact, according to Dave Meltzer, the two were close to an agreement last year, but talks ultimately fell through due to money. The UFC is willing to give ESPN pay-per-view caliber shows, and in return expects some sort of comparable rights fee. However, ESPN is much less certain about the property; younger employees are in favor of the sport and some of the older employees remain staunch boxing advocates who believe the UFC doesn’t align well with the Disney-owned ESPN brand. Perhaps the most important point in all of this is that ESPN doesn’t need the UFC. The World Wide Leader in Sports has more than enough properties to satisfy its viewers. ESPN can afford to pass on this round and then simply overbid a little in four years if the UFC is hot enough.

NBC-Comcast

This week the FCC approved the merger between NBC Universal and Comcast. Speculation is that NBC-Comcast is going to put together a sports network (in what may or may not be Versus) to challenge the ESPN-dominated cable sports marketplace. I expect the first few years will be quite lean until the network has an opportunity to bid on some of the bigger properties that will again become available. In the mean time, properties like the NHL and UFC will prove attractive.

The network has kind of been in a holding pattern with this merger announcement, but I suspect we’ll start to receive more news in the coming months. I wouldn’t be surprised if this new sports network, should it materialize, is quite aggressive in acquiring the remaining properties (NHL, UFC, college sports rights, etc.). It’ll certainly be interesting to see how it handles the UFC on Versus cards this year. That should provide us with some insight as to how committed NBC-Comcast is to the UFC moving forward.

FOX/FX

MMAPayout’s Robert Joyner was the first to write about the possibility of FOX and FX entering the sport of MMA in 2009. At that time, FX was rumored to be looking for a sports property to complement its original programming lineup. Joyner hypothesized that MMA could provide the perfect vehicle to deliver a solid audience in the key demos while also aligning with some of FX’s edgier content. Then news broke late last year that Bellator had secured FX as a broadcast partner for its 4th season. While this deal ultimately fell through, it certainly helped to fuel further speculation of FOX/FX’s interest in MMA.

The FOX/FX package is intriguing. FX provides a solid cable foundation for the UFC with its solid original programming content, including the highest rated cable show on TV in the M18-49, Sons of Anarchy (H/T: TVbytheNumbers) that would provide the perfect lead-in, exit, or target promotion audience. FOX provides the UFC with a good broad exposure play 3-4 times per year and the ability for FX to cross-promote during NFL or NASCAR programming.

Spike TV

The UFC’s home for the past seven years isn’t out of the picture yet. The UFC has had tremendous success on the network. Spike was the only network willing to gamble on the UFC (what did they have to lose, some may argue). However, don’t believe for a second that sentiment will have much of a bearing on this decision. If anything, the argument in favor of Spike has more to do with the value it brings to the UFC from a promotional perspective. No other network is going to provide the UFC with as much advertising, promotion, or flexibility as does Spike TV. Thus, I pose the following question: is it better to be a big fish in a small pond or a small fish in a big pond?

Ultimately, I think the UFC chooses to move to a bigger pond. Yet, that does not exclude Spike from being involved at all. Perhaps the UFC enters the market having over-estimated the appetite for its product. Maybe it re-signs with Spike for a larger dollar figure and alters/removes the cable exclusivity clause that might allow it to jump on another opportunity should one come to pass. It’s possible.

The PPV vs. Rights Fee Trade-Off

Approximately 75% of UFC revenue is event-related. The UFC wants to ensure it doesn’t lose out on substantial PPV money by moving to a network (or ESPN). Hence, this issue is one of getting a large enough rights fee plus other boosts in business that the loss in PPV dollars from those televised events is immaterial.

The exact size of the rights fee the UFC is looking for is unknown, but it’s not hard to determine a ballpark figure. If the UFC is looking to use the rights fee as a way to offset the lost PPV revenue, then the size of the rights fee ought to be a significant portion of the estimated value of those events as PPV cards:

  • Assume 4 events per year
  • If you use the absolute worst PPV of 2010, UFC 109 at 215,000 buys, then the opportunity cost is 215,000 x 4 x $49.99/2 = $21.5 million or $5.3 million/event
  • If you consider the likely strength of 4 events, say two title events at 600,000 buys and two non-title events at 325,000 buys, then the opportunity cost is 1,850,000 x $49.99/2 = $46 million or $11.5 million/event.

If the opportunity cost of moving a UFC PPV event to a broadcast network is roughly $11.5 million/event, then it’s likely the UFC is asking for at least $5 million/event. I’m not sure the UFC will be able to get even $5 million from a network given some of the reservations that industry people still have about the sport. Although, if one is willing to set aside the sport’s imagery issues, there is an interesting value comparison to be made between the UFC at say $5 million/event and MNF at $117 million/game (I’ll leave for another time!).

The rights fee is one way of reducing or eliminating the above opportunity cost, but it’s not the only way. Increased exposure as the result of a broadcast television platform will undoubtedly boost PPV and merchandise sales. The value of sponsorships is also likely to increase given the national exposure of the platform and the likely increase in viewership of all other non-broadcast network events. Moreover, I also tend to think that moving four events to broadcast television and away from the PPV calendar may act as an artificial constraint in supply. The UFC would essentially be giving fans fewer cards to spend the same amount of money on.

However, if I come back to the numbers once more, it’s clear that eliminating this opportunity cost is a tough proposition. The UFC would have to make up roughly $46 million over (what I assume would be) 12 PPV events per year, which translates into roughly 150,000 more PPV buys per card or a 20% increase on its average PPV event of 600,000. The UFC has grown its PPV business at 23%, 26%, and 14% over the last three years, but it has largely done so by increasing the number of events, not the average event buy. Thus, it seems a stretch that it can push its event average to 750,000 PPV buys within the first year (or even two years) of a broadcast network deal.

Perhaps a more realistic figure is a 8% increase in average PPV buyrate, which would mean an extra 50,000 PPV buys per event (or a push of the average to 650,000 per event). This would still leave the UFC with a $30 million gap to fill through some combination of rights fees, increased merchandise sales, and new sponsorship agreements. The UFC could probably add $5 million in merchandise and another $5-10 million in new sponsorships sales, but rights fees would need to cover the remaining $15-20 million gap. It’ll be challenging.

This is Dana White’s “right deal”, and when you consider there are still other ways to expand the UFC’s reach (digital, marketing partnerships, etc.) the UFC doesn’t seem interested in risking this guaranteed PPV. Then again, there are some that would suggest the UFC should sell high, lest things cool off in the next few years, it’s unable to command anything close to what it can today, and has few remaining options to expand outside of TV.

The Domino Effect

What sort of impact might the UFC’s decision have on the rest of the industry? This is an interesting question. If the UFC stays put, the landscape doesn’t change a whole lot. But, if the UFC leaves Spike TV, it’s more than possible that we see someone jump to Spike. I can’t see Spike wanting to get out of the MMA business given the success it’s had. Plus, it’s an attractive platform for a young MMA promotion looking for an experienced partner that will provide ample support and broadcast flexibility.

Viacom is the parent company that owns both Spike TV and MTV2. If the UFC leaves Spike, might Viacom attempt to shift Bellator over to Spike TV in order to fill the gap? Bellator’s weekly, but seasonal content could provide Spike with the programming consistency it desires. The tournament format is also an intriguing promotional angle with which Spike can leverage to better sell what is likely to be an inferior product to the UFC. I doubt the ratings for Bellator on Spike are even close to what the UFC was able to do, but they could  prove to be adequate.

Credits

I feel obliged to acknowledge Adam Swift for his help with this article. This is all largely the product of many rambling conversations we have had back and forth over the last several months and years. Adam truly has one of the best perspectives on television in the entire MMA industry (not to mention one of the best minds for the business of MMA, period).

10 Responses to “The Sports TV Landscape”

  1. jv on January 20th, 2011 12:56 PM

    It’s an interesting read. It sounds like you don’t think they will try to do weekly kind of a show. There is also the question of what Dana has planned on the internet side. He has sounded pretty gung ho about that in the past. Any network is going to want to hang onto the digital rights for any thing they show.

    The UFC was able to tell Spike and Versus “You my bitch”. That ain’t gonna fly with the big boys. And they won’t be able to get ESPN for example to drop a football game in order to let them counter program a competitor for them. I also don’t see the big players wanting to do sharezies with Spike, Versus and who ever the OTA broadcaster was. If the UFC wants to move onto a bigger player they are going to have to drop some of those luxuries and learn to get along. I’m not convinced they are going to want to do that.

  2. jv on January 20th, 2011 1:12 PM

    There is also the question of scheduling. I know that is a real sticking point with Strikeforce over on Showtime. When Strikeforce is able to do a show and where is driven to a large part by Showtimes needs rather than Strikeforces. Strikeforce gets bumped for boxing and movie premiers for example.

    Would the UFC be interested in being on a bigger channel if they need to run on Tuesday night for example? Any thing is possible but it would take a lot of money to make the UFC happy about that idea.

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  4. mmaguru on January 21st, 2011 5:40 AM

    Hi Kelsey,
    Thoughts on Strikeforces PPV agreement?
    http://www.fightersonlymagazine.co.uk/news/viewarticle.php?id=6025

  5. mmaguru on January 21st, 2011 5:58 AM

    Kelsey,
    You discussed the opportunity cost, however, what about the value add that can occur from being on network TV. Upticks in the next PPV buy rate need to be considered and could possible offset some lost revenue from being on TV, especially if you have a scenario where you build upon the TV event. I would propose that such a model would add at least 10% – 20% increase in buy rate of the subsequent event.

  6. Kelsey Philpott on January 21st, 2011 9:41 AM

    Guru,

    I think you need to read the entire article. 🙂

    KP

  7. mmaguru on January 21st, 2011 4:43 PM

    LOL
    I was at work, skimmed it. My bad. Of course you have all the basis covered 🙂

  8. Adam Swift on January 24th, 2011 5:21 AM
  9. Kelsey Philpott on January 27th, 2011 1:42 PM

    I’ll add a few more things to the above:

    1. The ability of the UFC to off-set that opportunity cost may be enhanced by any sort of deal with a network that covers production costs. If you assume that the production of an event falls in the $1-3m range, even a share of that cost helps the Zuffa accept a lower rights fee.

    2. There’s another interesting component to the debate here. Boxing. I mentioned competition from a pro league standpoint – specifically referencing the impending NBA CBA issues – but didn’t cite the groundswell of support for boxing to return to terrestrial television. It’s certainly another moving piece of this puzzle that needs to be accounted for.

  10. jv on January 28th, 2011 8:42 PM

    Up in Canada Shaw is starting a sports network. That is almost a sure fire sign that some one in the US is starting a sports network because almost noting is produced by Canadian stations any more. Every thing and I mean every thing is imported and usually from the US. A huge chunk of the biggest sports player up here TSN for instance is owned by ESPN who not so surprisingly supplies a good chunk of their content.

    Don’t be fooled by the “focus on Canadian content” those are just buzz words to get the application through the CRTC and will be dropped like every other channel has done once it clears the approval stage.

    Shaw wouldn’t be launching if there wasn’t some one new south of the border to partner with. So if we needed more proof that Comcast is doing a sports channel this is probably it.

    http://www.theglobeandmail.com/globe-investor/shaw-applies-to-launch-sports-network/article1887220/?cmpid=rss1&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheGlobeAndMail-Business+%28The+Globe+and+Mail+-+Business+News%29&utm_content=Google+International

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