By Tom Lowry
It has become a ritual: Television executives whine about the high price of sports programming and then turn around and make outrageously high bids to win broadcasting rights. The worst-kept secret in the media business is that virtually no one makes a profit on pro sports.
But it appears that the TV sports bubble, like the once-bloated stock market, is finally headed for a correction. Losses on sports contracts from 2001 thru 2006 could exceed $6 billion, estimates Morgan Stanley (MWD) Ratings are down (in some cases way down), shareholders are applying pressure on companies that own TV properties, and Congress has even stuck its nose into the high cost of America's national pastimes.
The upshot is that, after years of ego-driven bidding frenzies, more and more executives believe it's time to just say no when it comes to upping the ante on sports rights. As a result, the next round of sports deals could produce no prices hikes, or possibly even smaller deals. That would rock the leagues. If the gusher of TV revenue subsides, team owners will be forced to find new revenue streams, such as subscription services and overseas distribution deals. More importantly, they will have to redouble efforts to hold down soaring player salaries. "My hope is that the marketplace would come to its senses," says NBC (GE) Sports President Ken Schanzer.
It's about time. The old economic model for TV sports is dated. The strategy among execs used to be that if they couldn't recoup their investment in broadcast contracts, they could always use the games' huge audiences as a one-of-a-kind opportunity to promote their prime-time lineups and other network programming. But today, the people watching sports are mostly men, and the people watching prime-time shows are mostly women. "Begrudgingly, executives are beginning to realize that sports is not a loss leader anymore, either," says Richard A. Bilotti, a media analyst at Morgan Stanley. He estimates that sports losses wipe out about 40% of all profits from prime-time programs.
The once-massive sports audience is shrinking -- largely because of new cable-channel choices. Average viewership for the NBA Finals this year on ABC (DIS) for example, was down 37% from last year and 66% from 1998, when they were on NBC, according to Nielsen Media Research. Similarly, viewership for Major League Baseball's All-Star Game on Fox (NWS) on July 15 was down 5% from last year and 38% from 1993. Bilotti projects Fox will lose $54 million this season on its $2.5 billion, six-year baseball deal. "These prices can't go up like this much longer," says Rupert Murdoch, chairman of Fox parent News Corp. (NWS) "Broadcasters can't make money on sports any longer. I know we couldn't. The audience is too fragmented."
That's a candid acknowledgment from the man other media execs say helped land sports in its current mess. They blame Murdoch for blowing the first big breath into the bubble in 1993, when Fox snatched the NFL contract away from CBS with a bid that was $400 million richer. These days, it looks as if Murdoch has gotten religion after having to take a nearly $1 billion write-down in February, 2002, on losses associated with his current sports deals.
The leagues are all exploring the possibility of striking deals to broadcast more games on cable, but the cable industry is under fire in Washington. The average cable bill went up 8% last year, largely because of the high cost of sports, and Senate Commerce Committee Chairman John McCain (R-Ariz.) is investigating rates.
If execs do take a harder look at sports-broadcast deals, one thing is certain: Team owners will have to reevaluate what they pay their players -- the big winners in recent years. The New York Mets' annual payroll, for instance, rose from $13 million to $87 million from 1995 to 2001. The TV industry is none too sympathetic. "I have no concerns that these guys will still be able to pay their mortgages," says one exec. Of course, it was the networks that built the players' mansions in the first place. With Ronald Grover in Los Angeles.