By Amy Thomson - Nov 11, 2013 6:09 PM GMT+0100
BT Group Plc (BT/A), by taking control of the rights to two of the biggest contests in European soccer, ended British Sky Broadcasting Group Plc (BSY)’s dominance in sports that helped the Rupert Murdoch-owned company become the biggest pay-TV provider in the U.K.
After signing up more than 2 million customers to its three-month-old BT Sport channels, the phone company said Nov. 9 it agreed to pay $1.4 billion for exclusive live broadcast rights to theUEFA’s Champions League and Europa League soccer games. BSkyB, whose Sky Sports channels have aired top U.K. soccer games since the Premier League’s inception in 1992, slumped the most in five years in London trading.
It’s an “Armageddon scenario in sports rights,” said Claire Enders, chief executive officer of researcher Enders Analysis, while also calling it a “case of more money than sense.”
BT, the London-based company that started three sports channels in August, is trying to attract Internet customers by making those channels free for its broadband subscribers. Prices for broadcast rights have escalated, with a four-year deal reached in 2012 by BSkyB’s German affiliate to show the Bundesliga soccer matches boosting average annual income from the German rights to a record 628 million euros ($840 million).
BSkyB fell 11 percent to 829 pence in London for its biggest decline since October 2008. ITV Plc (ITV), a commercial broadcaster, dropped 1.6 percent to 187.4 pence. BT added 0.5 percent to 374.10 pence, taking its gains this year to 62 percent.
‘Commercial Sense’
BT said it will be able to absorb additional costs -- on top of the 1 billion pounds ($1.6 billion) it’s previously said it will spend over three years on the efforts -- without changing its financial forecasts.
“We think we can do this and it will make commercial sense for us,” Chief Financial Officer Tony Chanmugam said in an interview with Bloomberg Television. “It’s not going to change our financial guidance for this year or next year or the year after.”
Chanmugam said BT will make up the license costs by decreasing customer turnover and increasing subscription revenues and market share. “If you come to BT, you will pay materially less,” he said.
BT’s win marks the first time a U.K. broadcaster has won exclusive rights to all matches of both the Champions League and Europa League soccer tournaments.
BT Coup?
The three-year agreement starts from the 2015-16 season. The UEFA Champions League Final was watched by 360 million viewers last season.
“This is definitely a negative for Sky and ITV and a bit of a coup for BT,” said Alex DeGroote, a media analyst at Panmure Gordon in London.
Television rights deals in Germany and England have boosted the revenues of Europe’s top five soccer leagues by 25 percent to a combined 5 billion euros a season, according to a report from TV Sports Markets, which provides information for broadcasters and sports organizations. Sales of rights through 2016 in England, France, Germany, Italy and Spain added 1 billion euros a season from the previous three-year period.
BT began encroaching on Sky’s dominance in sports rights in June 2012, when the former phone monopoly won the franchise to broadcast some English Premier League soccer matches. BSkyB shares fell the most in almost two years on May 9 after BT unveiled the new sports channels.
‘Marketing Gimmick’
BSkyB had dismissed BT’s push into broadcasting as “a marketing gimmick” and said its own Sky Sports is in a different league.
BSkyB said it bid for the rights to air the tournaments “with a clear view” of what they were worth and that BT chose to pay far in excess of their valuation.
“ITV is lucky to be out of this, and Sky is lucky not to have won this auction,” Enders said.
BT last month reported a smaller-than-anticipated decline in second-quarter profit, despite the added expense of the broadcast rights and getting the channels running.
The company has said it expects revenue, excluding payments for carrying other companies’ calls on its network, to improve this fiscal year. Adjusted Ebitda will be 6 billion pounds to 6.1 billion pounds this year and as much as 6.3 billion pounds next year.
BT has the rights to 38 British Premier League soccer games, soccer matches in Italy, France and Brazil, rugby competitions, and tennis tournaments.
BSkyB has been diversifying away from sports rights as it increases production of original programs. The company will spend 600 million pounds a year on original commissions by 2014, compared with 380 million pounds in 2011. It spends more than 2 billion pounds a year on content, including sports rights.
To contact the reporter on this story: Amy Thomson in London at athomson6@bloomberg.net
To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net
How Watching 'Unbundled' ESPN and AMC Could Cost More Than Your Whole Cable Bill
One last word (for now) on sports and the cable bundle
ESPN would cost as much as $30 a month if you yanked it out of the cable bundle and made it a standalone service, according to new analysis from Needham Insights.
I asked a friend from the cable industry to forward the entire 34-page report to me, and here's the money chart (click to enlarge).
Lots going on here, so I'll direct your attention to two places:
(1) First column on the right: Subscription fees skimmed off your cable bill account for between 71 percent and 91 percent of sports channels' revenue mix. The best business model in entertainment is one that most TV-watching families don't even know exists.
(2) First row, fourth column: ESPN makes as much as $7.2 billion each year before counting a cent of advertising. Before counting a cent of advertising. Needham's estimate is the highest I've ever seen, but not totally out of whack with others.
Starting to make up that $7.2 billion among a smaller cohort of pay-TV households would require each household to pay much more for today's ESPN. "We believe that only 20 million super-fan homes would pay $30/month for ESPN's group of channels," the authors write, which is "equivalent to 100 million households paying $6/month today."
A similar experiment with AMC would produce even more striking results. If AMC receives $0.27 from 90 million households each month, that's $24 million a month. Let's make a generous assumption that every person who watches "Mad Men" live (or a third of households that watch "The Walking Dead") agreed to subscribe to the standalone network and had to replace its full cost.
That's 2 to 3 million household paying about $10 a month.
Today, the typical household pays a little under $40 a month in total subscription fees to all of the networks. So, $30 for standalone-ESPN plus $10 for standalone-AMC is already equal to or more than the total programming costs in your cable bill right now. In simpler English: TV just got more expensive with just two a la carte channels.
You could respond to this by saying that, in an unbundled world, ESPN and AMC would probably downsize to meet the economic realities of their audience. And fine. But the big point is that a la carte seems to many people to be technologically inevitable, economically efficient, and unquestionably good for consumers. The best I can say is: I almost agree with the first part.
Sports Could Save the TV Business—or Destroy It
Cable TV isn't a "sports tax." Or an AMC tax. Or a History Channel tax. It's an entertainment flat tax.
DEREK THOMPSON is a senior editor at The Atlantic, where he oversees the Business Channel
Reuters
Here's the week's news in TV economics in one sentence: Without live sports, the TV business could fall apart; and because of live sports, the TV business could fall apart.
Confused? Ha, well, blame the bundle, perhaps the most successful and most misunderstood business model in entertainment.
If the $70 billion television industry is on the verge of imploding, as viewer attention flees to DVR'd shows and Netflix accounts, live sports is the keystone keeping the roof from collapsing. And live is the key word. The bulging of the bundle and the rise of on-demand video have thinned out ratings and partially severed the tendon between live-viewing and lucrative advertising. But in a time-delayed video world, the biggest games still drive dependable live audiences, making sports rights the most valuable resource in the whole TV ecosystem.
... so, that's why cable needs sports.
Here's why sports could destroy cable ...
Networks have recognized that sports has unique social currency in live viewing, and they've stormed the marketplace in the last few years, throwing egregious sums of money in exchange for exclusive deals. Those costs are trickling up. As Patrick Hruby explained, "big time sports are taking a minimum of $84.90" out of each family's budget even if they don't care about sports. This amounts to a"sport tax" on families forced to pay for something they don't watch. Cable companies sensing this backlash are starting to resist new sports networks. There is even chatter about what would happen if sports existed on a separate "tier" that untied the Gordian Knot of TV.
Households will decide for themselves if the cost of their cable package is worth the price ($73 a month, on average). But before we cheer the death of the cable bundle and the end of the sport tax, consider what might die along with it.
"The AMC Tax"
Let's talk about a channel that many non-sports fans might consider utterly critical to the bundle: AMC.
You might think that AMC makes money from all the people who watch "Mad Men" or "The Walking Dead." The opposite is true. AMC makes money from all the people who don't watch "Mad Men" or "The Walking Dead."
Here's what I mean. Only 2.5 million people watch the typical "Mad Men" episode. Eleven million watch the zombies. The other 80+ million households who have, but don't watch, AMC still have to pay between $3 and $3.50 each year to the network out of their cable bill. They don't have a choice.
Much more than advertising, it is these mandatory fees that explain exactly how AMC makes money. Reading from the company's 10-K annual report: "Affiliation fees [i.e.: a little more than $3 from each pay-TV household each year] represents the largest component" of AMC's revenue.
"Mad Men" and "The Walking Dead" might still be produced in an a la carte world. But maybe not. We only know that today, these sensational shows exist because the vast majority of the country that doesn't care who Don Draper is still pays for his suits.
That's the AMC Tax.
A National Non-Mandatory Tax
You can think of TV as "I pay for what I want, plus a sport tax," or " ... plus an AMC tax," or "... plus a History Channel tax." But when you line up 100 million pay-TV households, a bigger picture emerges. We are all paying each other's TV taxes.
The cable bundle is perhaps the closest thing to a non-mandatory flat tax in America. The idea is that if 100+ million households all pay $70ish a month for television, the breadth of the customer base will support a diverse and thriving entertainment business without asking any group to pay too much for what they want. Readers -- and, more certainly, network executives -- might bristle at the idea of TV being compared to taxes. But what is the government if not the biggest of bundles? Every year, 150+ million tax-paying families across the country pay into a common system with each household consuming varying amounts of different goods and services (interstates around D.C., defense spending in San Antonio, NIH in Bethesda). The point isn't that everybody in America consumes every good and service provided by the federal government. The point is that public financing makes a diverse and quality array of goods and services possible for those who want and need them.
The subscription fees in your bundle are, in a way, like a national entertainment treasury divided between a handful of media companies. One hundred million subscribing households pay a collective $7 billion a month into the entertainment super-coffers, with each family consuming varying amounts of different programming, all of it made affordable by scale. The TV business is so rich in part because its popularity allows it to achieve the scale of something like public financing.
I don't know if this is an entirely good thing, or an entirely unchangeable thing. But it is the thing that's created the current golden age of TV.
Sports is the final bastion of must-see-live-TV. It's both saving the bundle and threatening to make the entire enterprise unaffordable and unworkable. If the latter happens, we'll all know, because pay-TV households will do something to their entertainment tax bill that they simply can't do to their federal tax bill. They'll tear it up and move on.
