To come even close to covering the $3.3 billion it agreed to pay the NFL for its Thursday primetime package, Fox is going to have to generate more money from retrans and reverse comp. It can do that by acquiring more stations and putting a tighter squeeze on mVPDs and affiliates. But in doing so, it may eventually test the economic and regulatory limits of retrans.
As we discussed last month, the Murdochs’ strategy for the Fox network is clear. Load up with live entertainment, news and sports — lots and lots of sports.
And if anybody had any doubts about the strategy, they were quieted two weeks ago when Rupert and his boys agreed to pay a whopping $3.3 billion for an 11-game NFL Thursday Night Football package over the next five seasons.
But here’s what I want to know: How is Fox going to pay for the games?
The securities analysts who follow Fox have the same question.
During the company’s fourth quarter earnings call last week, they were more interested in the TNF deal and its financial impact than they were in hearing more about the $3.3 billion to spin off the Hollywood, international and most of 21st Century Fox’s cable programming assets to Disney. That deal will reduce Fox essentially to the broadcast network, the O&Os and cable-jewel-in-the-crown Fox News Channel.
But despite their insistent questioning, the Murdochs revealed nothing about the TNF finances.
In fact, the Murdochs gave every impression that the TNF deal was an impulse buy. They couldn’t or wouldn’t explain exactly how it made sense in dollars and cents. They defended the deal with platitudes and generalities. No numbers.
Our baseball-obsessed reporter David Seyler who sat on the call heard the Murdochs easily handling everything the analysts threw at them.
“Analyst pitches TNF fastball. Fox responds with: ‘It’s about choices.’ Here comes the cutter! ‘It’s about choices.’ Uh oh, a nasty curve. ‘We’re going to monetize it.’ OMG, a knuckleball. ‘We’ll add in digital over time.’ Holy cow, an analyst fires a nasty screwball. ‘It’s about choices.’ “
Fox Networks CEO Peter Rice, in an appearance Monday, showed that he too could defend the deal by essentially saying nothing.
“Any time you go to an auction, somebody wins, and everybody who loses says that the winner overpaid,” he said. “You either have the most-watched content on television, or you don’t have it.”
Of course, the lack of transparency will not stop everybody from speculating about TNF’s finances. In fact, it tends to encourage it.
Michael Nathanson, at MoffettNathanson, figures that, after production cost are added in, Fox will spend $3.9 billion to broadcast the games over the five years. (Michael, forgive me for rounding off your numbers.)
However, the games will reap just $3.2 billion in revenue — $1.9 billion from advertising and $1.3 billion from incremental “retrans.”
The $700 million loss is mitigated by the estimated $300 million or so that Fox will not lose from its usual Thursday night primetime lineup. So, bottom line, TNF will set Fox back around $400 million.
These numbers sound plausible. Nathanson has been modeling Fox finances for years.
Fox should be able maintain a healthy and steady revenue stream from advertising, despite the NFL’s declining ratings. Fox may have fewer GRPs over the years, but it will be able to charge more for them.
Less supply leads to higher prices if the demand stays the same, and I don’t see demand lessening. Rice is correct when he calls the NFL the “most-watched” programming on TV.
Let’s set aside for the time being that this is another money-losing sports deal and that nobody seems to think twice about such arrangements. That’s just the way it is.
Let’s talk about that $1.3 billion in incremental retrans.
Nathanson believes that with TNF, Fox will not only be better able to drive retrans in the many NFC markets where it currently holds rights to the local Sunday games, but also in its AFC markets like New York, Los Angeles, San Francisco (Oakland) and Houston.
I spoke to Nathanson. He told me that when he says “retrans,” he really means retrans and reverse comp from affiliates.
So, in other words, Fox affiliates can soon expect a call from affiliate relations chief Mike Baird with the news that Fox expects you to pick up part of the TNF tab.
From what I can gather, Fox affiliates are so far OK with the deal, figuring that the games will be a big improvement over what Fox has been offering in prime on Thursday. However, their continued equanimity will be tested if Baird delivers a fat bill.
There is another way that Fox can pay for the games: acquire high-margin stations in the three NFC market where it does not already have stations — Seattle, New Orleans and Milwaukee — so it can keep all the retrans they generate.
Such revenue is not part of Nathanson’s calculation, so it would shrink the $400 million that he says Fox will lose on the deal.
Fox is negotiating to buy stations from Sinclair as it tries to close on its acquisition of Tribune and conform its station portfolio to the ownership limits of the FCC and Justice Department.
I would be much surprised if Fox does not end up with Tribune’s Fox affiliate KCPQ in Seattle, the home of the NFC Seattle Seahawks. Fox has coveted that station for a long time and I think the regulators will insist that Sinclair spin off either KCPQ or its ABC affiliate there, KOMO.
Unless the regulators interfere, Sinclair-Tribune would also own Fox affiliates in eight AFC markets: Buffalo, Baltimore, Cleveland, Pittsburgh, Indianapolis, Nashville, Denver and Kansas City.
All could be targets of Fox. However, Sinclair, I would suppose, would be reluctant to sell stations in those markets like Cleveland where it has only one station. Its whole ATSC 3.0 strategy is based on having a national footprint, an outlet in every market.
Of course, Fox has the power to march into any of the other four AFC markets (Boston, Cincinnati, Jacksonville and Miami) and take its affiliation in-house. It’s done it before and it will do it again.
Most vulnerable would be Ed Ansin’s WSVN in Miami, where the AFC Dolphins play. Fox could buy out Ansin, or, if he digs in, buy a stick and create a new O&O from scratch as NBC did in Boston.
So, what was that question again? Oh, yeah. Who is going to pay for TNF?
The advertisers, of course.
But also affiliates through reverse comp or loss of affiliation.
But also cable and satellite operators and their subscribers. They’re the one who are ultimately paying for retrans and reverse comp.
You know me. I have a been a champion of retrans for 25 years. But I fear that Fox with its heavy reliance on the NFL and other high-cost sports will become the broadcast equivalent of ESPN — a network that forces people who have no interest in sports to heavily subsidize it.
Whenever I see the number of people who watched the Super Bowl, I don’t think about how popular the NFL is, I think that two-thirds of our great nation couldn’t care less about the sport.
Retrans is a great and growing source of revenue. But there are economic and regulatory limits on it. I don’t know where those limits are exactly, but they are out there.
If the Fox TNF deal doesn’t test them, the renewal of the Sunday afternoon, Sunday night and Monday rights in a few years will.