The Great Re-bundling
Last week we released the following research note to our institutional research subscribers discussing our initial thoughts on the announcement by Disney, Fox & Warner Brothers on their just-announced sports streaming venture. We thought you would find it to be useful.
“It’s somewhat ironic that we’ve unbundled to re-bundle to unbundle to re-bundle.”
– Brian Roberts, chairman and CEO,
Comcast Corporation 3Q 2023 earnings call
Last week brought a potentially landmark development in the ongoing evolution of the U.S. media landscape. On February 6, industry juggernauts Disney, Fox, and Warner Bros. Discovery announced that they will be launching a combined service for streaming sports content. Targeted at cord-cutters/nevers (people who have dropped or never subscribed to a pay TV product), the as-yet-unnamed service is expected to launch this fall as a joint venture, with each company owning a one-third stake.
The streaming venture could offer fans access to around $16 billion per year in rights fees (according to Bernstein), since each of the three media companies is a powerhouse in sports rights, controlling key events such as the NBA, MLB, golf, grand slam tennis, and much of the NFL and college football. No further details have been released so far, but Wells Fargo analyst Steven Cahall puts the cost of the service at around $40. Unfortunately for U.S. consumers, for nearly double the cost of Netflix’s premium tier, sports fans would gain access to only ~55% of U.S. sports. Viewers who also purchased additional services from Peacock and Paramount Plus (which provide live NBC and CBS broadcast feeds, respectively) could access almost all U.S. sports content—but at a cost of approximately $58 per month. This high price, and the number of companies involved, highlights the incredible complexity of the U.S. media landscape and the impact of its historical structure.
Reversal of Fortune
Ever since late 2015, when Disney CEO Bob Iger announced that ESPN, the (self-proclaimed) worldwide leader in sports, had begun to lose subscribers for the first time, U.S. cable networks have been under pressure. Until that point, they had been Wall Street darlings, with consistent subscriber growth fueling their dual revenue stream model of advertising and affiliate (subscription) fees. But repeated annual price increases that cable operators passed through to consumers eventually pushed the cost of the “big bundle” too high. The situation has only deteriorated over time, with consistent subscriber losses causing media companies to increase their prices further (to keep their revenues growing), leading to even greater subscriber losses—a vicious cycle often called a “doom loop.”
Today’s viewers are blessed to live in a golden age of television, with standalone services from the likes of Netflix and Amazon Prime pressuring cable companies to offer their wares via streaming on platforms such as Max and Peacock. In fact, last year streaming accounted for more minutes of viewing in America than either broadcast or cable TV, according to ratings firm Nielsen. Sport is the exception, however: the U.S. cable companies that control the majority of sports rights have been slow to shift sports to streaming, mostly because existing contracts with cable companies (like Xfinity and Spectrum, owned by Comcast and Charter Communications, respectively) include sports channels in cable packages regardless of whether consumers watch or wish to purchase the service. Additionally, media companies leverage their high-profile sports networks to include other channels in packages, for which they receive extra affiliate fees. (By contrast, sports are available unbundled for live streaming internationally, such as in the U.K. on Comcast’s Sky platform and in Australia on various platforms such as Kayo, owned by News Corp, Paramount+, and locally operated Stan).
A Changing Landscape
However, the accelerating number of cord-cutters seems to finally be motivating the content providers to launch standalone streaming services. (According to research firm MoffettNathanson, approximately 73 million households subscribe to pay TV, either through the traditional cable companies or through Internet substitutes like YouTube TV—down from approximately 100 million a decade ago.) The regional sports networks (RSNs) that televise local sports franchises have been under particular pressure, as they are often excluded from the few available “skinny” cable packages. In response, MSG Networks (owned by Sphere Entertainment), recently launched MSG+, enabling New York area fans to watch the New York Knicks and New York Rangers without a cable or bundled streaming subscription. Unfortunately for such fans, this service alone costs $29.99 per month (or $309.99 annually), so for households that like multiple teams or sports, subscribing to several different services can quickly get expensive. Adding access to the Yankees and Nets, for example, would cost a New York area fan an additional $24.99 per month (or $239.99 annually).
Aside from the cost, combining so many streaming services creates an extremely poor user experience. For example, if the NFL were to transition entirely to an à la carte streaming model (highly unlikely given broadcasts continued strong reach), its games would be televised across a staggering six services—ESPN, CBS, NBC, Fox, Amazon, and YouTube—each of which would operate a different platform with its own login credentials and disparate viewing experience. While there is technology available to consolidate the various apps into one platform that delivers a unified experience, having to subscribe to multiple services can create its own set of challenges that can create a less than ideal consumer experience. Moreover, many of these aggregating platforms require a device/piece of hardware equipment, so the experience associated with having multiple apps would certainly deteriorate away from the home.
Reducing Churn
For media companies, offering single sport streaming options increases one of streaming’s biggest challenges—churn. The ease of subscribing to and cancelling a service (especially without cable installation) means that consumers often opt in to and out of streaming services. As a result, media companies commonly receive lower subscription fees and must continually entice users to maintain their subscription (or resubscribe). One way of reducing this churn is to provide sports coverage that covers the household’s “off season” (e.g., MLB for predominantly NBA or NHL fans, and vice versa). Providing a broader range of coverage could also entice more households to sign up, letting them justify the cost by watching different sports.
This new joint venture attempts to solve these problems by providing viewers with one streaming home for the majority of live sports content, drawing on each company’s particular expertise in streaming and broadcasting sports. It also aims to lower the cost to fans by giving them only the content they want to watch instead of constraining them with content bundles. In this regard the U.K.’s Sky might serve as a model, with its sport content completely unbundled and available on a standalone basis for a year, a month, or even a single event.
Interesting Idea but Key Questions Remain
This early in the process, only limited details are available, but the combined streaming service represents a logical business move for the three media giants. Beyond reducing churn, it should spread fixed expenses and the cost of the sports rights across a greater number of subscribers, perhaps eventually leading to combined bidding for future rights (although this potentially could run afoul of U.S. antitrust laws especially with the DOJ recently announcing that it will be looking into the proposed streaming platform). Such an approach could help media companies compete with the deep pockets of tech giants Apple, Amazon, and Google for future rights deals or, alternatively, drive down the cost of sports rights through better negotiating leverage (which may have a follow-on impact for sports team valuations).
No Panacea
The success of this venture would likely hasten the demise of the big bundle, as sports content had been viewed as the glue keeping what’s left of the Pay TV bundle together. At first, however, it will be no panacea, since it will cover just over half of U.S. sports and there is no guarantee that it will be able to maintain its breadth of content as its rights expire beginning with the NBA where rights are currently controlled through just the 2024/2025 season. Moreover, and as noted above, consumers will still have to subscribe to other standalone streaming services and packages to fill in potential gaps in sports coverage. For example, Amazon is broadcasting certain NFL games exclusively, which cost consumers another $139 a year. It will also be interesting to see whether pushback or support will be forthcoming from the leagues (according to reporting by the Wall Street Journal, the NFL and NBA were not consulted before the announcement), cable companies (which are looking to become distributors and aggregators of streaming services), or other large media companies (which Fox says have not been invited to join)—and whether the service will fare well against the standalone DTC ESPN expected to launch in fall 2025 as an add-on to Disney Plus (similar to the current Hulu arrangement).
Boyar Conclusion
At this point, there are more questions than answers as little in the way of specific details have been released about this proposed streaming platform. However, we believe that a couple of things can be gleaned from this announcement. First, the streaming business is still in flux and legacy media companies are still trying to figure out the optimal monetization mechanisms. Second, sports are likely to play a pivotal role in future streaming profitability and therefore we believe that entities holding or directly benefiting from sports rights will likely continue to be key beneficiaries. In our 2024 Forgotten Forty we featured three companies including Liberty Braves, Madison Square Garden Sports and Formula One Group that are well positioned from this perspective. Although, one might argue that the proposed streaming platform would enjoy newfound bargaining power when negotiating for future rights, we view the move from these legacy media companies as somewhat defensive in light of the interest in live professional sports from deep pocketed media companies such as Apple, Amazon, Netflix and Google that are increasingly bolstering their exposure to this attractive genre. Finally, and as the opening quote to this note suggests, it’s likely that we are coming full circle and new bundled offerings are likely to emerge that will look quite similar to the old traditional cable bundle.
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