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Original Issue

TV To Sports: The Bucks Stop Here

The networks say they no longer can afford to pay high rights fees, and the sports world could soon be the poorer for it

There's a dagger aimed at the hearts of the NFL, major league baseball, the Sugar Bowl, the Kentucky Derby and other sports leagues and events we've come to know and love. The dagger isn't drugs or alcohol or under-the-table payments to college athletes. It is the financial problems besetting network television, the sugar daddy that has allowed owners, promoters and athletes to reap fortunes that 20 years ago would have seemed unfathomable. All of a sudden things are changing.

In 1985 the three networks lost $45 million on the NFL. NBC Sports stood to lose $15 million overall before deferring some rights payments until this year. CBS Sports, largely on the strength of NBA and NCAA basketball tournament telecasts, made a narrow profit of $10 million, although it lost $15 million on the NFL. ABC Sports, mainly because of its deal with the NFL, ran a staggering $30 to $50 million in the red, this following a record $70 million profit in the Olympic year of 1984—in short, a $100 million-plus Wrong Way Corrigan.

After years of paying ever-increasing millions for the rights to broadcast sports events, the networks now say that the gravy train has ground to a halt. The party's over. Some sports will have to live with less or take a walk, a situation fraught with peril for owners, athletes and fans, who may be asked to pay more for tickets if the TV spigot taps out.

Here's a synopsis of the turmoil:

•Last year, Capital Cities Communications, a media conglomerate renowned for its lean, bottom-line management approach, bought ABC. Out of the sports division he had led for 25 years went Roone Arledge. In as the division's president came Dennis Swanson, a former marine and sportscaster who said that ABC Sports will be "looking for relief on all rights contracts it negotiates. Swanson leaves open the possibility that Monday Night Football may be canceled after next season, and he is also paring costs in other ways (see box, page 27).

•NFL commissioner Pete Rozelle, sobered by the harsher climate and faced with a lawsuit from the USFL that challenges the NFL's right to have its games televised on all three networks, is examining such TV alternatives as syndication and pay cable for 1987 and beyond. A month ago Rozelle said he expected a modest increase over the average $414 million per year—$65 million per team—the networks now pay the NFL when a new package is negotiated next year. Today, he won't go even that far.

•Last September, NBC, CBS and ABC all low-balled the Seoul Olympic Organizing Committee, which once expected to get as much as $1 billion for the U.S. TV rights to the 1988 Summer Games. NBC's winning bid was an unexpectedly modest $300 million (with the possibility of more under a revenue-sharing arrangement), and even at that price the network could lose millions.

•Last year, ABC's award-winning SportsBeat with Howard Cosell followed American Sportsman to the undertakers. CBS jettisoned the Belmont Stakes, the third leg of horse racing's Triple Crown. On Feb. 4, ABC refused to renew the Gator Bowl, and its coverage of the Sugar Bowl may end after 1987.

•Other traditional events may fade from network screens within a few years, predict sports presidents Arthur Watson of NBC and Peter Lund of CBS. Possible casualties: major horse races, auto races, including the Daytona 500, other postseason college football games such as the Peach and Fiesta bowls and regular-season college football packages.

Network sports programming has become less profitable largely because demand among advertisers for commercial time on those telecasts has slackened considerably. In the past, the networks paid big money for the rights to broadcast sports events because they could pass the costs along to advertisers who were only too willing to shell out, say, $185,000 for a 30-second commercial on Monday Night Football. Network salesmen snapped their fingers and the advertisers came running. But now, suddenly, the networks have to beg Madison Avenue to buy time—and often at considerably reduced prices.

It's not that the ratings are so terrible. Last year, in fact, ratings improved quite nicely on the networks' NFL and major league baseball telecasts after stumbling for most of the '80s. ABC's Monday Night Football was the top-rated show in its time slot last season, and last month's Super Bowl drew the largest audience of any television program in history—120 million viewers.

Then why has the advertising demand fallen so? For one thing, the nation's TV viewing habits are changing in such a way that advertisers often feel they can reach their target audiences more efficiently by buying commercials on programming other than sports. Until quite recently, for instance, an overwhelming majority of automobiles were purchased by men, and carmakers advertised heavily on sports telecasts. Now car-buying decisions are made increasingly by women, who are more likely to watch Murder, She Wrote or Dan Rather. At the same time, brewing companies like Miller and Anheuser-Busch no longer need sports and only sports to reach beer-drinking men. They are now spending some of their advertising dollars on new alternatives such as MTV.

Another factor is the glut of sports on television. With the proliferation of cable TV and court rulings that have led to decentralization of college sports telecasts, there is wall-to-wall football, and so much basketball on the tube that the games seem to run together. With so many advertising options available, the networks often fail to sell all their commercial spots—or they are forced to sell at prices that are lower than those on their rate cards. The networks foresaw little of this and paid too much for the rights to sports events. Now they have to pay the piper.

One indication of the changing relationship between TV and sports came just before last Christmas when Jim Spence, then senior vice-president of ABC Sports, informed his new bosses at Cap Cities that he could land the NBA's TV rights for the next four years. Spence had all but worked out a deal with NBA commissioner David Stern—subject, of course, to Cap Cities' approval. ABC was prepared to throw in some pre-championship playoff games to be broadcast in prime time—a plum the NBA doesn't have in its current contract with CBS. In addition, ABC would double the current fee to about $44 million a year. Spence argued that with the increasingly popular NBA telecasts on the network schedule, ABC Sports would "turn the corner" and make a profit.

Cap Cities' response told more about the company's conservatism and the new order in sports TV than Spence or any of his colleagues at ABC could have possibly imagined.

"No, no, a thousand times no!" said the network's new owners. And the economics of the prospective deal wasn't all that concerned them. Chairman Thomas Murphy and president Daniel Burke felt that doubling the NBA rights fee would send the wrong message to the NFL, which is due to renegotiate its contract next year. "And furthermore," one Cap Cities exec said, "paying the NBA that much money will mean higher salaries for the players. And higher salaries will contribute to the drug problem in athletics today."

Since then other tremors have hit ABC. One registered a 6.8 on the Nielsen scale, which was ABC's hideously low prime-time rating on the Jan. 1 Sugar Bowl. On Jan. 27, Arledge was relieved of his day-to-day sports duties and left in charge only of the network's news division. Spence, an ABC Sports original and Arledge's second-in-command, was not even interviewed for the sports job and resigned Feb. 3. As president of the sports division, Cap Cities installed ex-sports-caster Swanson, 47, who most recently had headed the ABC-owned stations division. Clearly, Cap Cities will be calling all the shots through him and not in the same language the Arledge disciples at ABC Sports are used to hearing.

Cap Cities' message is that the balance sheet is more important than holding on to prestigious yet money-losing sports events. Thus, although Arledge made Monday Night Football an American institution. Cap Cities won't hesitate to sack it if it can fill Monday nights with more profitable programming.

Says Swanson, "We have to try to come to grips with what people who control these sporting events expect in return for our right to televise them. There are some difficult days ahead, some tough negotiations ahead."

Asked if ABC might abandon the NFL altogether in '87, once an unthinkable notion, Swanson adds, "That's something we're going to have to take a close look at."

Arledge, who since 1977 had been ABC's president of both news and sports, insists he was delighted to leave sports. "Henry Longhurst [the late golf writer and announcer] once said that having sucked the juice from an orange, you don't feel compelled to chew upon the rind," he says. Others are sure that Cap Cities forced Arledge out, at least partly because he had spread himself too thin.

It is not too much to say that Arledge established sports TV as an industry. He took over ABC Sports in the early 1960s and promptly turned it into a profit center that the rest of the network built itself around. But eventually the other networks caught up. After 1977, Arledge turned most of his attention to running the news division. In the hallways, Sports staffers called Arledge the Wizard of Oz ("Nobody can see the wizard!"). Before Spence could do anything, he had to first clear it with Arledge. And when Arledge was off directing coverage of the invasion of Grenada or a presidential election, weeks would go by before Spence would hear back on such things as announcer assignments or how much money to pay the bowling tour.

Even so, Arledge and Spence might still be running ABC Sports today had they not negotiated contracts that Cap Cities considers horrendous. The current NFL agreement, which Arledge negotiated in 1981, cost ABC $160 million in rights fees last year. Less than $135 million was recouped from advertisers, leaving a net loss of at least $25 million. The terms of the 1983 baseball contract, which was Arledge and Spence's baby, called for ABC to pay $575 million for six years, including 120 prime-time telecasts. But only a few months after the deal was concluded, the network, having met resistance from advertisers, decided to cut the number of prime-time games by more than half. This in effect guaranteed an annual loss on the network's baseball package of millions of dollars through 1989. In 1984 ABC signed a $309 million agreement to televise the 1988 Calgary Winter Olympics, which now has Cap Cities accountants squirming. It came as no surprise when ABC failed to make a serious bid for the 1988 Seoul Summer Games last fall.

ABC, of course, has company in its misery. The only shocking development now would be if the Cap Cities' philosophy didn't rub off on the other networks.

"You add up [the numbers] and there's no profit. It's gone," says CBS's Lund. "But the impact hasn't been felt yet, at least not entirely, by the leagues. The reason is that the [new] baseball and football contracts haven't come up yet. That's where the rubber is going to meet the road—when there is either a leveling off or a diminution in the rights paid to those leagues." CBS feels justified in having recently renewed its NBA contract—ABC having dropped out of the picture—for four years at an average $43 million annually (up from $22 million per year), because, says Lund, it's the one sport whose ratings have gone up in the last five years. It's also the one sport on CBS's schedule that has been substantially profitable for the last few years.

A good example of an event gone sour is the Belmont Stakes, which CBS has aired for 20 straight years. Its ratings have decreased 58% over the last five years, and thus it won't be back on the network next June. CBS wanted to keep the Belmont for its prestige value, but the cost—$3 million a year—was too high. To make a profit, CBS would have had to lower its price to less than $1 million. At last report, the New York Racing Association had been looking for a deal with ESPN. Watson, Lund and Swanson predict flatly that the networks once again will lose money on the NFL in 1986. The problem: While their rights payments to the league will rise 11% over those of 1985, to a total of $500 million, the market for commercials for NFL and other sports telecasts has become soft and fragmented. Some of the advertisers who helped drive up the prices in the first place, such as computer and video-game manufacturers, have dried up or moved out of sports entirely. A further sign of the times: The Miller Brewing Co. spent 95% of its advertising dollars on sports TV five years ago, but now only 70% goes into sports. Says Miller spokesman Steve Forsyth, "Sports programming used to be a bargain compared with prime time. Now it's as expensive or more. With that, other types of programming become just as important. We are using MTV, late-night shows like David Letterman and some comedy programming to reach our target audience." Says Steve Leff of Backer & Spielvogel, the advertising agency that buys spots for Miller, "Prices are affected by demand, not ratings. For years sports was the most efficient way to reach the male target audience. Now, other vehicles such as news and late-night programming reach it, and the market has started to correct."

The sports glut on TV—there are now 1,500 hours of network sports programming per year, compared with 1,175 nine years ago—has further contributed to the buyers' market. As Neal Pilson, executive vice-president in charge of sports and radio at CBS, says, "If there are 10 advertisers outside my door looking for five opportunities, I have the leverage. If there are five people outside and 10 opportunities, it's hard to set a price because they know they only have to sit there and wait."

That is exactly what is happening. Each week during the 1985 NFL season, network ad salesmen held what became known as Friday afternoon fire sales. Like an airline selling standby seats at discount before a departure, the networks booked unsold commercial spots below their full-price rates. Some of last year's commercial time was sold for less than 1983 and 1984 prices.

The implications are obvious for the NFL, which derives 60% of its revenue from TV—a cool $16.5 million per team in 1986—and must renegotiate its network contract next February. One effect of any falloff in TV revenues: less money trickling down to the athletes. Are the heads of the players associations getting the message? Apparently not. Gene Upshaw, executive director of the NFL Players Association, dismisses the talk of hard times in TV sports as so much posturing. "I just can't see [NFL TV rights] going down or staying even," he says. "I mean, last season was one of the best the NFL has ever had."

"I wouldn't give too much credence to [the networks'] statements," says Donald Fehr, executive director of the baseball players' union. "I think you have to recognize the possibility that this is just a bargaining strategy."

However, baseball commissioner Peter Ueberroth, who must negotiate a new network contract in three years, has let his owners know that they've suddenly reached a crossroads. "The fact is that revenues from network television most likely will not be fiat but will decrease," Ueberroth says. "All of baseball must prepare for that and do some worst-case analyses.... There are going to be some very lean times ahead."

Where will the partnership between sports and television be 10 years from now? Here's some educated crystal-ball gazing:

1) As Arledge recently predicted in Advertising Age, some of the lost ad revenue may be made up by exclusive sponsors purchasing and attaching their names to major events. We may live to see the 1996 Burger King World Series or the 1997 Old Spice Stick Deodorant Super Bowl.

2) Cable TV will remain an idea whose time has not yet come. With few exceptions, the networks will still control the major sports events, and cable will still have to make do with the minor ones.

3) You'll see some selected NFL and baseball games on pay-per-view TV, but the crown jewels—the Super Bowl, the World Series, the Olympics—will still be on "free" TV. With commercials, of course.

4) The 1996 Olympics—the Summer Games, at least—will be divvied up by sport and seen on all three networks simultaneously, simply because the freight has become too heavy for any one network to bear. The U.S. Justice Department will have to grant the networks an antitrust exemption so they can bargain for the Olympics together, but why not, if having the Games on TV is considered to be in the national interest.

As for the present, there won't be any more free lunches at the networks or at league headquarters now that Cap Cities is setting the table.

"For years TV sports has been run like the Pentagon—everything was cost overruns," said one network sports exec last week. "From now on it's going to be run like a business."