Fat and Unhealthy
If the networks don't correct this spending, people will not get spoils on free TV in the future. I don't want to see sports being broadcast out of little bread trucks as viewers put coins into a little box to watch games.
—DICK EBERSOL
PRESIDENT, NBC SPORTS
During the fall of 1990, the NFL began hearing complaints from the sports divisions at ABC, CBS and NBC that they were losing millions of dollars a year on their coverage of pro football. At the time the league was in the first year of its four-year contracts, worth a total of $3.65 billion, with the three big networks plus ESPN and TNT. Not until last summer, though, did Cleveland Browns owner Art Modell, the chairman of the NFL's television committee, fully realize the seriousness of the financial woes at ABC, CBS and NBC. For the first time, the networks opened their books to the TV committee, allowing it to scrutinize sales orders and the prices charged for commercials.
After consulting with members of the advertising industry, Modell's committee projected that the three networks would lose $260 million on pro football telecasts over the course of their contracts with the league. Worse yet from the NFL point of view, the league looked to be headed for a severe hit when the contracts expire at the end of 1993. Each of the 28 NFL teams was scheduled to receive $41 million in television rights fees in 1993, but according to Modell's calculations, that figure could plunge to $28 million in the next TV deal. Modell suggested that he and his fellow owners flatten their '93 payout to this year's rate of $34 million per team and extend the TV contracts at the same amount through 1995. In other words, Modell proposed that the NFL reduce its previously negotiated rights fees for next year by $196 million.
That didn't happen. Instead, late last month the owners voted to reduce their 1993 rights payments by only $28 million, or $1 million per team. While the owners have promised to discuss a contract extension again sometime this fall, the TV committee isn't too hopeful that anything will come of the talks. "I'm frustrated for a group of very bright men who don't want to be bored with the facts," says NFL president Neal Austrian, the league's top-ranking official after commissioner Paul Tagliabue. "There will be a shocking reality at the end of this contract."
Says Dennis Swanson, president of ABC Sports, "It's just as well that we finish this contract and negotiate a deal that gives us the kind of circumstances we need. We might be better off to take our lumps and then get it fixed properly."
The kind of circumstances we need? Get it fixed properly? Is anyone listening?
Never before have the sports divisions at ABC, CBS and NBC and the leagues faced such uncertainty. Through the late 1980s the three networks enjoyed healthy financial partnerships with the NFL and other major sports properties, but the climate changed once the recession took hold. On top of that, between December 1988 and March 1990 CBS had jolted the broadcast industry by committing a total of $3.5 billion to televise the NFL, Major League Baseball, the NCAA basketball tournament and the '92 and '94 Winter Olympics.
For the past three years Ebersol has been sports television's voice of concern, knocking CBS's spending spree at every turn. His primary target has been CBS's four-year, $1.06 billion deal with baseball. By contrast, baseball's previous contracts with NBC and ABC had been worth $1.1 billion over six years. "The baseball rights fees were disastrous," says Ebersol. "It polluted sports rights fees."
Indeed, CBS's baseball contract begot the NFL's $3.65 billion deal. Ebersol insists that NBC will remain on the sidelines during the next negotiations with pro football unless he can considerably reduce the network's risk of future loss and can recoup much of its estimated $100 million to $120 million in losses from the current contract. "We will not go forward unless we throw in every risk and the amount of dollars left over still leaves us room for profit," Ebersol says. "My bosses won't be thrilled to hear this, but I'd be happy with a 10-percent profit. You'll see us the next time out offering to pay a rights fee for way, way, way lower than the [proposed NFL] extension. Tens of millions. We won't ever make good on all our losses, but we have to try."
To skeptics who say he's only posturing, Ebersol replies, "Try me."
Ebersol, Swanson and Neal Pilson, the president of CBS Sports, agree that because rights fees represent almost 90 cents of every dollar their divisions spend—the other 10 cents goes to production costs—NBC, ABC and CBS might be better off without sports. "What is the point if you're losing money every year?" says Swanson. "How many businesses operate that way?"
No longer can the networks pass on the cost of the rights fees to the advertisers by simply charging more for commercials. Now with the proliferation of sports programming and the increase in commercials that goes with it, advertisers can drive down the prices of commercials by shopping around and by waiting until the last minute to buy time at a discount. CBS, for instance, sold the last quarter of its Winter Olympics spots at a reduced rate. "The golden goose is dead," says Bill Sherman, vice-president of national broadcasting at McCann-Erickson Worldwide, a leading advertising agency. "For years we told the networks we would reach our ceiling, and that day has come."
You can be sure that the heads of ABC, CBS and NBC—Swanson's, Pilson's and Ebersol's bosses—have expressed the same concerns about expensive sports properties. NBC president Robert Wright has stated that his network would rather be No. 1 in common-sense spending than No. 1 in the ratings, especially if being the top-ranked network means paying too much in sports rights fees. In an October 1991 speech to the Hollywood Radio and Television Society, Daniel Burke, the president and CEO of Capital Cities/ABC, went so far as to say that sports are "nice" but in no way necessary for the survival of his network or its affiliates. (The necessity of sports on ESPN, of which Cap Cities/ABC owns 80%, is, naturally, another story.)
"In our zeal to compete vigorously with each other, we have handled sports rights purchases very foolishly." said Burke. "There never was—and never will be—enough money to bring these huge expenditures anywhere near break-even.... I am as confident as I can be about anything that nothing approaching these amounts will ever be offered again. A drastic meltdown in player salaries and perhaps franchise prices as well has to be the result."
If all these statements are not convincing enough, consider the following:
•CBS has taken write-offs totaling $604 million for baseball and the NFL over the duration of its contracts. Pilson once defended the network's decision to pay big bucks for sports properties by saying that sports programming would help pull his third-rated network out of the cellar in prime time and that it would please the affiliates. Last week it was announced that CBS had indeed finished first in the ratings for the 1991-92 season, its first ratings title in seven years. Nonetheless, Pilson concedes that CBS grossly overbid for baseball. "If we knew then what we know now, we wouldn't have made the offer we did for baseball," he says. "Nobody will ever again say to a sport, 'We have to have you, and we'll make any deal we can.' "
•ESPN, which paid $400 million to televise baseball for four years, says it lost $36 million in 1990, and industry sources estimate that ESPN lost another $40 million to $45 million in 1991. "At one time we'd hoped to make money |on baseball]," says ESPN president Steve Bornstein, "but it doesn't look as if we'll make anything." ESPN and Major League Baseball have until Oct. 31 to determine whether to continue the agreement for 1994 and '95 at higher rights fees, which were negotiated into the original deal.
•NBC has sold only 80% of its commercial time for the Summer Olympics in Barcelona. In hopes of recovering approximately $100 million of the $401 million it paid the International Olympic Committee and the Barcelona organizing committee for the rights to televise the Games, the network, working with a national cable operator called Cablevision, came up with a 24-hour-a-day, three-channel pay-television concept called TripleCast, which will show 12 hours daily of live Olympic coverage, from 5 a.m. to 5 p.m., and repeat it from 5 p.m. to 5 a.m. Cost to the consumer: $29.95 for one day of events, $95 for seven days, $125 for all 15 days, $170 for all 15 days plus Olympics promotional material. So far, sales have been extremely disappointing, and cable insiders are projecting NBC and Cable-vision will lose $75 million to $80 million on TripleCast.
•Last week NBC bought the rights to broadcast the next three Cotton Bowls for $8.1 million. Last year CBS paid about $4 million to televise the game.
On the plus side, CBS, which paid $243 million for the 1992 Winter Games in Albertville, claimed that it broke even. That claim, however, has been challenged by those in the television community.
Of the big three sports properties—the NFL, Major League Baseball and the NBA—the NBA seems to be the least concerned about a significant reduction in rights fees. The league's four-year deals through 1994 with NBC ($601 million) and TNT ($275 million) have been profitable for both carriers. Advertisers like the exclusive window NBC offers on Sunday afternoons, when the NBA forbids teams not playing in the network game to telecast their games at the same time. Advertisers also believe they reach a very desirable audience—young and male. Moreover, the NBA operates under a salary cap, with the players receiving 53% of all revenues. Under this structure, if revenues fluctuate, the salaries fluctuate, so the league, if it must take a hit from television, won't be so badly hurt.
By contrast, baseball will suffer greatly if in its next TV deal national rights fees are slashed in half, which is the latest estimate from broadcast and baseball insiders. If the decrease in rights fees is combined with the added shares baseball's two expansion clubs will receive, each team's average yearly national television income would drop from $14 million this year to $6.5 million in 1994. Currently the teams share the national TV revenue but not the money from local TV rights. A reduction in national rights fees would put more pressure on the small-market teams than those in large markets. Already there is an enormous discrepancy between the "haves," like the New York Yankees, who signed a 12-year, $486 million deal with Madison Square Garden Network in 1988, and the "have-nots," like the Kansas City Royals, Milwaukee Brewers, Minnesota Twins and Seattle Mariners, whose local TV and radio deals amount to less than $20 million each per year.
Before baseball's winter meetings in December, commissioner Fay Vincent warned the owners that national rights fees could be cut by at least 33% after next season. However, the fact that 68 players will earn more than $3 million and 270 will earn at least $1 million this year suggests that owners are not yet taking this sort of talk seriously.
"Why do we keep spending if we continue to show losses?" says Eddie Einhorn, president of the Chicago While Sox. "All I've done in my 12 years in baseball is find ways to get more money. I've never addressed the expense side of the ledger. Few of us have. I believe we can handle our payrolls at half the rights fee." It's worth noting that when baseball tried to "handle its payrolls" in the late 1980s, the owners were found guilty of collusion and paid the price—a $280 million fine.
Beyond trying to control salaries, there are other things the leagues—and television—might do to handle the hard days ahead. For one thing, the three major networks and their cable counterparts will probably attempt to get leagues to accept a revenue-sharing mechanism in future contracts. Television would guarantee the NFL, the NBA or baseball a minimum fee, but rights fees would increase if a broadcaster's ad revenues for the sport in question surpass certain thresholds. This concept, however, is not trouble-free. "The network has the pencil," says Trans World International's Barry Frank, the television consultant to the IOC. His point is that broadcasters could "creatively" account for revenues obtained from advertisers buying multisport or multi-program packages of commercials.
Don McGuire, executive producer of sports at TNT, envisions a day when the leagues will no longer sell the rights to televise their games but will maintain control over their product—selling everything from commercial time to space on stadium billboards—and use the networks only as distributors. "Right now, we're the banker." McGuire says. "The leagues send us out to get the money from advertisers. Why not make this one-stop shopping? Sell an advertiser a $10 million package and spread it around. We can't sell local coaches' shows, signage, mugs or decals. This would put leagues more in control of their own destinies."
Others in the TV industry think the leagues might try to generate additional revenue by producing their own games, thus lowering production costs for the broadcaster and freeing up more money for rights fees. Game telecasts would not require costly network union technicians and would belong solely to the league, as would the secondary use of the telecasts—e.g., the right to supplementary pay-per-view packages, such as "season tickets" to Chicago Bears games for their fans who live in, say, Tampa.
The NFL, Major League Baseball and the NBA all have repeatedly said that they oppose placing a majority of their games, especially the marquee events like the Super Bowl, World Series and NBA Finals, on pay-per-view. (Right now, about 19 million of the 92 million homes in the U.S. can get pay-per-view.) Look for the leagues to scramble their signals so that the three million owners of satellite dishes have to pay to pick up games that are not broadcast in the viewers' area.
Sports and television executives will keep a close watch on how aggressive the bidding is for the 1996 Summer Olympics in Atlanta. The Atlanta organizing committee hopes to get $500 million to $600 million in U.S. rights fees, which would be the largest amount ever paid for an Olympics. Because the IOC and the Atlanta organizing committee have already sold the European broadcasting rights for $275 million, or about $180 million more than the rights for this year's Barcelona Games went for, Atlanta's negotiators are sitting tight in hopes that they can get a similar windfall if the U.S. economy turns around. Is there a chance that the allure of an Olympics in the U.S., with many glamour events in prime time, will cause a network to whip out its checkbook and pay an outrageous amount?
Says Ebersol, "I feel like I've woken up early one morning beside a lake, the ice is glistening, and I think I can see into the future. But then I look closely and see it's dry ice and everything is in a fog. Just when we all thought an NFL extension would help put TV rights fees back into perspective, none of us can predict where it's all going. Does everybody really have a grip on this?"
No. Nobody has a grip on all of this. There's only one probability. Just as baseball's billion-dollar TV contract started the upward spiral in rights fees for sporting events, the NFL's unwillingness to modify its deal with the networks will likely have the opposite effect.
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ILLUSTRATION
RUSS WILLMS
The food chain: If the advertisers spend less on TV, leagues may have less for players.
ILLUSTRATION
RUSS WILLMS
Pay-per-view of marquee sports events is a frightening prospect for most fans.
ILLUSTRATION
RUSS WILLMS
CHART
JOHN GRIMWADE
ILLUSTRATION
RUSS WILLMS
With rights fees expected to shrink, the NFL may cut costs by producing its own TV games.