The frantic blitz to figure out sports streaming

San Francisco 49ers head coach Kyle Shanahan waves after winning the NFC Championship football game on 28 January. (Reuters)
San Francisco 49ers head coach Kyle Shanahan waves after winning the NFC Championship football game on 28 January. (Reuters)

Summary

Disney, Fox and Warner’s venture to bundle live sports content—the latest hit to traditional cable packages—needs to cover high costs and keep leagues on board.

Executives at the National Football League were in Las Vegas on Tuesday preparing for this weekend’s Super Bowl when they got word from news reports that their business—and the sports media industry writ large—was about to change in a fundamental way.

Disney’s ESPN and Fox, two of the league’s biggest media partners, announced that alongside Warner Bros. Discovery they would create a new streaming service to offer all their live-sports programming. 

The NFL, a titan that’s used to having a seat at the table in any discussion affecting its future and content, was out of the loop. Executives including Commissioner Roger Goodell and media chief Brian Rolapp were caught off guard by the news.

That the media behemoths were willing to risk the ire of the NFL shows the sense of urgency—even desperation—they feel about solving what is arguably the biggest riddle in their industry: finding a business model that can work in the streaming economy.

To do that, they made a profound shift without consulting powerful partners like the NFL, revealing it days before the biggest sporting and television event of the year. They’re taking the chance that, by joining forces with big rivals, they won’t draw antitrust scrutiny. And they’re doing it with a product that consumers might not even want—in part because the new service won’t deliver anything close to the entire landscape of sports programming.

Sports have been the linchpin of the hugely profitable cable-TV industry for decades. But as consumers cut the cord in droves, pushing that business to the brink, making the transition to streaming has been rocky.

It’s been hard enough to port entertainment programming to streaming, with services such as Disney+, Peacock and Paramount+ struggling to show investors profits. But sports are even trickier, because of the staggeringly high costs for the content.

Media companies collectively pay billions of dollars annually to the NFL and NBA alone. Cable makes the math work because of its inherent subsidy—even households who don’t watch channels like ESPN pay for them on their monthly bill, meaning the high rights costs are spread among higher numbers of subscribers.

What ESPN, Fox and Warner settled on was to create a slimmed-down version of a cable bundle in streaming form that is focused on sports. The as-yet-unnamed service, expected to launch this fall, will carry 14 networks, including Disney’s ESPN channels and its ABC network, Warner’s TNT and TBS, and Fox’s broadcast network and sports cable channel. The service will feature sports including the NFL, NBA, Major League Baseball, college football and basketball, golf and Nascar.

By packaging together all the content, the companies are hoping they can bring in enough sports-first customers to make the economics work. Wells Fargo analyst Steven Cahall projected, based on various assumptions, that the service could break even if around six million subscribers paid at least $40 a month.

The companies are discussing a price that could approach $50 a month, people familiar with the situation said.

For many years, media companies resisted offering such a sports-specific package, fearing it could cannibalize the old-school cable bundle, which they wanted to preserve as long as they possibly could. Now, the cable industry is reaching a tipping point: Only 73 million households subscribe to pay-TV, either through traditional distributors such as Comcast or internet versions of cable like YouTube TV, down from about 100 million a decade ago, according to MoffettNathanson. 

The rate of decline has picked up pace since streaming really started to take off in 2019, when multiple services beyond Netflix became popular.

With the streaming venture, Disney, Warner and Fox have decided to leap into a new business even if it accelerates cable’s collapse—with the real risk that what they are building won’t be anywhere near as lucrative. As one rival executive put it, they are tearing down the house to put a shed in the backyard.

“We’re doing what should have happened slowly over 20 years all at once now," said Patrick Crakes, a sports media consultant and former senior executive at Fox Sports. He added, “This is not going to save anybody, but it’s a start."

Missing games

Even with all the sports games the planned service will offer, it still won’t be a complete, all-in-one sports platform, partly because Comcast’s NBC and Paramount’s CBS aren’t part of the partnership. NFL fans would still need CBS to watch Sunday afternoon football, NBC’s Peacock for Sunday night football and Amazon Prime Video to watch Thursday games.

Ian Schrader, a 48-year-old automotive technician from Pendleton, Ky., said he is paying for YouTube TV, which streams a package of more than 100 cable channels, exclusively because of sports. When he first signed up years ago, it was $40 a month. Now it’s $73.

“As long as it’s less than what YouTube TV is, I’m probably going to be on board," he said of the planned sports-streaming service.

Dave Focareta, a 45-year-old freelance writer from Santa Monica, Calif., said the planned service doesn’t include the sports content he likes. An avid soccer fan, he pays for Peacock to watch the English Premier League and Paramount+ for the Champions League.

“In theory, I like the idea of a streaming service that bundles live sports," he said. “But what’s being proposed isn’t going to meet my needs."

Sports fans who also like all the other channels in their cable packages might not be interested. And customers could resist adding another expensive streaming service to the ever-expanding assortment such as Netflix, Apple TV+ and Max.

Failing to bring the NFL, NBA and other leagues in on their plans was a risk for the media companies. The leagues have plenty of options when licensing their rights, and in the past few years tech companies such as Amazon and Apple have emerged as customers. On Friday, The Wall Street Journal reported Amazon will stream its first NFL playoff game next season.

Tech companies are also eyeing an NBA rights deal if they get the opportunity. Warner and ESPN are the league’s biggest media partners and are now in negotiations to renew their deals, with an exclusive window that expires this spring.

If the sports service does gain traction, it will deal another major blow to the cable bundle by driving more consumers to cancel their subscriptions, said Steven Bornstein, a former chairman of ESPN and a former executive with the NFL. “It just further decays the bundle, which is the lifeblood of these companies," he said. “I would be concerned if I was sitting at Disney and Fox and Warner Bros. about being part of something like this."

The companies said the venture would bring in what it called “cord nevers," younger people who had never subscribed to traditional cable.

But it could very well have broader appeal, and traditional cable companies such as Charter will likely start demanding flexibility to create slimmed-down sports-centric packages of their own. Traditionally, deals with media companies have required the cable companies to package the attractive sports properties with smaller-audience entertainment channels.

The biggest losers in cable’s collapse will likely be the owners of local TV stations and smaller entertainment networks, from A&E to AMC to Comedy Central and Syfy, that are the most dependent on cable TV. Shares of Scripps, owner of 61 local stations, are down 24% since the sports venture was announced.

“In a way, these guys just ran into the castle and pulled up the drawbridge," said Doug Shapiro, a former head of strategy at Turner, a division of Warner, who is now a consultant to media companies. “And you are either inside or outside the moat."

Frenetic experimentation

The new sports venture grew out of a frenetic, almost chaotic period of experimentation in the industry over the past year. Media companies have explored all sorts of potential business models for streaming and sports, some that involve going it alone and some that would require teaming up with others, through pricing bundles, joint ventures or all-out mergers.

Fox Corp. Chief Executive Lachlan Murdoch had been having separate discussions with both Warner Bros. Discovery and Disney last year about creating a sports streaming service, people familiar with the discussions said. Fox has an ad-supported streaming service for entertainment, Tubi, and a Fox Nation streaming service for news and lifestyle programming—meant as a complement to Fox News—but didn’t have a major subscription streaming option for its huge array of sports content.

Murdoch was inspired largely by Kayo Sports, a similar platform in Australia that Journal parent News Corp owns, which counts ESPN as a programming partner. Murdoch is chair of News Corp and executive chair and CEO of Fox Corp.

Warner Discovery Chief Executive David Zaslav, who has long advocated bundling streaming services, was eager to do something with Fox. Warner in September announced that its live sports content, including NBA and MLB games, would be available on its Max streaming platform for an additional $9.99 a month. But the company wanted a way to reach even more sports fans in the streaming world.

At the same time, ESPN Chairman Jimmy Pitaro was also thinking about the idea of partnering with another media company. Bob Iger, chief executive of ESPN parent Disney, had broached the topic of a sports partnership with Murdoch as well. Iger has been battling activist investor Nelson Peltz, and finding a future strategy for ESPN is a major imperative in his quest to keep investors on his side.

ESPN had been working on a plan to offer its flagship TV channel in a stand-alone streaming app, while considering a number of other paths, including strategic partnerships with the NFL and NBA, as well as teaming up with rival media outfits. The stand-alone ESPN app is still moving forward, with a target date of fall 2025.

“The current bundles and packages haven’t necessarily met all the customer wants and needs," said Marc DeBevoise, chief executive of the video technology company Brightcove and a former Paramount executive, resulting in the wide experimentation.

The talks for the new venture quickly moved forward, the people familiar with the discussions said. A hunt is now on for a chief executive.

The platform will license the channels from its parent companies, and each owner will keep the ad revenue from their respective networks.

A number of private-equity firms, including TPG, have expressed interest in possibly investing in the new company, according to people familiar with the situation. It’s unclear if Disney, Fox and Warner will want financial partners.

Disney, Warner and Fox will each own one-third of the venture, which will have an independent management team, the companies said.

The structure could pose challenges. Fox, NBC and Disney owned the streaming service Hulu together but often disagreed on strategy—it was at times referred to as “Clown Co," partly because of the struggles to formulate a unified approach.

Disney bought out Fox’s share in Hulu in 2019, as part of its acquisition of much of Fox’s entertainment assets, and is now buying out NBC parent Comcast to take full control of Hulu.

Competition question

The collaboration by three giants to pool a huge amount of sports programming—Citi analysts peg it at 55% of U.S. sports rights—could draw antitrust scrutiny. Smaller rivals have already raised alarms.

Disney, Fox and Warner have said they will negotiate independently for sports rights, mindful that teaming up would be a red flag to federal antitrust regulators.

The government is going to look at this arrangement and ask how it benefits sports viewers, and how content suppliers—in this case the sports leagues—are reacting, said William Kovacic, a former chair and general counsel at the Federal Trade Commission, who is now a law professor at George Washington University’s law school.

It could be challenging for the media companies to prove that they are truly operating independently, Kovacic said. “How do you assure that you get collaborators who have a common interest to schizophrenically step aside and go after each other’s throats" and compete on bids for content rights, he said.

The pact’s focus on sports, one of the most popular types of programming among consumers, makes it even more likely that enforcers will at least examine the deal, said Michael Katz, an economist at the University of California Berkeley. The Justice Department might look at the potential impact on prices for sports programming and whether Disney and its partners would have an incentive to withhold that content from cable companies or rival streaming services, he said. “The focus here might be on the consumer of video programming and the harm to distribution," he said.

Fubo, a nine-year-old sports-centric streaming service with more than 200 channels and 1.5 million subscribers in North America, saw its company’s stock drop more than 20% on the news of the joint venture. “Every consumer in America should be concerned about the intent behind this joint venture and its impact on fair market competition," Fubo said.

Cable operators, for their part, have been trying to offer such sports “skinny bundles" for years but were blocked by the very media companies doing this now, said Grant Spellmeyer, president and CEO of ACA Connects, which represents more than 500 smaller rural broadband and cable providers.

“Allowing the biggest media players to join forces—while locking out traditional linear cable providers from offering the same package at the same price—only gives even more power and leverage to the Goliaths to extract more money from customers," Spellmeyer said.

The companies are searching for a name for the venture. Jon Miller, a senior adviser at venture-capital firm Advancit Capital who once oversaw Fox’s digital strategy, including its investment in Hulu, offered up his take: “I’m trademarking Spulu—as in Hulu for sports."

 

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