Given the tens of billions of dollars it has invested to attract fans to its cable and broadcast properties, News Corp (NASDAQ:NWSA) has little choice. The potential for profit is too huge to ignore … even though it might wind up costing consumers in the long run.
News Corp has to take on Walt Disney’s (NYSE:DIS) sports behemoth ESPN.
The strategy — creating a 24-hour sports network — obviously is not without risk. ESPN remains a formidable competitor and is among the most watched cable networks. News Corp also is behind Comcast (NASDAQ:CMCSA), which has launched the NBC Sports Network. However, Rupert Murdoch’s media empire is prepared to spend big bucks to play catch-up.
News Corp mostly is lured by the fact that ESPN is among the most profitable cable operations in the industry. Disney charges providers about $5 per subscriber for the all-sports network, leaps and bounds better than the average fee of about 26 cents.
Spending on cable advertising exceeded broadcast television for the first time in 2011 — a trend that is expected to continue for the foreseeable future. Cable makes it easier for marketers to target their messages to specific audiences, allowing them to spend more efficiently.
The magnitude of News Corp’s investment in broadcasting football and baseball is simply breathtaking, even for a multibillion-dollar conglomerate, but it’s understandable, too. Advertisers are willing to pay premium rates on ESPN to reach young male viewers, whose television habits tend to be diffuse, making them tough to target.
Sports also is one of the few genres of programming that consistently delivers huge ratings year in and year out. About 61% of Americans describe themselves as sports fans, according to a poll conducted last year by Marist College, and sports programming often is the most watched program in a given night on broadcast and cable networks. Pro football is by far the most popular “Big Four” sport, followed by baseball, basketball and hockey.
Last year, News Corp was among the companies that agreed to a nine-year contract extension with the NFL valued at about $28 billion. That works out to an increase of about 63% increase over the annual fees the networks had been paying.
Days ago, NWSA reportedly reached a tentative deal valued at $6.1 billion over 25 years to broadcast Los Angeles Dodgers games, which would be the richest deal in the history of sports. The New York-based company also spent $1.5 billion on a 49% stake in the YES Network, the regional sports network that broadcasts the games of the New York Yankees and Brooklyn Nets. The company’s Fox network, ESPN and Time Warner‘s (NYSE:TWX) Turner Broadcasting also recently signed a $12.4 billion deal for the broadcast rights to Major League Baseball from 2014 to 2021 — double the value of their existing deal.
The pressure on News Corp to make its sports investments pay off will only intensify once the company separates its publishing assets from the rest of the company’s businesses, such as Fox News Channel and 20th Century Fox. Traditionally, Murdoch has been willing to wait for investments to turn a profit, but his patience isn’t endless, as was evidenced by its disastrous purchase of MySpace, which he subsequently sold at a loss. That will be tougher to do in this instance, as it will be harder for stronger-performing businesses to prop up their weaker counterparts.
Rupert Murdoch’s media empire earned $953 million in operating profit from its Cable Networks business in the most recent quarter — by far the most of any of its business thanks in part to its 20 regional sports networks. Disney’s cable business earned $1.38 billion in its most recent period because of ESPN.
As sports costs continue to rise, the public will be forced to increasingly shoulder them. It hardly seems fair that even non-fans are paying these costs, but until cable companies buckle to a la carte pressure, it’s great for shareholders.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter@jdberr.