For Media Companies, Sports Sure Ain’t Cheap

They are basically writing blank checks for broadcast rights

By Jonathan Berr, InvestorPlace Contributor

While most baseball fans and teams are gearing up for the baseball postseason, media companies are looking ahead a little further. News Corp‘s (NASDAQ:NWS) Fox, Disney’s (NYSE:DIS) ESPN and Time Warner’s (NYSE:TWX) Turner just spent $12.4 billion for the broadcast rights for Major League Baseball from 2014 to 2021.

It’s undoubtedly a great deal for the league, which is earning more than double what it did from the previous deal, according to The Sports Business Journal. But is it — and the many other large sports rights contracts — a home run for the companies and shareholders? That’s tough to say.

These multi-billion dollar contract extensions simply may not be — pardon the sports pun — as big a “slam dunk” for media companies as they used to be. Cable companies, for one, are complaining more and more about the ever-increasing transmission fees being fueled in part by skyrocketing sports rights. Plus, there’s also the problem of predicting the future.

Let’s stick with baseball, in this case. The media companies’ payoff on the MLB deal might prove hard to find if small-market teams such as the Washington Nationals and the Oakland A’s — ones that don’t have huge national fan bases — go far in the playoffs.

That would mean fewer viewers will tune in, and the networks might risk missing the audience numbers they guaranteed to advertisers, who usually buy commercials before knowing which teams are playing. When that happens, companies sometimes have to award make-goods — essentially free commercial time — to advertisers as compensation.

On top of that, if you think broadcasters are willing to pay huge bucks for baseball, just look at the price that they will pay to show the National Football League games — which are far more popular than baseball and routinely break television ratings records.

Last year, Fox, CBS (NYSE:CBS) and Comcast’s (NASDAQ:CMCSA) NBC agreed to pay $28 billion in fees for the rights to NFL games from 2013 to 2022. That works out to be a 63% increase over the current rates being paid by the companies. Plus, ESPN has a separate deal paying about $1.9 billion annually, and DirecTV (NASDAQ:DTV) pays about $1 billion for the rights for its NFL Sunday Ticket package.

And to get a feel of the sheer expense of sports rights, also consider this: Comcast made headlines this summer when it announced that it would unexpectedly eek out a small profit on this summer’s Olympics in London. It paid $1.8 billion for the rights to the Games to show 5,355 hours — up from $894 million it spent in 2008 on the Summer Olympics in Beijing, where it showed 3,600 hours — and wasn’t expecting to make any money on it. It also has a nearly $5 billion deal for the next four games.

Even less-popular sports are seeing huge increases in TV rights. ESPN/ABC and Time Warner’s TNT agreed to pay the National Basketball Association $930 million a year under its latest contract — a 20% increase. And last year, NBC signed a 10-year, $2 billion deal with the National Hockey League, that was hailed as the most significant in the league’s history. The NHL, which recently canceled part of its regular season because of a labor dispute, will earn about $200 million annually — more than double the $77 million it got under its old deal.

Part of the reason that prices for sports broadcast rights have skyrocketed in recent years is because of the growth in viewership on devices like smartphones and laptops — and companies are already feeling the pain.

New York-based News Corp, for one, is increasingly dependent on these expensive sports, especially as declines in ratings for American Idol helped push down operating profit at the company’s television business by $25 million last fiscal year. Likewise, increased programming and production costs at ESPN are hurting results at Disney, Philadelphia-based Comcast and Time Warner, according to their latest earnings press releases.

Plus, consumers — even ones who don’t care about sports — are already bearing the costs. Just look at the price consumers must pay for ESPN, the leader in sports programming. It charges the most on a per-subscriber basis of any channel, which makes the baseball deal worrisome for some operators.

As Matthew Polka, president of the American Cable Association — a trade group representing small and mid-sized companies — recently put it in a press release:

“The plain truth is that these MLB deals will send monthly pay-TV bills streaking skyward. They will make life hard for families whose incomes, hammered by the recession, can’t keep pace with the greed of broadcasters, cable networks and sports leagues.”

It could only be a matter of time before they make life hard for the media companies — and their investors — as well. The good news, of course, is that most of the are diversified, so they can survive the spikes for now. But as there seems to be no limit to the amount of money media companies are prepared to spend, prices look set to continue to rise until the costs don’t justify the benefits.

The difficulty for investors, of course, is determining when media companies have reached that point.

As of this writing, Jonathan Berr was long CBS. Follow him on Twitter@jdberr.

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