Fox Sports’ decision to turn over its U.S. Open package to NBCUniversal wasn’t exactly the product of conventional wisdom—with seven years left on the USGA contract, Eric Shanks and Co. effectively chose to punt on third down. But investors should be wary of interpreting Fox’s divestiture as a sign that media rights valuations are about to take a pounding; the golf switcheroo was a reallocation of resources and a strategic shift designed to free up more cash for upcoming NFL rights renewal.
The transfer also uncoupled Fox from an asset that didn’t necessarily jibe with its brand. Fox’s golf tie-up represented a money-draining alignment that was pieced together by executives who have long since left the fold. In the absence of bigwigs Chase Carey and Randy Freer, Fox’s USGA deal lost both its progenitors and its loudest cheerleaders.
For the luxury of handing over its assets to NBCU, Fox will pay close to 55 percent of its annual $93 million tribute to the USGA—a not-insignificant buy-out fee. All told, the company will spend another $364 million on its now-defunct links contract through the end of 2026, while reabsorbing some $294 million. Naturally, Fox’s savings will be substantially higher once the costs of production and other on-site considerations are factored in.
If one-third of a billion dollars won’t make much of a dent in Fox’s new NFL payment schedule, which is expected to soar from $1.1 billion to nearly $1.98 billion per year under the current arrangement, every penny counts in the midst of what’s shaping up to be a ruinous year for media. A dearth of top-tier sports and plummeting advertising revenue have conspired to diminish Fox Corp. Since February, the company’s market cap has shrunk 31 percent to $16.0 billion.
The devastation wrought by the coronavirus demonstrates just how essential live sports are to the media marketplace. According to Standard Media Index, a research firm that harvests ad sales data from the invoices of the largest buying agencies, broadcast TV sales in April plummeted 33 percent to $907 million, with Fox Corp. taking the biggest hit among the parent companies of the Big Four networks. The loss of MLB and NASCAR broadcasts saw Fox’s broadcast and cable sales drop 46 percent versus the year-ago period, while ViacomCBS fell 43 percent and Walt Disney Co. and Comcast both declined 33 percent.
With sports riding the bench throughout the spring, the May data was just as grim. In a world without the NBA Finals, Stanley Cup Final, regular-season MLB broadcasts and the Kentucky Derby and Preakness Stakes, advertising in sports TV programming sank from around $630 million in May 2019 to $211 million in May 2020, a difference of 66 percent. All told, broadcast sales fell 24 percent on the month.
If the ad market is to rebound, sports will have to do much of the heavy lifting. And now that the NBA, MLB, NHL, MLS and WNBA have all made plans of varying specificity to return in July, there is hope that a good deal of the advertisers that have been dormant during the pandemic will reemerge. “There have been some encouraging signs that ad dollars will return in the second half of the year, especially with the anticipated return of live sports,” SMI CEO James Fennessy said. “We have high hopes for a quick recovery.”
At the risk of giving the good folks at NFL HQ a superiority complex, any sort of definitive recovery will take place only if pro football is in session this fall. “The NFL is in a different business than virtually every other sports property, and it operates on a totally separate plane,” Sports Media Advisors CEO Doug Perlman said during a pre-corona industry conference. “The NFL dwarfs everyone else, and there’s really no comparison .”
Indeed, your TV now is basically just a delivery system for the National Football League, and the proof is in the Nielsen numbers. The NFL in 2019 accounted for 41 of the top 50 most-watched broadcasts, and 73 of the top 100. Fox’s “America’s Game of the Week,” which notched its 10th consecutive season as TV’s top-rated program, averaged 24.8 million viewers per game, up 10 percent versus its 2018 deliveries; by way of comparison, Fox’s 2019-20 scripted series averaged 3.07 million viewers per episode.
Fox’s push to load up on live sports is clearly the way forward for ad-supported TV. Particularly in the fall, while baseball and football are at full throttle, around 90 percent of the network’s commercial impressions are served up via its pro and college sports properties. Now that the average C7 rating for scripted broadcast programming is less than a 0.8 rating (in other words, on any given network, not even 1 percent of the nation’s 129.5 million adults 18-49 are watching the commercials seven days after the original airdate), top-shelf sports are now the only thing keeping ad-supported TV from the slag heap.
Which is why there will be no frenzied sell-off of sports rights packages, the exceptional activity of the last few weeks to the contrary. Not only do each of the Big Four networks have to scare up ad impressions via the traditional airwaves, but they also have hungry mouths to feed on the cable side. And because cable is a dual-revenue stream, one that depends mightily on the cash generated by affiliate/operator fees, the parent companies of ESPN and FS1 and CBSN and NBCSN have to continue feeding the beast.
While 2020 has taught us that literally nothing is outside the realm of possibility, you’d be better served by staking your life savings on the Knicks winning the NBA title next season than taking up Grant Wahl’s FIFA wager. Soccer’s international governing body awarded Fox the English-language rights to the 2026 World Cup as a make-good for shifting the 2022 Qatar event to the fall, where it will conflict with four weeks of the network’s NFL coverage. Given that the 2026 tourney will play out in North America, it’ll be an absolute ratings monster. But again, there are more quotidian concerns at stake here. The 25 matches that FS1 is likely to carry that same year will go a long way toward justifying the network’s carriage fee, which at $2 per subscriber per month, is one of the priciest on the cable sports dial.
Nor should you expect to see Fox try to wriggle out of its $1 billion WWE deal. Friday Night SmackDown not only creates a four-day weekend for the network, serving as a bridge between Thursday Night Football and college football, it also provides 52 weeks of programming at a cost of just $1.9 million per hour. Slap two dramas in that Friday 8-10 p.m. time slot, and you’re looking at an outlay of around $5 million per hour, and that’s for just 22 nights of original, first-run content.
While not a runaway hit, SmackDown is outperforming the former occupants of its time slot, drawing a 5 percent larger audience of adults 18-49—no mean feat in a season where overall primetime demo deliveries were down 13 percent year-over-year. Moreover, the show has also had something of a rejuvenating effect on Fox’s Friday night audience; with a median age of 52.4 years, SmackDown viewers are nearly five years younger than those who tuned in during the 2018-19 season.
If Fox gets its entire sports lineup back up and running in the fall, it may very well look to confound expectations by taking on an expansionist role. Although it parted ways with the NHL back in 1999, Fox could try to outmuscle incumbent NBCU for a new hockey package, which would kick in at the beginning of the 2021-22 campaign. While NBC enjoys the benefit of a right-of-first-refusal clause and is determined to re-up with the NHL, the league is said to be considering a non-exclusive package that would accommodate at least two network groups. The current deal is valued at $200 million per year.