The prospect of playing an abbreviated 2021 season—likely without fans in attendance—has sports leagues facing a second straight year of steep financial losses. While ownership within some will borrow capital to offset the shortfall, media strategist Pat Crakes suggests other leagues could look to renegotiate or extend their existing television contract(s)—taking some of the back-end money upfront—to improve teams’ short-term economics and placate broadcast partners. “If adding years to a deal makes a problem where a league has lost inventory for all their network partners easier with distributors, then it has to be on the table,” he said.
Our Take: From a conceptual standpoint, renegotiating a broadcast pact is not all that different from taking out a loan against future revenues. It’s another form of borrowing. A league extending its existing contract out is in essence pushing money forward in exchange for a longer-term deal.
If conceptually similar, it’s fair to wonder why every league wouldn’t first try to extend media rights deals before looking to a bank for help. Former Turner Sports president David Levy says the answer is because broadcast renegotiations tend to favor the rights holder when it’s an extension due to missed games or value loss related to COVID-19. The problem sports leagues run into is that any conversations about a potential extension are taking place in a closed environment. So, while the two sides may be able to come to an agreement on the value of the rights on the additional year(s), the league doesn’t really know what it’s worth. In a “free market, some other platform might be willing to pay more,” Levy said.
When a sports league signs a new media rights deal, there is typically a large bump in value in the crossover year before flattening out to nominal YoY growth. If a league is willing to extend out at a compound annual growth rate of 2-3%, then it becomes a no-brainer for the network to push some money forward to gain extra years on the deal. “Remember, most sports networks are owned by much larger media distribution companies. Getting rights for an added period of time during an era of disruption that allows [the network] to sort of twist the dials between the established [linear] and digital system is strategically very valuable,” Crakes noted.
Those running pro sports leagues should be looking to borrow money from a financial institution before extending their media rights deals. If a league is tacking on years, it’s doing so at old pricing to take a loan. But interest rates are so low right now, there’s little upside in tying up broadcast rights at the contracted CAGR. Sure, if an existing partner were willing to pay a 200% increase on the added years, it would make sense for a league to extend. There’s just no reason for broadcast networks to do so, considering they’re bidding against themselves. Remember, the only group the rights owner can sell extra years to is the one who currently has the product. It’s a one-sided negotiation.
Of the big four leagues, Major League Baseball is likely the only one that would be inclined to extend its existing media pacts. Because the league just inked a new deal with Turner Sports, MLB knows the value of its product in the free market and could negotiate accordingly.
Crakes argues the NBA and NHL may have no choice should another lockdown occur. “If you’re not going to play inventory, and your network partners now have to go negotiate more lost inventory with distributors, the three-link value chain [among rights owner, rights holder and distributor] is getting disrupted,” he said. “If the NBA [or NHL] could get a 20% increase [on an additional year] and it makes the economics this year higher, satisfies and hedges against distributors pro-rating the networks and you think you’re maybe leaving four or five basis points on the table, I don’t know the league doesn’t do that. A dollar today is worth more than a dollar tomorrow.” Of course, the NBA and NHL may believe they’re in line for a bump significantly greater than 25% when their existing pacts expire.
While tacking on an extra year may not be attractive to the NFL, NBA or NHL, it could be a sensible solution for some of the less prominent pro and collegiate leagues. Those leagues are more likely to find themselves in financial trouble, and because they are less likely to draw a bidding war for their rights at the ends of their current deals, the risk associated with renegotiating in a closed environment is minimized.