John Ourand of Sports Business Journal had an interesting series of articles about ESPN earlier this week, in which he discussed how ESPN arrived at its current challenge of being the most profitable cable network in the U.S., but facing the greatest threat from the growing trend of cord cutting.

In the article, Ourand mentions how ESPN executives are frustrated by how much negative press they’ve received in the last two years about the threats.

One of the constant refrains you read in the bearish takes on ESPN — which is mostly owned by Disney — is how the channel might get outbid in the future when the next round of sports rights come up for auction in three or four years.

One negative view you hear is that ESPN recently greatly increased the amount it is paying various leagues for their rights. ESPN is now paying $1.9 billion a year for its “Monday Night Football” package instead of $1.1 billion. It pays the NBA $1.4 billion a year instead of $500 million. Given that its cable subscribers have declined from 100 million to 87 million, and its cost cutting in head count, these articles wonder if ESPN can continue to shell out as much when they come up for bid again.

But did ESPN overpay? It doesn’t appear so.

According to Disney’s most recent 10-K, its cable networks division (of which ESPN is the biggest contributor) had operating profit of $6.7 billion last year. So, even with the new NFL deal well behind it (it signed it in 2011), ESPN is still massively profitable.

Could it afford to pay a similar amount or more when the NFL “Monday Night Football” deal comes up for bid for 2022? It seems so.

Another angle you hear from ESPN critics is how the big profitable internet companies like Facebook, Amazon, Google and Apple might come in during the next round of sports rights auctions and bid more than what ESPN and the other old broadcasters can pay. How could ESPN outbid an Apple and its $200 billion of cash on its balance sheet, these articles ask?

It is true that any big internet company could outbid ESPN or any other current NFL broadcast partner for future NFL rights. However, I think ESPN and the current broadcasters are still well-positioned to keep the rights (and other sports rights, if they want to keep them).

Here’s why:

Currently, here’s how much the NFL makes annually from slicing and dicing its TV rights to games (ranked from highest to lowest):

• ESPN pays $1.9 billion to the NFL.
• DirecTV (AT&T) pays $1.5 billion for Sunday Ticket.
• CBS pays $1.23 billion (including Thursday games).
• NBC pays $1.18 billion (including Thursday games).
• The NFL Network generates $1.2 billion a year in affiliate fees.
• Fox pays $1.1 billion.
• Foreign rights holders pay $500 million.
• Amazon is paying $50 million to air the Thursday games next year.

You add it all up and the NFL is raking in $8.66 billion a year from these different fees.

And ESPN is at the top of the class in terms of what it’s been anteing up every year (since 2011). That makes it the most important TV partner that the NFL has had since 2011. That doesn’t guarantee it’ll be awarded the rights when they come up in 2022, but it does mean something when it sits down at the negotiating table.

How much did ESPN — paying $1.9 billion a year since 2011 — bring up the prices that the NFL was able to charge its other partners for other packages? Again, no guarantees about the future, but, if I’m the NFL, I’m very appreciative to how ESPN has helped me, even though I’ve also helped it.

Now, could Apple or Netflix or Amazon buy all these rights up for $9 billion a year? It’s possible but probably unlikely.

The NFL has always valued reach. Having many games on broadcast has always been important to NFL owners because they’ve always wanted to ensure the games were seen by the most people. Given the popularity of the league, it’s hard to argue with their logic.

When DirecTV asked to give them $1.5 billion a year for Sunday Ticket, reach wasn’t relevant. It was found money for games that were already running on broadcast.

When ESPN got a package of games, reach wasn’t really an issue because ESPN had the benefit of being the most distributed sports channel on cable still in 87 million U.S. homes today.

The NFL could theoretically award all or a big chunk of its games to an internet company in 2022 but it would likely need to get comfortable with how accessible the games are through those services. When it gave the rights to Fox in 1993, Fox wasn’t yet a national broadcaster but committed to be and soon was. (Back in 1993, the NFL sold all its package of rights for $3.6 billion versus the $8.6 billion it’s getting this year.)

Amazon Prime has 80 million subscribers today and that’s only going to go up five years from now. But how many of those Prime subscribers use Prime Video? And how many of those will watch the Thursday night games there instead of on NBC or CBS? That’s why Amazon is only paying $50 million this year to start to help answer those questions for the NFL as well as for themselves. The $50 million is about 0.5 percent of the money the NFL will generate from selling its rights to partners this year.

Because of this reach bias, I think it’s unlikely that the NFL sells all its broadcast rights in 2022 to a single or multiple internet companies at the expense of traditional partners. I would expect it to keep a big chunk of games on traditional partners in the next round of negotiations.

If that’s true, the question then becomes which of the traditional partners are best positioned to keep those games which will be made available? I would put ESPN at the top of the list because it is currently paying the NFL the most money every year. If I’m a team owner like Robert Kraft trying to decide which swath of NFL games I’m going to take away from my traditional partners and award to an Apple or Amazon or Google, I’m probably looking at Fox at the bottom of the list in terms of what they’re paying today and not ESPN.

No one can say with certainty what will happen for the future Sunday, Thursday, or Monday packages. The NFL will obviously do its best to gin up as much competition from as many partners as it can.

Just because ESPN paid more than any other partner for a decade doesn’t guarantee that it’ll retain that package for beyond 2022. However, it certainly won’t hurt it.

And if ESPN is likely to retain the NFL games according to the logic laid out above, why wouldn’t it be well-positioned to retain the NBA and any other sports it currently has and want to keep?

The bigger questions facing ESPN management is likely to be which of its current sports might it want to drop? Tennis? Golf? Some swath of college sports?

And which sports that ESPN doesn’t have might it want to go after? UFC? Future World Cups?

The bottom line here is that ESPN is much better positioned to retain the key sports leagues it wants — like the NFL — than the ESPN critics would have you believe.

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Source: Tech CNBC
Op-Ed Why ESPN is still well-positioned to keep NFL rights in 2022 and beyond