Thursday, April 28, 2005

Are You Ready for Some…. Desperate Housewives??

Dun Dun Dun Dun. Howard Cosell. Hank Williams, Jr singing “Are you ready for some football?” For 36 years, they have defined Monday nights for millions of Americans who have grown accustomed to watching Monday Night Football on ABC. Starting in 2006, this will all be but a distant memory. The NFL announced on April 19th a new TV deal that will result in a three network shakeup.

Here is the way the deal broke down: ABC is out of the NFL. They will no longer broadcast the Monday Night Football package which included playoff games and a spot in the Super Bowl rotation. Instead, ESPN will pick up the Monday Night Football rights at a cost of $1.1 billion a year for eight years. In doing so, ESPN is giving up their current rights to the Sunday night game, which will now be broadcasted by NBC at a cost of $600 million a year for six years. Included in NBC’s package are two playoff games and the Thursday season opener, as well as the rights to the 2009 and 2012 Super Bowls.

What was behind the decisions for the three networks?

ABC felt that it did not make financial sense to continue their Monday Night Football deal that resulted in a $150 million loss per year. Ratings had dropped significantly in the last decade, down 21% over the past five years. Monday Night Football had lost its luster due to the addition of more prime time football and the recent trend in parity in the NFL that resulted in meaningless late season games. At the same time, they have had recent success with more traditional entertainment programs like “Desperate Housewives”, and saw a potential to launch such profitable shows on Monday night.

NBC saw something that fit into its new strategy towards sports programming. Ten years ago, the network had broadcast rights for all three major sports: football, baseball, and basketball. They came to the realization that the excessive fees sought by the professional sports leagues did not justify the profit potential, and chose to divest themselves from all three. They decided to take a “wait-and-see” approach and re-enter these markets only when the “price was right”. Apparently, that time is now. The network has fallen from its first place position it held for many years, and is looking for programming like primetime football to directly compete with the other networks. It also sees the NFL as a promotional tool for the rest of the week’s shows.

ESPN’s decision factored in two concerns: maintaining bargaining power with cable companies for their monthly subscriptions, and fending off entry into the cable market of other all-sports programming. ESPN currently has the highest per-subscriber rate at $2.50 a month and had already been facing resistance to these prices before the NFL deal was announced. In addition, there have been rumors that Comcast and News Corporation are planning to launch their own cable sports network, and getting the NFL would be a key asset in making this entry.

NBC’s re-entry into the world of professional football has been viewed favorably by the media and Wall Street analysts. Analysts at Prudential feel that NBC’s exclusive rights to broadcast Sunday Night Football should position the network to profitably rebuild primetime leadership over the next few years. Sunday is traditionally the most-watched night of the week, and currently NBC has no such hit on that night. Demographically, football also makes sense for NBC since it is the perfect counter-programming for ABC’s lineup which is particularly aimed at women.

Furthermore, analysts feel that NBC’s parent company, GE will realize significant synergies as the NFL deal will give them a vehicle to generate additional income cross-selling its products. These include financial services, healthcare and medical services, stadium and team security and lighting and electrical products for stadiums. Nicholas Heymann at Prudential Securities estimates that GE could be looking at roughly $300-$500 million of additional revenue annually based on these synergies.

Analysts have mixed views, however, on whether the deal is good for ABC and ESPN’s parent company, Disney. Although expensive, the deal is a strategically smart move for the company according to CSFB analyst William Drewry. Not only will the deal strengthen ESPN’s dominant cable position, he agrees that this is a necessary roadblock to News Corporation. The high costs will be offset by advertising fees and profit potential from counter programming. JP Morgan analyst Spencer Wang, on the other hand, believes that the deal is very costly, and will result in a net loss for Disney of $96 million based on lower distribution on ESPN when compared to ABC.

We agree with analysts that NBC came out as winners in the deal. The wait and see approach undertaken by NBC has finally paid off, as they entered into the NFL contract at a great price. In addition to the prime time audience captured on Sunday nights, NBC gained the right to switch Sunday night games with CBS and FOX’s afternoon games if they feel a better match-up exists. This problem had plagued ABC’s Monday Night Football and lowered its value. Additionally, the Sunday primetime game sets up the opportunity to create a pre and post game NFL show which would compete directly with ESPN’s popular Sunday night sports programming.

NBC will also be able to charge higher rates for the NFL primetime advertising.
Advertisers have been threatened by the increasing use of recording devices such as Tivo. The NFL provides entertainment that its fans are likely to follow on a day to day basis and watch live, including the commercials.

We also agree that ESPN paid a high price for the Monday Night Football package, but had no choice because of competitive issues. The NFL was able to use News Corporation’s threat of entering the all-sports network arena (a similar strategy to how Murdoch used sports contracts to promote Fox and Sky Network) as a bargaining chip to force ESPN to pay a premium. Bottom line, ESPN’s dominance in the sports entertainment world gives them the power to charge high subscription rates, and losing the NFL might signal a weakness in maintaining this position.

Although the deal is good for everybody involved, the big question is: What does this mean for Hank Williams, Jr?

- Joel Amico, Carol Pinlac, and Jason Rosenthal


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