There is nothing quite like a single-elimination tournament. Even for the heavy favorites, every hiccup or slow start in a game is enough to set the pulse racing. The NFL learned this long ago, but it is not the only one to employ the format. The NCAA Men’s Basketball Tournament, known colloquially as March Madness, averages some 10.5 million viewers per gamecounting the games at the earlier stages of the tournament. The Final Four is a considerably more lucrative trifecta of games. With 67 games being played each year – 68 teams whittled down to one champion in single-elimination format – that means some 700 million total “game-viewers” against which to sell advertising.
The primary beneficiaries of one of the most lucrative franchises in sports are Paramount Global’s (NASDAQ:FOR) (NASDAQ:PARAA) CBS and WarnerMedia’s Turner Networks, still currently owned by AT&T (NYSE:T) for a few more weeks before Discovery (DISCK) (DISCA) takes it over in a new, Warner Brothers Discovery venture – though AT&T shareholders will continue to own 71% of that new combined company.
The Rarest Breed: Reasonable Sports Deal
In light of all those numbers, the surprising thing isn’t that the March Madness TV contract costs so much. It’s that it doesn’t cost much, much more. In fact, the March Madness TV contract, which is scheduled to run through 2032, with a fee hike in 2025, is almost certainly the most profitable sports contract in American television, and quite possibly the world.
It costs “only” $770 million, roughly half of what ESPN spends for less than half of the NBA’s national games. While that number will increase to $1.1 billion in a few more years, that is unlikely to knock the contract from its dubious distinction of being the most lopsidedly profitable in sports.
March Madness Revenues
In 2019, the last normal year we have numbers for, March Madness generated $910 million in advertising. 2021 probably eclipsed this number. This for sports rights that only cost $770 million to acquire. Even adding on a few odds and ends of production expenses and taking into account the increase in fee level to $1.1 billion scheduled for 2025, roughly $200 million in subscription revenue should be enough to break even on a 67-game tournament with over 10 million viewers.
Even a modest $20 fee for the entire tournament would turn a profit. Or imagine selling each game, with ads, for $0.99 the way Apple used to sell iTunes songs. At the same viewership levels, that would generate a profit of almost $800 million – roughly equal to what the rights cost to acquire. A 50% profit margin on sports contracts is simply unheard of.
Streaming Style Future Format
Even on a pay-per-view format, March Madness would look attractive. There currently is no such offering, but a $770 million contract could be monetized extremely effectively at $2 per game for each buyer. Starting at $1 and then increasing the price as the tournament went deeper would be an option as well.
Streaming and online comparisons are not totally inapt in this case, either. Paramount+ streamed twice as many March Madness games in 2021 as 2019, and it is expected that number will only continue to rise. Paramount doesn’t care, though, as management has repeatedly guided that margins are similar on linear and streaming platforms.
Ordinarily, this is where I point out that not everyone who watches content on a pay-TV system will pay to watch it outside the pay-TV system. That point still holds, but it holds a little less when the price is so reasonable. Regional Sports Networks are so expensive that they have to charge close to the price of a full pay-TV subscription on an a la carte basis just to break even. March Madness, apparently, suffers no such flaw.
Paramount’s Championship Sports Strategy
It’s hard to overstate how out of character this is for a sports rights conversation. Ordinarily, the conversation is about how much a company is losing on sports rights, and then the question turns to how effective it is as a loss leader and whether the investment overall makes sense. Talking about the profits from sports rights themselves is almost unheard of.
But for CBS, its fairly typical. It’s contract with the SEC was widely considered the biggest bargain in sports contracts – until March Madness stole the title. CBS paid $55 million a year for the Conference title game as well as the pick of the litter of the regular season games – this at a time when the three games of the College Football Playoff final game go for almost $500 million on their own.
Meanwhile, Paramount Global has studiously avoided the money-losing sports deals that threaten to bring down some of its peers. When the SEC contract was finally running out and Disney’s (DIS) ESPN swooped in with a $300 million per year offer, CBS allowed it to walk rather than pay up a rate that would have completely destroyed the economics of the deal.
When Fox Corporation and Disney were required to sell off the old Fox Regional Sports Networks as a condition of the merger, Viacom was approached about bidding and respectfully declined – a decision vindicated as the market value of those networks has fallen from $22 billion, through the $11 billion Sinclair Broadcast Group paid for them and down to probably no more than a couple of billion now.
The U.S. Open wrangled a 50% increase over CBS’s offer from ESPN and they were allowed to walk as well. Even the Thursday Night Football contract was jettisoned when Fox Corporation offered a 50% hike on the fee. CBS decided that it simply couldn’t turn a profit at those levels. But it always seems to find new bargains to replace the old ones; its new deal with Serie A in Italy is widely seen as an underpriced winner.
About the lowest Paramount will go, in fact, is direct break-even. It’s contract with the Masters doesn’t really allow it to turn a profit, but nor does it pose any danger of creating a loss – the Masters’ unique contract format is that CBS doesn’t pay a rights fee and is allowed to make no more from advertising than needed to cover production costs. CBS accepts this arrangement because even a break-even deal on a prestigious sports property carries a profit in terms of brand cache and scale. But actual money-losers? Paramount simply doesn’t do that.
Turner Sports: Exception Proves The Rule
March Madness is therefore, very much in keeping with how Paramount approaches all its sports properties, and its results are in keeping with the fruits of such careful precision in sports bidding as Paramount always displays.
For Turner, however, it is very much the exception, in a series of otherwise expensive and questionable sports contracts.
Turner pays $1.2 billion a year for a fraction of the NBA – sharing national games with Disney’s ESPN – and has just inked a similar arrangement for the NHL. The NHL deals were particularly noteworthy for more than tripling the previous fee that NBCUniversal had been paying, between the two of them.
There are persistent rumors the NBA will seek a similarly sized increase in two years when its contract is up, and every indication that so far, ESPN and Turner both intend to pay. Turner may even cede its interest in NBA TV back to the league to close the deal.
But while the tripling the NHL rights fee only took the combined total from $200 million to $600 million, tripling the NBA will take the combined total to $7.8 billion – an over $5 billion increase over current levels. Even with Turner only picking up half of that, leaving ESPN to pick up the other half, such an increase would require $2.4 billion per year in new revenues.
Even right now, that would require doubling Turner’s current monthly affiliate fee for its flagship TNT channel, where it showcases its NBA content – TBS is reserved for MLB content – and that’s assuming that cord-cutting magically stops tomorrow and the 80 million pay-TV subscribers are all still around. If instead, as expected, pay-TV has fallen close to 50 million by the time the new deal kicks in, TNT would have to triple its cable fee right alongside its rights fee.
It’s not clear the cable bundle can handle or would be willing to handle such a hike. It’s well-established to even casual observers that price increases are the primary driver of cord-cutting. Especially since ESPN would presumably be imposing even larger increases around the same time. So Turner, if it is going to sign a deal like that, you would think at least needs an alternative monetization scheme for the content.
A Contrast In Strategies…And Prospects
And this brings me to my final point. Unlike CBS, Turner has not launched a dedicated streaming service. True, Turner content sometimes finds its way over to HBO Max, but you will not find a live stream or any of Turner’s marquee sports properties on the service.
Nor could you, since at a steady state adoption rate – ie., if HBO Max kept all its subscribers even as it implemented higher prices – HBO Max would need to hike its price to $25 per month to incorporate TNT and TBS. TNT and TBS alone were estimated to account for almost $3.20 in monthly affiliate fees in 2020, and HBO Max only signs up about one in three households. CNN, Turner Classic Movies and TruTV would probably take it up near $30.
That’s at current contract costs, by the way. A massive NBA fee hike like I outlined above would take the break-even price to close to $45. That would almost certainly lock in the same fatally vicious cycle of price hikes and churn that traditional pay-TV is experiencing.
Without a dedicated streaming service that can monetize its sports deals, Turner is essentially putting all its eggs in the traditional pay-TV basket. It is banking on becoming little less essential for cable-TV than ESPN is, and securing the price increase to match. It’s strategy can essentially be summarized as:
- Retain marquee content, primarily sports, at all costs to remain absolutely indispensable to pay-TV bundlers, to secure as large a share as possible of the cable bundle revenue stream.
- Move gradually on streaming to avoid upsetting existing relationships, and maintain pay-TV exclusives on your best content.
- Compensate for pay-TV losses by increasing fees on remaining subscribers, and perhaps reducing non-marquee content like scripted dramas and comedies.
With respect, this seems questionable in light of the rampant cord cutting going on. It is doubly questionable in light of the fact that one major pay-TV provider already dropped Turner Networks, and vaulted to the head of the pack in subscriber growth after doing so.
The Winning Strategy
The Paramount strategy is far superior. And that strategy is
- Have a dedicated, owned & operated streaming service, alongside traditional pay-TV deals
- Price said service such as to be indifferent as to which one your customers choose to access your content through, and allow open access to content on it to all subscribers.
- Strictly control sports exposures, and be prepared to let sports content walk if it exceeds the price at which you could profit from it on your streaming service – where all content including sports is probably eventually headed.
This strategy allows Paramount to avoid setting itself against the prevailing trend in US entertainment towards streaming and standalone offerings from each content company. It prevents Paramount from taking on any obligation to which it does not have an immediately clear path to effective monetization. And it avoids crowding out non-sports content for the 40% of US households which are not interested in any sports.
We won’t know for sure until the NBA deal is announced. Turner may yet course correct away from a massively unsustainable yearly spend on NBA rights. That would not be in keeping with its present statements of intent, however; more importantly, it would not be in keeping with its past history. And the NBA deals will almost certainly be big enough that Turner’s new owners will not be much better off than its old one if they overcommit on sports rights.
Paramount, on the other hand, has earned the benefit of the doubt. Disciplined approaches to sports and non-sports spending mean that Paramount+ will almost certainly retain its position as a platform appealing to sports and non sports viewers at a reasonable price. That augurs well for the future of the company. Sports acquired at a reasonable cost will drive signups and scale in streaming, allowing Paramount to emerge as one of the winners in a winnowed, more profitable streaming field.
I am long Paramount, and a dubious hold on AT&T.