The most valuable live-viewing content creators in America are professional sports leagues, private cartels that together reported over $46B of revenue, including more than $21B of media rights fees, in 2019. This report analyzes 6 of the largest US sports leagues and their 4 largest revenue streams and discusses the importance of live sports to DIS, FOXA, VIAC, CMCSA, T, and SBGI. This report also quantifies economics at risk, by company and by league, during COVID-19. Finally, we highlight how diverse league business models drive disparate valuation outcomes. We believe that the return of 7 pro sports in July and August plus the NFL in September suggests higher linear TV sub adds in 2H20, including by cord-Nevers, and higher subscriber churn for streaming services. DIS, FOXA, and VIAC are the companies in our coverage universe that have the most upside from the return of live sports, in our view.
KEY INVESTMENT TAKE-AWAYS
1. We project that live sports will be the first major content genre to return to TV owing to clearly aligned economic interests between players and team owners plus the easily identifiable billions of dollars at stake if a season (or games) are not played. In contrast, new TV and film content production is heavily unionized and requires the collaborative cooperation of over a dozen guilds (egg, directors, actors, producers, editors, makeup, costumes, teamsters, etc.) to re-start production at the large public content companies.
2. The current plan is for 7 pro sports leagues to air live games by August. We expect live sports TV ratings to hit record levels in 2H20 owing to:
•Data from a Morning Consult 1,500 person survey taken in June 2020 found that 27% of respondents self-identified as sports fans plus 38% as casual sports fans, implying that 65% of the 330mm US population (i.e., 215mm potential viewers) self-identify as sports fans. In an environment where only news or library content (i.e., reruns) have been viewable for months during lock-downs, we expect game-day TV ratings to surprise to the upside.
•Supporting this conclusion, the Sunday, May 24th PGA "Match" averaged an astronomical 5.8mm viewers across the entire 3-4 hour event, and raised $20mm for COVID-19 research, doubling the goal of $10mm. PGA golf is not normally one of the top viewed US sports, so TV ratings upside should be higher for fan favorites.
•US viewers highly value choices, which is why Roku has 2,000 AVOD streaming apps plus 300 SVOD streaming apps, in addition to virtual MVPDs (i.e., skinny bundles), plus the large linear TV bundle. Since March lock-downs began, the two primary choices for millions of 18-54 year old viewers have been news or old content (i.e., reruns) from film and TV libraries, although NFLX did launch some new content. This rerun reality will continue throughout 2H20 as new TV production will not resume fast enough to get new TV content in front of consumers before December 2020, in our view. There is a backlog of completed films awaiting the intersection of cinemas reopening and consumers willing to sit for 2-3 hours in an enclosed space with dozens of other people. US consumers say they want a break from news content (i.e., COVID-19 and politics), according to Associated Press. Against this backdrop, 7 pro sports leagues will begin airing live games. We expect this plethora of new competition-based content to drive higher vMVPD and traditional TV subscriptions, including by cord-Nevers. An important competitive advantage of the television bundle is that password sharing and theft aren't easy, implying that the cable, satellite, and telco distributors will capture the revenue upside of any new demand.
•Assuming the current pro sports schedules remain intact, the resumption of live sports games benefits ESPN (i.e., DIS) most, followed by FOXA, followed by VIAC. Streaming services like NFLX, Disney+, Apple+ etc. that benefited from live sports being dark have the most risk to their US reported sub adds during 2H20 because viewing time will move to sports, which may lower their perceived price/value ratio to consumers.
•DIS/ESPN has the highest media rights payments for live sports content, by a lot, at $5.8B paid out in 2019. In 2019, media rights fees for live sports represented 52% of ESPN's total costs and 10% of DIS's total expenses. Because many of DIS's other business segments are paused during COVID-19 (i.e., theme parks, cruise ships, film releases. etc.) we believe DIS is the biggest beneficiary of live sports (especially the NFL and NBA) returning to TV.
•FOXA had the second highest media rights payments for live sports content, at $3.3B in 2019. Media rights fees for live sports represented 59% of FOXA's 2019 TV Segment's total costs and 37% of FOXA's total expenses. By implication, FOXA benefits materially by the return of live sports (especially the NFL and MLB) to TV.
•VIAC paid $1.7B for media rights for live sports content in 2019, representing 18% of VIAC's 2019 Entertainment Segment's total costs and 7% of VIAC's total expenses. VIAC benefits most from the NFL and NCAA returning to play, we believe.
WHAT MAKES LIVE SPORTS SO VALUABLE?
Live sports is one of the most expensive genres of TV content. Broadcast, cable TV, local TV, radio, internet, and mobile companies compete to purchase live sports rights because this content has the most valuable ad units (our view) because:
1. Live sports are generally watched on large TV screens by millions of unduplicated viewers (8 of the top 10 rated shows in 2019 were sports), many of them in the difficult to reach 18-34 male demographic;
2. Live sports are one of the few forms of content watched live, meaning consumers generally don't record and fast-forward through commercials, so the ads have more impact;
3. A majority of sports fans we surveyed don't consider films or television series as substitutes to pro sports competitions, so sports programming is the cornerstone of the $150B revenue/year traditional US Pay-Tv bundle.
4. Emotionally, sports represents a large shared-interest community with the authenticity and unpredictability of live events, enhanced by a clear winner and loser at the end of play. Production values are high, players and announcers are accomplished at their craft, and audience engagement/emotional connection levels are higher than most other forms of content which results in high social (i.e., talking) value. Live sports is also a unifying force compared with live news, which can be divisive.
Although this report focuses on the $46B of "direct" US revenue generated by the top sports leagues in 2019, pro sports also has a large "indirect" economic impact through ancillary sales attributable to running shoes, sporting goods, analytics, collectibles, apparel, etc. which nearly doubled their economic impact to $74B of US revenue in 2019, representing about 51% of total global live sports-related revenue.