Tuesday, November 27, 2007

This is the NFL

The majority of U.S. households will not have the ability to view tonight's showdown of the NFC's two 10-1 teams, the Dallas Cowboys and the Green Bay Packers. Nor will such households have the ability to watch eight more prime time Thursday and Saturday NFL games through the remainder of the season. This is because these games will be shown on the NFL Network, the NFL's own proprietary all-football, all-the-time channel.

It is hard to overstate the prowess of the National Football League as a business entity. As I have mentioned previously in this space, the NFL gets what it wants. Almost without exception.

The one exception of which I am aware is the failure of Time Warner, Comcast, and other major cable systems to carry the NFL Network. The dispute among these entertainment industry heavyweights is entirely financial in nature. The NFL requires cable systems (including satellite and IPTV providers) to pay $.70 per month per subscriber for the privilege of carrying the channel.

Additionally, the NFL requires that cable systems carry the NFL Network on its basic (or digital basic) tier, as opposed to offering it as part of a premium package of sports channels where they can more easily pass the cost on to subscribers. And of course, these would be targeted subscribers (i.e., sports fans only instead of all cable subscribers) constituting a much smaller group, thus a smaller multiplier in the formula of: [number of subscribers] x 12 months x $.70 = annual revenue to NFL.

But the NFL's real endgame is much deeper.

First, through these machinations the NFL's intention is to create an extremely valuable asset. A television network with good carriage (i.e., wide cable and satellite distribution on basic tiers) is worth a lot of money. Billions, in fact. For example, the channel formerly known as "Fox Family", a very crappy channel with very good carriage, was purchased by Disney in 2001 for $3.2 billion dollars. (As it turns out, this purchase was a catastrophically bad decision by Michael Eisner -- for reasons that are too complicated to go into here (read the excellent James B. Stewart book Disney War for the details) -- but the deal still illustrates the market values of these types of assets.)

The fact is that if the NFL Network achieves a high level of carriage, then this, combined with an unparalleled brand name and content with a very high level of demand, could potentially be worth many many billions of dollars.

But furthermore, the NFL Network is potentially a near-perfect vehicle for the NFL to monetize its entertainment product. The NFL currently receives more than $3.7 billion per year from NBC, CBS, FOX, and ESPN for broadcast rights. If you assume that these networks are paying these vast sums only because they are using the rights to make substantial profits (a safe assumption), then once the NFL builds its own network platform (i.e., network carriage), it can broadcast a large portion of these games itself, thereby allocating to itself profits that formerly went to the other networks (otherwise known as cutting out the middle man, or in corporate-speak, "vertical integration").

But here's the beauty part: hese revenues (subscriber fees, broadcasting profits (from ad sales), or the asset value of the network (which could be sold outright for billions, or spun off and sold to the public in an IPO)) would not be considered part of the revenues which are split with the players' union as part of the collective bargaining agreement.

This bears repeating (and, as far as I can tell, is somewhat of a scoop for HipHopLawyer's little blog). Labor costs are -- by a huge margin -- the NFL's biggest operating expense. The players, as is well documented, are very highly paid (and compared to other sports, there are lots more of them). And player salaries in the NFL are determined by an NFL labor innovation known as the "salary cap". The salary cap can be understood as a revenue sharing arrangement in that it is calculated as a negotiated (collectively bargained) percentage of a league revenues. But not all league revenues (therein, the beauty). Only certain categories of league revenues are used in determining the amount to be paid out to NFL players as salaries, the largest category being licensing fees paid to the NFL by third party broadcasters for the right to broadcast NFL games.

Notice that this category does not include advertising revenue. Nor subscriber fees. Nor amounts earned through the sale of an asset like a phenomenally valuable television network, built on the value of its content (that is, its entertainment product (i.e., football games, played by NFL players)).

Of course, when games are shown on the NFL Network rather than on third party networks, the NFLPA would demand to be compensated for its share of the revenue which the NFL is foregoing by its election not to sell the rights to these games to third parties. But, as shown above, this is only a small fraction of the NFL Network's revenue and overall value to the league, the great bulk of which need not be shared with the players under the current labor agreement.

These kinds of things are largely within my professional area of expertise (as far as that goes, anyway) and part of the business I'm in (and plus it concerns football), so I could continue on in this vein for pages and pages. But that's enough for one sitting.

No comments: