How digital is disrupting the sports media industry

Ian Horkley (MBA '16)

Ian Horkley (MBA ’16)

The NBA has seen its popularity skyrocket both in the U.S. and overseas, with league revenue rising in tandem. In October 2014, the league signed a nine-year, $24 billion media deal with The Walt Disney Company – which owns the ESPN networks – and Turner Broadcasting. The deal runs from the 2016-17 season through the 2024-25 season and grants both TV broadcasting privileges and the rights to digital content.

Although the deal’s expiration is a long way off, it is worth taking an early look at what the next deal might look like and what role digital disruption will play.

The advent of “cord-cutting” and a continuing move to digital are changing how we view sports. Will advertising revenue be affected by these changes, and will the NBA look outside of traditional networks for partners?

The price tag and delivery platforms for the NBA’s next media deal will be determined by the continued popularity growth of the league and the changing nature of the media landscape.

A deal announced by the NFL in July 2015 could prove a harbinger for further change. The deal gives Yahoo! exclusive rights to live stream an NFL game to global audiences across devices for free. Among the Yahoo! properties showing the Oct. 25, 2015 game between the Jacksonville Jaguars and Buffalo Bills will be Tumblr, which has over a billion active users.

Tumblr’s user base is just one example of the significant advantage online platforms have in reaching larger audiences. With continuing advances in digital technology, the ability to provide quality live streaming of games will soon be an afterthought. So who is best positioned to usurp Turner and Disney and offer more attractive user bases to the NBA? Here are a few possibilities:

Facebook has almost 1.5 billion active users, and is growing its base at over 13 percent YoY. Although this pace may slow, the company will almost certainly have well over 2 billion users by 2025. Facebook has a willingness to spend, as evidenced by its acquisitions of WhatsApp and Instagram, and a rapidly growing pile of cash in the bank.

Much of Apple’s growth is overseas, including markets that the NBA is targeting. The proliferation of Apple devices in China (18.0percent revenue growth from 2013 to 2014), Japan (11.2 percent) and Europe (8.0 percent) combined with growing NBA fan bases in these regions could make a productive marriage, and Apple obviously has plenty of cash to spend ($203 billion as of 2Q 2015).

Used by billions worldwide, the search giant has over $18 billion in cash (as of 4Q 2014) and would be more than able to cover the yearly fees the NBA would demand.

While these tech giants are currently in the best position to woo the NBA, the swift-moving nature of the tech industry means that more players are likely to emerge in the next few years.

Cord-cutting – moving completely away from cable or to cheaper, condensed bundles of channels such as Sling TV – is already having an effect on major networks. ESPN, which contributes the highest cost to monthly cable bills at $6.10, has lost 3.2 million subscribers since May 2014. Projections show this number rising as high as 15 million in the next few years. TNT, one of the Turner properties that broadcasts NBA games, is the 2nd most expensive per user. These prices could rise significantly – as high as $36 for ESPN and $8.95 for TNT, according to reports – if companies are forced to operate under an à la carte model. To compensate for lost revenue, ESPN is cutting costs – and there is no reason to think that this initiative will not eventually extend to content acquisition.

By the time the contract is renegotiated, today’s elementary and middle schoolers will be entering the 18-34 demographic, and their consumption preferences will help drive the next deal’s value. However, evidence suggests that other options are diverting young people’s attention away from TV. In 2013-14, the median age of viewers was 44.4 – a 6 percent increase from 2009-2010 – while viewership of live events was down 13 percent over the same period.

Fewer viewers seems to suggest a decline in future advertising dollars. Will the next deal generate less annual revenue for the NBA?

In a word, no. Given inflation and the fact that the league would never agree to a “down round” as its popularity continues to rise, the real dollar figure will be higher barring an unforeseen catastrophe or string of scandals. Therefore, the anticipated value should start at $2.67B per year and be revised upwards, likely by a large amount. It is not a question of whether the money will come, but who will be providing it and on what platforms the content will be shown.

As mobile plays an ever-growing role in our lives, people will want to move viewership of live events to mobile platforms instead of stationary devices. It follows that the next NBA media deal will include the management of digital properties and the rights to live-stream games in addition to traditional television broadcast rights.

Due to the league’s visibility and popularity, the next NBA media deal will highlight many of the issues surrounding the shifting television and media landscape. How it plays out will be reflective of changes that occur in the next ten years.

The bottom line: Digital disruption is reshaping the business landscape, and no company or industry is immune. Don’t be caught off guard – start preparing your game plan now.

By Ian Horkley (MBA ’16)