Thesis

Why are the big media companies betting $1B to $2B per year with the NFL, despite their still-unproven ability to capture cord-cutters and cord-nevers for sports streaming at scale?

Addressable advertising.

Research

The best article I read on the newly announced $100B+ in NFL broadcast rights deals was from Kevin Draper of The New York Times, “The Pay TV Model Is Declining. The N.F.L. Is Still Banking on It”. The entire piece is a must-read, but I thought this quote does the best job of summarizing the dynamic that sticks out to me:

“The key is to protect the multiplatform aspects of this deal,” said Sean McManus, the chairman of CBS Sports. “So that if it turns out that streaming is the No. 1 growth element in the deal, we have those rights, and we have the broadcast rights.”

I think this quote implies there are both two uncertainties, and two big certainties.

The two, obvious uncertainties for all parties are:

1. whether cord-cutting is going to accelerate or slow down by 2029, when the NFL has a one-time right to opt out of the multiplatform rights agreement after the 2029 season; and


2. whether streaming will capture both cord-cutting NFL fans and a new generation of younger “cord-never” audiences.

#1 is a debate topic with little agreement across the marketplace. So I am avoiding it here.

#2 is interesting to dive into given the numbers for legacy media streaming audiences for the NFL tell a subpar story, to date. Super Bowl LV drew a record streaming audience of 5.7 million, marking year-over-year growth of 68 percent, but that was only 6% of the 91.63MM TV-only viewers.

Contrast CBS’s Super Bowl numbers with Amazon which, according to Amazon’s press release, drew an estimated 11.2 million total viewers for an NFL regular-season game in a December 26th Thursday night match-up between the San Francisco 49ers and the Arizona Cardinal. That same week Sunday Night Football on NBC drew 14.66 million viewers, and was #1 in prime-time.

Effectively, Amazon demonstrated it can pull NBC Sunday Primetime numbers on a Thursday night on Prime Video, and 2x CBS’s numbers. That is a big part of why they are the NFL’s first exclusive national broadcast package with a digital streaming service.

But we don’t yet know if CBS and Paramount+, NBCU and Peacock, and Fox and Tubi (and “future direct-to-consumer opportunities” at Fox) can draw NBC Sunday Primetime numbers on streaming. CBS has a positive story, above, though relatively unimpressive next to Amazon’s numbers. Peacock is not sharing anything about their sports viewership on Peacock, and likely will not share data until the Olympics. Fox has no SVOD for sports yet, and seems to be banking on Tubi (33MM+ viewers) to deliver it.

In short, because we don’t know how good streaming services are at capturing existing streaming audiences, we don’t know if streaming will capture both cord-cutting NFL fans and a new generation of younger “cord-never” audiences, regardless of what happens to linear audiences . Even in the case of CBS, which revealed its streaming numbers, it captured for the Super Bowl ~50% of what Amazon was able to capture on a holiday weeknight digitally.

So, given this, why are the big media companies betting $1B to $2B per year on these deals, despite their still-unproven ability to capture cord-cutters and cord-nevers for sports streaming at scale?

Advertising.

One big certainty in both streaming and linear is demand for NFL advertising inventory remains inelastic (this remains true after a rough 2020). Those audiences are valuable and advertisers will pay a premium to be in front of them ($5B across all networks in 2019)

The other big, but new, certainty is all legacy media networks are in the early stages of offering and testing addressable advertising on both linear and digital, enabling these legacy media ad sales teams to extract multiples on standard CPMs across direct sales, scatter sales, and programmatic sales.

All four legacy media companies are building towards offering advertisers more sophisticated, addressable, and national advertising solutions across linear, connected TV, and digital video by 2029 (you can read about Disney’s recent presentation of its plans, NBCU’s recent partnership with Charter, and ViacomCBS’s recent test with DirecTV).5 Basically, the bet is a move from the “spray and pray” of traditional advertising can be replaced with ads served to particular consumers based on geography, purchasing history or other data points.

In the case of Amazon, it is not “spray and pray” but rather to be able to serve addressable ads to Amazon Prime viewers based on first-party Amazon data for 126MM+ U.S. members (est. - there are 150MM total worldwide), and across 50MM+ active users of Fire TV devices.

The problem with the “spray and pray” of traditional advertising was the effective CPM (eCPM): an advertiser would have paid $20 CPM but could have only reached 10% of the audience, resulting in a $200 eCPM. Addressable advertising allows them to reach that 10% at a higher CPM than $20, but lower than an eCPM of $200.

That means, in theory, smaller audiences don’t necessarily translate into lower ad revenues for networks (though they do run the risk of lower retransmission consent fees, which is a whole other problem).

In this light of advertising, the $105B+ bet by all networks reads like a bold bet on the upside of addressable advertising across national TV and streaming, which is higher CPMs and eCPMs. Or better yet, it seems to be framing an interesting horse race between Amazon, whose ad revenue has grown 64% year-over-year with sophisticated targeting based on its first-party data, versus the cross-platform addressable TV capabilities of legacy media companies, which remain in their early stages after a brutal 2020.

What will be more valuable to NFL advertisers in 2029: a bet on addressable advertising on national TV, connected TV and digital video? Or a bet on the hyper-targeting of audiences within Amazon based on Amazon’s invaluable first party data?

Because whether cord-cutting is going to accelerate or slow down by 2029, the ability of legacy media companies to deliver addressable advertising solutions that advertisers will want seems to be the determinative question driving their definition of success of the NFL deal. If they prefer Amazon, advertisers will be less likely to buy advertising on the legacy media companies to target NFL audiences.

In this light, it may be no accident as to why NBCU’s Peacock remains in a standoff with Amazon over distribution.

Keeping advertisers on board with addressable advertising seems to be more important to legacy media companies than whether streaming solutions can capture cord-cutters and cord-nevers. This piece argues Australia’s attempts at local content regulations on streamin services “ignores complex realities of how the TV business and its funding have changed”, and will have unintended consequences.