$600 Million Offer
It’s no secret NFL viewership has been on the decline for the past few years. Whether that’s due to the national anthem protests and increased politics or other reasons is still is still up for debate. However, it is not debatable that most reports have shown NFL viewership to be down around 10% from last year. It seems everyone understands this except for Twenty-First Century Fox, Inc. (FOX) who just agreed to pay over $600 million per year for the Thursday Night Football broadcasting rights. This hefty price tag is $150 million more per year than NBC and CBS previously paid combined for Thursday night football.
The Fine Print
The more than $600 million per year includes 11 regular season games, but excludes one of the most watched days of the NFL season, Thanksgiving. Additionally, their broadcasting rights isn’t even exclusive rights. Fox also has to compete for viewers with the NFL Network and whoever secures the digital broadcasting rights (Twitter, Amazon, Facebook etc.) for all 11 games.
Another potential pitfall of this deal is the possibility of the newly reformed XFL taking more viewers from the NFL. Obviously, the XFL didn’t work the first time when it only lasted one season in 2001 so many skeptics wonder why it would work a second time. It’s highly doubtful the XFL will steal material market share in year 2020 or even 2022, but it’s still another factor to consider in weighing the $600 million per year bid. On the other end, what if the XFL actually took off and people starting watching it more than the NFL towards the end of this 5-year deal?
The Cost of 30 Second Ad
The good news for Fox is that despite declining NFL viewership, the cost of a 30 second ads are still on the rise. The average cost for a 30 second ad for NBC’s Thursday night football is up 3.7% to $524,047 from last year. Assuming a similar price increase for the 2018 season, Fox would have to sell around 100 30-second ads per game to break even before other operating costs are included which seems reasonable. However, eventually ad costs will most likely stop increasing if the declining NFL viewership trend continues.
Investors shouldn’t immediately sell all their shares just because of this one decision, but it is fair to question whether management could have spent the $600 million more effectively. Fox clearly sees more potential in Thursday Night Football than other cable providers who previously dropped bids. Only time will tell if they made the right bet. However, in the interim this looks like an ineffective use of scarce capital by management to maximize shareholder value. Management could have spent their money more effectively with stock buybacks, dividends or on a sport on the rise like the NBA or upcoming XFL. Regardless, spending over $600 million a year or $100 million more than your competitors on a declining product potentially creates more margin compression and uncertainty for a company facing increasing millennial cable cutters and competition from streaming companies like Netflix.