by_nicholas
It has been said “football is a game of inches.”
The reason is because it’s a game often decided by the narrowest of margins. If you need proof of that go back and watch the end of Super Bowl XXXIV (34).
Although that expression also has parallels to real life as well because the people who fight for those extra yards tend to be the ones to come out on top. It’s part of the reason we’ve seen Google (NASDAQ:GOOG)(NASDAQ:GOOGL), Amazon (AMZN) and Apple (NASDAQ:AAPL) become the companies they are today. Each has been driven by a collection of individuals who have pushed them to the next level.
While none of them started as entertainment providers they’ve all morphed into that space in the past decade or two. Google with YouTube, Amazon with Prime Video and Apple with…well a lot of things.
Most of that has stemmed from the evolution of streaming and lately the evolution has come to include sports. From the unpredictability that comes with live games to the fact they occur daily like clockwork, sports give platforms the ability to snare a captive audience for hours at a time.
And given we spend hours at a time on our phones and computers it’s a natural fit.
So, it came as no surprise that when the NFL was looking for a new partner for its NFL Sunday Ticket, Google, Amazon and Apple were right at the top of the list of potential teammates (along with places like Disney (NYSE:DIS).
The NFL brings a massive audience and that commands a massive price tag for the rights to air the games. They have in many ways set the tone for putting a value on sports rights in general.
For big tech, streaming is a valuable area for their growth as it’s not only a subscription driver at times it also helps with other areas of its business. With Sunday Ticket, ultimately it was Google that came out with the deal, but it wasn’t an forgone conclusion and for investors it’s not something that may have an immediate impact.
Google, like Amazon and Apple, are playing the long game and going inch by inch as this new landscape continues to unfold for them.
So, while the ink on the contract is still fresh and shareholders across those various companies are wondering how we got here and what’s next, it seems liked a good time to go behind the numbers a bit.
This push by the tech world to enter sports is far more detailed than one may imagine. While each of those big three now control a piece of the NFL pie, there’s a reason why each has carved out what it has and for investors to fully weigh their options they need to fully understand the thinking.
First as always, some background.
Amazon made history the other year when it acquired the rights to Thursday Night Football. To say the package has made the rounds over the years is an understatement. Originating at CBS and then moving to Fox it now calls Prime Video home (and will for the next decade).
The shift to streaming was a massive one and raised the questions about whether audiences would follow, truthfully for real fans, it’s not like there was really a choice. They are going to find their team and they have no qualms about paying a premium to do it.
On top of that, an Amazon subscription also is very common place these days given how valuable that free two-day (or less) shipping is to consumers… the trick is more getting people used to taking the extra step to log in vs. just changing the channel.
It’s an adjustment – especially to a certain generation.
Although for Prime Video, the TNF brand is really just another value-addition proposition. For them, that subscription is the main goal, just as with Apple the end goal is to sell hardware – content is more a means to an end.
It was a similar situation for DirecTV which has been the home to NFL Sunday Ticket since it launched in the 90s. You needed DirecTV to buy the package and despite its high price tag, people gladly shelled out the money.
Times have changed and that demand has waned.
For one, NFL Red Zone – a specialized channel that offers whip-around coverage from each game based on what’s happening – has negated some of the need for a full roster (it’s also a fraction of the price and in some cases included in your TV package).
That, along with the debut of TNF, and a variety of economic factors has made DirecTV re-think the value of its deal. Less people were now paying for it and that was making it harder to justify the cost to continue the partnership.
It became less of a “if” they’ll keep it and more of a “where” it will go next?
For a while it looked Apple was in pole position.
There were even rumors a deal was done and the pair were just waiting for the right moment to announce.
Although last week in a shock move, it was reported Apple had bowed out. It was suggested while Apple could (obviously) afford the presumed $2.5 billion price tag, the company also was questioning the value of it all.
While a number of analysts were firmly on board the Apple track (myself included) and were surprised by the news, given Apple’s propensity for watching its spending and desire to innovate, it really shouldn’t have been a shock in retrospect.
Apple has always been very careful about what it acquires. It’s part of the reason why Apple never invested in a massive back-catalog to support its Apple TV + streaming service. To them, there was no need to spend on a library, as they were still the cheapest streaming option and they were valuing quality over quantity.
It also has been reported that Apple’s interest wasn’t in being a “conduit” for the NFL programming, but to be a partner with the league. In other words, they wanted to do something on the same scale as to what they are doing with Major League Soccer.
Apple is building a new service from the ground up with the league. It will for the first time unite all the games, so regardless of where you live you will have access to any team’s matchup for the full season.
It also was believed they wanted to make the Sunday Ticket package more affordable for fans, but what they soon learned is that both options were something that is simply not possible with the NFL’s other broadcast deals.
Its agreements with CBS and FOX actually prevent any major changes to the package including the price. In other words, the networks were worried that if Sunday Ticket was cheaper or promoted as an add-on that was free with subscription, CBS and FOX would take a hit in viewership in the various local markets the games air.
In either case, Apple wanted to help innovate the way the NFL broadcasts its game, which was going to be harder than it thought.
On top of that, Apple had already secured the rights to produce the Super Bowl halftime show production, which long-time sponsor Pepsi was walking away from after a decade long run. So in effect, Apple had its foothold into the NFL machine and as part of an area that gets almost as much coverage as the game itself.
That, paired with its Friday Night Baseball deal with MLB (and the upcoming MLS package), gives them a solid sports portfolio that allows them to walk away should they see fit.
So with Apple out, the assumption became either Amazon or Google would swoop in for the rights. Of the two, Google was more likely because Amazon already has the Thursday package (which is doing well) and the NFL has a history of trying to bring in new partners whenever it can.
What makes Google different is that your subscription means more to their business model. They aren’t doing this to sell more devices or to get you buy from their e-commerce store – they want you to use them to watch TV.
While Google’s You Tube TV has seen a strong boost in recognition over the last year, it’s still not as well known as a traditional streamer, so having the NFL package would get them a sizable amount of extra attention. It also would be a closer by example comparison to the current DirecTV package where Sunday Ticket is an add-on to a traditional TV package – just in this case you are trading satellite for streaming.
That said, keep in mind Sunday Ticket was always going to be going to a streamer. It’s not just a “sign of the times.” DirecTV was one of only a handful of places that had both the reach and infrastructure in place to house something of that level on a linear scale. It couldn’t go to an Optimum or a Comcast because then you cut off a large part of the population – so really it had to be online based.
Overall, it’s a win for Google, there’s no argument there… but the question of how much of a win remains to be seen. The company is effectively shooting its shot with a top tier brand that has proven to be reliable and popular. To continue competing in this landscape it HAD to make some type of big move.
Yet as expected, parent company Alphabet didn’t see a massive stock leap when news leaked (or was made official), so the short-term effect may be minimal, however over the next eight-to-nine months in the run-up to next season YouTube TV should be more prominent in the media and that could help boost subscriptions.
Again – a long term inch-by-inch play, but it also comes with a risk.
Google is betting on cord-cutting to help them continue to divert viewers from the major players to them, but it still needs those networks to survive so they can stream them on their service. Remember YouTube TV is an aggregator, meaning it relies on the traditional model to feed them content to stream.
Part of what remains to be seen in that long term timing is the role linear and cable TV plays. As mentioned, their influence in the NFL ecosystem is what complicated this deal being done sooner.
It stands to reason that traditional TV’s existence is important to keep the prices at this high of a level. Without it, the value shifts for all parties, and if that influence fades, Google potentially may have overpaid for those rights. It’s something Apple and Amazon were likely mindful of as well when they are looking at the perceived value of this deal as well as the others they had made with the NFL.
The league needs multiple bidders to keep that price tag high, and without broadcast and cable in the model, the competition for these packages would shrink considerably. For them, part of the value in having CBS, NBC, FOX and ESPN/ABC in the mix is the convenience factor to fans. While many have cut the cord, a good chunk still haven’t and have no plans to in the future.
That’s what makes those “corded” ratings so important to the NFL and other leagues – they validate the costs of these deals. And here, had those broadcast deals not been so iron-clad, we likely would have seen a very different scenario play out and a company like Disney could have swooped in and used it as way to support ESPN+.
All sides are banking on the current model changing, but only enough that it makes their deals look good – if it changes to much, the deals begin to look a little less desirable which will raise flags with investors and also make re-negotiations a beast down the road.
It’s a delicate line but one Google is willing to walk because, like Apple and Amazon, they see the payoff that could come with the risk.
For investor’s sake, let’s just hope there’s no flag on the play.
