Seeking Alpha
Bonds, portfolio strategy, asset allocation
Profile| Send Message|
( followers)  

Summary

  • College sports is big business. The popularity of football and basketball provide significant revenues to the NCAA, its member institutions and to major media companies like Disney, Fox and CBS.
  • Student athletes, who receive a very small share of these revenues, are becoming increasingly dissatisfied with the current system and have taken steps to shift its financial dynamics.
  • Long-term investors in Disney, Fox and CBS should keep an eye on this developing situation and to consider the revenue at risk for these companies.

In April of this year, over 70,000 fans attended a football game at the University of Alabama's Bryant-Denny stadium. Those fans were watching Alabama play itself in the annual spring game. It was a practice game, and 70,000 fans came to watch!

We are living in a golden age of college sports. Record numbers of fans attend games and follow their favorite teams on television, radio, computers and smartphones.

As you might expect, this great popularity translates into large amounts of money. College sports is a big business, and major media companies like Disney (NYSE:DIS) (through ESPN), Twenty First Century Fox (NASDAQ:FOXA) and CBS Corp. (NYSE:CBS) have significant, vested stakes in its continued success.

But that success is threatened by recent actions taken by college athletes to gain a greater share of the financial pie. For example:

· In a recent decision by the National Labor Relations Board, Northwestern University football players were deemed to be employees with the right to unionize for collective bargaining purposes.

· Jeffrey Kessler of Winston & Strawn, a sports labor attorney, has filed a lawsuit alleging price fixing, arguing that it's unlawful to limit an athlete's compensation to the value of a scholarship package.

· Ed O'Bannon, a former UCLA basketball star, contends the NCAA and schools should cut athletes in on a share of the revenue made from their names, likenesses and images.

The situation is ripe for change, and, I suspect, most college fans already appreciate that the days of the true "student-athlete" are long gone. In fact, the hired gun (more politely referred to as a "one-and-done") is becoming more and more prevalent, especially on those teams that attract the most dollars and fan support.

This article examines what's at stake for the major media companies if players are successful in their efforts to gain a financial foothold and, by so doing, risk disenfranchising the fans who are the ultimate consumers.

Disney

Disney's ESPN has the largest position in the broadcasting of college sports.

Its contracts to televise regular season football and basketball games for the Big Ten, ACC, Big 12, PAC 12 (shared with Fox) and SEC (secondary to CBS) with commitments from 8 to 15 years total close to $9 billion (or about $675 million annually).

In addition, it has paid $7.3 billion (or $608 million per year) for the 12-year TV rights to air the soon-to-debut College Football Playoffs.

ESPN is a part of Disney's media networks division, which provides a significant part of the company's total revenue (45%) but an even greater share of operating income (68%). The dollar amounts below (from the Annual Report) are in billions:

Media Div Total DIS Percent
Revenue $20.4 $45.0 45%
Income $6.8 $10.7 68%

The contracts detailed above equate to $1.3 billion per year in costs, and assuming they are profitable, probably somewhere between $1.5 and $2.0 billion in annual revenue. This translates to somewhere in the range of 3.5% to 4.0% of total company revenue.

On a longer-term basis, ESPN has college sports commitments of $16.1 billion stretching out over the next 15 years.

CBS Corp.

CBS has purchased the primary rights to broadcast regular season games for the SEC at a cost of $825 million over 15 years, but the big kahuna is their commitment to the end-of season basketball tournament lovingly referred to as "March Madness."

In tandem with Turner Broadcasting, CBS has paid $10.8 billion for the 14-year TV rights to March Madness (an average of $770 million per year). The vast popularity of this three-week event is reflected in the TV advertising revenue it generates.

In other words, March Madness ad spending in 2012 was the equivalent of four Super Bowls.

According to Kanter Media:

"...the NCAA men's basketball tournament edges out pro football for the honor of most lucrative post-season sports franchise as measured by national TV ad revenue.

Over the past decade (2004-2013), the NCAA men's basketball tournament has triggered more than $6.88 billion of national TV ad spending from 269 different marketers. Ad revenue in 2013 was $1.15 billion. "


CBS Sports is part of the Company's Entertainment division, which provides more than half of the company's revenue ($8.6 billion out of the total of $15.3 billion). To highlight the importance of the sports business to CBS, one need go no further than the company's first quarter 2014 earnings release which noted a 9% decline in the division's revenue due to the absence of the Super Bowl (which switched Fox) as compared to the year-earlier period.

From the chart above, it would only take a decline of 25% in March Madness revenue to have a similar impact.

Twenty First Century Fox

Fox has contracts costing $400 million annually, primarily from its shared rights (with ESPN) to air games of the PAC 12, its secondary rights for games of the Big 12 and Big 10 (through its 49% stake in The Big Ten Network), and exclusive rights to the Big Ten championship game.

Fox is a part of the company's cable networks division. It provides a significant part of revenue (39%) but an even greater share of operating income (67%).

Cable Div Total FOXA Percent
Revenue $10.9 $27.7 39%
Income $ 4.2 $ 6.3 67%

These dollar amounts (in billions) were taken from the Annual Report.

NBC

NBC Sports (part of Comcast) has, by far, the smallest commitment to college sports. It does have a college football contract with the University of Notre Dame worth $15 million per year, but NBC's focus is primarily on professional sports (like the NFL) and major events (like the Olympics, for which it owns the U.S. media rights through 2020 at an average cost of $1.275 billion per year).

Summary

It's too early to predict the extent of the financial consequences the media companies could face if athletes gain a share of revenue and/or if such changes were to reduce the overall popularity of televised college sports. But, we can at least estimate who has what to lose if such events were to occur.

  • Disney/ESPN has revenue at risk estimated at $1.5 to $2.0 billion per year, which is the largest of media companies. However, its commitments are spread over a number of contracts for both regular season games and post-season playoffs, with a balance between football and basketball. At $2 billion, this can be compared to division revenue of $20.4 billion (or 9.8%) and total company revenue of $45.0 billion (or 4.4%).
  • CBS has revenue at risk of about $1 billion annually, but it is highly concentrated on the end-of season basketball tournament, which represents over 90% of its college sports commitment. As March Madness goes, so goes CBS. In addition, CBS has the smallest total Company revenue base against which to absorb any decline in revenues and profits from college sports broadcasting. The $1 billion estimate represents 11.6% of Division revenue and 6.5% of total company revenue.
  • Fox has a lesser commitment than either Disney or CBS with revenue at risk of about $500 million from its college sports commitments. This can be compared to division revenue of $10.9 billion (or 4.6%) and total company revenue of $27.7 billion (or 1.8%).

To summarize,

Revenue at Risk
DIS CBS FOXA
College Sports Revenue $2.0 $1.0 $0.5
% of Total Division 9.8% 11.6% 4.6%
% of Total Company 4.4% 6.5% 1.8%

Admittedly, these are only rough estimates but they do provide a perspective on the potential financial impacts.

So What Could Happen?

In the interest of full disclosure, I am an avid college sports fan and take great pleasure in the excitement of both the football and basketball seasons through the amazing array of college games televised to my home screen.

But, viewed as a business, there's a huge financial imbalance that needs to be addressed. The NCAA and its universities may be happy. The networks may be happy. But the student athletes are increasingly voicing their dissatisfaction with the current state of affairs.

There are two ways these developments could impact media company earnings.

It's probably inevitable that the athletes gain a share of the financial pie, though what or how much they gain is highly uncertain. And once the players get a first taste, they're not likely to settle for better food at the training tables or plusher towels in the shower rooms. With organized labor and powerful law firms supporting the athletes, there will certainly be upward pressure on what the athletes bargain for.

When this happens, it's a good bet that the "profit making" media companies (not the universities) will be looked to as the deep pockets.

Much less predictable is how fan support might change, and this is potentially the more critical factor, as it can reduce the overall size of the financial pie.

John U. Bacon, author of "Fourth and Long: The Fight for the Soul of College Football" comments on this factor:

If the players do unionize, and become employees of their schools, their new identity (could) diminish the appeal of college sports. College fans aren't attracted to excellence. They're attracted to romance. Even though the Detroit Lions at their worst could crush the University of Michigan at its best, the Wolverines draw twice as many fans (as the Lions do).

If the magic bubble bursts, college football fans might decide to stop supporting the venture … and then who's paying the growing bills?

Both parties should be careful what they wish for, or the law of unintended consequences could obliterate the benefits both sides receive.

I think Mr. Bacon has it exactly right. The real worry here is not what the players might gain, it's how the fans will react to whatever changes ensue. That's the Black Swan lurking in the stands of college stadiums and arenas. The problem with a Black Swan is that you never know what it looks like until it has arrived.

Conclusion

These issues will take some time to be resolved, but if some spark ignites the anger of college sports' devoted fan base, an economic spiral for the college sports franchises of the major networks is not outside the realm of possibility.

The betting man would say that this all gets worked out with little change to the status quo. The cautious investor would take note of the volatile environment and be alert to developments that could trigger ground-breaking changes.

Source: Disney, Fox And CBS: How College Sports Could Negatively Impact Future Earnings