May 10, 2022 - Economy

Sports networks squeezed by rising costs and fewer subscribers

Affiliate revenue versus subscribers for select sports networks
Data: S&P Global; Chart: Simran Parwani/Axios

A new report suggests sports networks should expect continued profit margin declines as the economic outlook for traditional TV worsens in the next few years.

Why it matters: Live sports have been the bedrock of cable subscriptions for decades. But the rising costs of sports rights can't be subsidized by cable subscribers forever.

Details: Data from Kagan, a media research group within S&P Global, finds that sports rights fees have risen faster than inflation over the past few years, which has begun to cut into the profits of major sports networks.

  • Analysts estimate that ESPN's cash flow margin peaked in 2011 at 41.5% and declined to roughly 25.1% in 2021.
  • The network, the report notes, "is projected to see margins dip into the single digits as soon as 2023."
  • Pay-TV providers are also seeing declining margins on video offerings as more consumers cut the cord in response to rising cable and satellite package costs.

By the numbers: Networks spend around $15.5 billion each year for rights across major American sports leagues, according to the study.

  • The NFL commands the highest premium, with roughly one-third of all annual sports rights fees going to the league.
  • While networks were able to make up for some of the pandemic-driven cable subscriber losses with advertising revenue, that revenue hasn't necessarily increased enough to also offset rising programming costs.

Yes, but: An analysis from researchers at MoffettNathanson last year noted that most of the pay-TV erosion in the U.S. "appears to be from consumers who aren’t self-classified as sports viewers."

  • Those analysts predict there are 53 million households that describe themselves as regular sports viewers, which should represent a new floor for pay-TV's precipitous drop over the next few years. There were currently around 84 million homes that paid for cable or satellite TV at the end of last year.

The big picture: As more consumers cut the cord, sports leagues are beginning to more seriously experiment with streaming rights. And networks are investing more in transitioning some sports rights over to their streaming services.

  • Apple and Amazon are both considered likely contenders for the NFL's lucrative Sunday Ticket package, after the NFL's deal with DirecTV expires this year. Apple has also landed a few exclusive MLB regular season game rights.
  • ESPN+ had 21.3 million subscribers by the end of last year, thanks in part to exclusive deals for UFC events and hundreds of MLB and NHL games. Paramount+ and Comcast's Peacock have sports rights extended from their broadcast network deals.

What to watch: Live sports are doing much better this year, thanks to the return of in-person games and studio events. ESPN, for example, saw its best first quarter ratings this year since 2017. Super Bowl ratings bounced back this year after a 10-year low in 2020.

  • A ratings bump certainly won't stop the broader decline of traditional television viewership, but it will help drive cash for networks as they navigate the shift to streaming.

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