Tuesday, December 26, 2006

Titans of Industry -- the National Football League I

The facts speak for themselves, if the rights fees paid to sports leagues and properties are added up, the sum total would not top the $3.75 billion in annual fees generated by the National Football League. Four major events in the NFL’s year stood out among what was a busy year for the business of the NFL. A leader retired, a new one was hired, a founder left much more than he likely ever imagined he would contribute to the growth of the sport, and the evolution of the NFL Network was the most discussed sports media event of the year.

The NFL Network was launched November 4, 2003, only eight months after all of the league's 32 team owners voted unanimously to approve its formation. The league invested $100 million to fund the network's operations.

NFL Films, which produces commercials, television programs, feature films, and documentaries on the NFL, is a key supplier of NFL Network's programming, with more than 4,000 hours of footage archived in their library. Thus, much of the network's highlights and recaps feature NFL Films' trademark style of slow motion game action, sounds of the game, and the talk on the sidelines.

Last fall after the NFL secured network television revenues collectively that are greater then the sum total of NASCAR, NBA. MLB, NHL, the NCAA and the last two Olympic Games combined. The NFL understanding that they were dealing from a position of strength looked at a number of different options for the eight late season games the league hadn’t sold the rights for.

The league's decision to build the NFL Network with regular-season games comes nine months after it completed deals with NBC Universal Sports on a six-year, $3.6 billion deal to carry Sunday Night games, and with ESPN on an eight-year, $8.8 billion contract to show ''Monday Night Football.'' In November 2004, CBS and Fox extended their Sunday deals for six years, with CBS paying $622 million annually and Fox paying $712 million. DirecTV extended its contract for $3.5 billion over five years.

''I never thought eight games would be so valuable,'' Jones, the owner of the Dallas Cowboys, said before his team defeated the Eagles, 21-20, in Philadelphia on Monday night last November.

''I get up in the middle of the night to watch international news, and then I turn to the NFL Network,'' Robert K. Kraft, the owner of the New England Patriots told The New York Times. ''I watch it all the time, and many real fans do the same.''

In November there was a great deal of speculation the NFL would either use the eight games as leverage to create a national cable sports network or sell the games to Comcast who would in turn put the games on OLN. OLN, which reaches 65 million homes, secured national cable rights for the National Hockey League.

''We hope our potential programming partner can help us get more exposure, even without putting games on the NFL Network,'' Jones said.

Kraft added, ''If we can have the new multisport platform, and the NFL Network continues to grow, that would be the ideal solution.''

Ten weeks later, on January 27, 2006 the NFL realized they weren’t going to receive what they believed was fair market value for the eight games, and announced the NFL Network would host the games. At least for the short-term (six years) Comcast and Turner weren’t interested in investing hundreds of millions of dollars in helping the NFL move the league’s in-house network forward.

The NFL Network was a ‘fledging’ operation at Super Bowl XL, reaching 33 million homes). Through 15 weeks of offering Monday Night Football, week after week, ESPN’s Monday Night Football has produced ratings that have stunned even the most optimistic sports media observer. Monday Night Football has averaged close to 10 million homes each week, showcasing not only the power of the NFL, but how important ESPN has become to the sports consumer.

ESPN’s 95 million homes offer the NFL the cable partner it needs to deliver ratings that can justify billions of dollars. The NFL Network doesn’t have the reach or the awareness to deliver significant ratings to the NFL when the league decided to make what at best was an ‘interesting’ decision.

''They'll be able to build the NFL Network into something far more significant,'' said Marc Ganis, a sports industry consultant in a New York Times report last January. ''On the 357 days when games are not being carried, N.F.L. programming will be going into people's homes.”

NFL owners for their part, where pleased a broadcast venture they had invested $100 million in start-up funds three years earlier was ready to make a dramatic step forward.

Dan Snyder, the Redskins' owner, who is on the league's broadcast committee, said by telephone, ''The games are ultimately so powerful that we could propel this into a major network.''

Robert K. Kraft, the owner of the Patriots and a third member of the committee, said by telephone, ''In some ways, I had hoped that we would be able to do a deal with Comcast.'' But, he added, ''we're into the development of our sport, and our network is 24 hours a day, 7 days a week, 365 days a year.''

When National Football League teams went to training camp in late July the league announced it was ready to move forward with a $100 million multi-media campaign to generate interest in the NFL Network. When the campaign began the NFL Network was in 40 million homes. The focus of the NFL Network’s efforts was focused on three major cable carriers – Time Warner (the second biggest American cable carrier), Cablevision (the biggest cable provider in the ‘Tri-State area’ New York, New Jersey and Connecticut) and Charter.

NFL Network officials made it clear where they wanted to be when the network aired its first live NFL game on Thanksgiving Day, November 23 – in 65 million homes.

“People will go nuts on Thanksgiving when there's a game on and they can't watch it,” says Seth Palansky of the NFL Network. Forcing its way into another 25 million homes this season will bring the NFL Network two-thirds of the way toward its goal of matching ESPN's distribution of 91 million homes.

“The full weight of the NFL marketing machine will be used,” vows NFL Network spokesman Seth Palansky in an oft repeated line as the campaign began in late July.

Four months later the NFL Network aired their first game to mixed reviews, but in the same 40 million homes the NFL Network was in when their campaign began. The National Football League which rarely if ever fails, fell flat on their collective faces in convincing anyone their product had real value. The NFL should have been paying more attention to ESPN and less to what they believed the consumer wanted.

ESPN’s live event programming includes 17 weeks of Monday Night Football, full schedules of Major League Baseball and National Basketball Association regular and post-season games, thousands of college football and basketball games, Major League Soccer, Arena Football League and many other live sports events. The NFL Network offered eight live NFL games, eight late season games.

ESPN charges cable operators a monthly rate of $3 per subscriber, the NFL Network wants to charge cable operators between 75 and 80 cents per subscriber. In a 500 channel cable universe – compare the value of what ESPN offers and what the NFL Network believed was worth close to a third of what ESPN provides consumers, and it’s a wonder any cable provider believed they were justified in charging their subscribers what the NFL Network demanded. It didn’t make sense in July, it didn’t make sense in November and it makes even less sense today as the 2006 NFL season is coming to an end.

There is however solutions to the challenges the NFL Network is facing, but none of these are short term problem solvers.

Agree to terms and conditions that allow cable carriers to place the NFL Network on a “pay-per-view” sports tier. Football fans will have no issues whatsoever paying between 75 and 80 cents for the NFL Network and the eight games. That is the short-term solution. The NFL didn’t make a mistake in putting live games on the NFL Network, the league just didn’t offer enough games to create the demand they believe existed.

There remains only one real solution to the challenges the NFL Network faces – a full schedule of Thursday and Saturday games, 17 weeks, 34 games. That’s easier said than done, but if Roger Goodell continues to demonstrate the leadership he has shown in his first few months, you can expect Goodell to move forward with the right business plan to move the NFL and the NFL Network forward.

The NFL needs to expand by at least two franchises in the next six years. The current television agreements expire in six years. The National Football League has every expectation the networks will line up in six years and again pay billions of dollars for the rights to NFL games on Sunday.

However for that to take place it will be critical the NFL preserves the integrity of their Sunday schedule. In simplistic terms you can’t take away from the number of games on Sunday in order to create the additional games needed to create a full Thursday and Saturday schedule. If the NFL adds two more teams that will create the extra number of games needed to offer a full slate of Thursday and Saturday games for the NFL Network.

With a full schedule of Thursday and Saturday games the National Football League will have the needed leverage to not be in just 65 million homes, but the power to be in close to 90 million homes. Eight NFL games are an appetizer, 34 NFL games are a full course meal. Charging consumers for a complete dinner and only offering a bowl of soup isn’t what the NFL is about – hopefully under the leadership of Roger Goodell, the NFL will move forward in serving the consumer an extra value meal.

Part II of Sports Business News NFL year ender will focus on the end of the Tagliabue era and the start of the Roger Goodell’s time as NFL commissioner.

For Sports Business News this is Howard Bloom.

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