The Most Important Sports Broadcast Deal in 2010!

One of the most important – if not the most important media deal that the international sports movement will likely strike in the next 12 months, will be the negotiations for the US broadcast rights to the 2014 Sochi Olympic Winter Games, and the Rio 2016 Olympic Games.. All of the 33 Winter and Summer Olympic Sports Federations, the  205 National Olympic Committees, and especially the United States Olympic Committee, will be anxiously awaiting the outcome of the IOC’s negotiations with the US Networks.

 Everyone has become accustomed to regular quantum leaps in US rights fees – and have developed ambitious sports development programmes, in large part funded by these network fees. At a time, when nearly all budgets are facing significant financial pressures, the stakes are perhaps higher than ever….Will the IOC succeed in once  again increasing the rights fee, or will there be, for the first time since Calgary 1988, a reduction in fees, with the ensuing belt tightening all around? Although local Games sponsorship remains stronger than ever, the IOC has already felt the economic pinch with the TOP Programme, as it struggles to fill the remaining sponsor slots.

The US Broadcast rights represents the single largest source of revenue for the Olympic Movement – with the NBC 2010 / 2012 deal generating a record $2 billion in rights fees, and a further $200 million in Top sponsorship from NBC’s parent General Electronic. Although broadcast rights fees have continued to grow dramatically around the world, the US territory still accounts for around 55% of the IOC’s total broadcast revenues. These revenues are distributed according to a complicated formula. For the first time with the 2010 / 2012 Olympic Games, the IOC is attempting to cap the amount of revenue distributed to the Organising Committees at 2006/2008 levels, plus inflation – and in the process reducing the Games share to less than 50% of total broadcast proceeds.  The balance – the plus 50% is distributed to the broader Olympic Family.

The United States Olympic Committee has perhaps the most at stake, and is by far the most dependent on the revenue from the US deal of any of the Olympic stakeholders. The current NBC deal, including the GE Sponsorship, will generate in excess of $250 million for the USOC. The International Federations will likely share over $300 million from the US deal, and a similar amount will be distributed to Olympic Solidarity for the NOCs.

To say there is a lot at stake is to put it mildly. The mid night oil will already be burning brightly at Chateau Vidy, IOC Headquarters as the IOC negotiators plot and plan their strategy to strike the most important commercial deal they make each quadrennium.

Across the Atlantic, the President’s and CEOs of the US Networks, their holding companies and a potential barrage of diverse other new media groups are weighing up the benefits and risks of bidding for the world’s single most important sports event.

The last time the IOC went to market with the US rights, was a surprising 7 years ago – June 2003, shortly before the election of Vancouver as Host City for 2010.  Much has happened in the intervening years to the Olympic Movement, the US Broadcast and media market and not least the world advertising market – all of which means that the outlook and environment for all parties is very different today than it when the IOC last  called for offers and the Networks accepted the invitation to come and dance.

Certainty versus Uncertainty……

For the first time since 1996, the IOC will be negotiating with the US Networks where the two host Olympic Cities are already known – Sochi, Russia and Rio, Brazil. In recent years the IOC had preferred to negotiate the major broadcast rights prior to the  city being selected – an attempt to insulate the Host City selection process from any perceived commercial interests – or at least the media from taking the IOC to task for selecting one city over another because it would earn more from broadcast rights fees.

The IOC had initially wanted to take the US rights to market before the selection of the 2016 Olympic Games….with the media, and various bid spin doctors attempting to wind everyone up with the claims that a Chicago victory would mean $ hundred millions more for the Olympic Movement.

However with the global economic downtown hammering market confidence and the advertising market, the IOC very rightly decided to postpone bidding until better times. Many commentators were surprised and concerned at the postponement, being well accustomed to the IOC negotiating 7 – 9 years ahead of any Games.

Everyone forgets that the US rights to the 1996 Atlanta Games were only negotiated less than 3 years before those Games. If it was not for the pressure at the time from the Atlanta Committee desperate, to have a bankable US TV agreement so they could begin construction on their main stadium, the IOC would have happily sat it out for another 12 months – waiting for the economy back then to also rebound and regain market confidence. There is no question that had the IOC had been able to postpone the bidding, the US rights fees for the Centennial Games would have probably been a further $50 million higher.

The IOC learnt it’s lesson with the Atlanta negotiations – control the timing – do not get bullied into an artificial bidding time line, wait for the market to be ready and confident. The IOC currently has all the time it needs on it’s hands – and could probably even wait until the Summer of 2012 if it really had to, to go to market. Rule of any bidding scenario – you go to the market when you have maximum market confidence, and a credible market competition.

Market confidence has taken a hammering over the past 18 months, with several of the traditional key Olympic advertising categories withdrawing or significantly cutting back on their media investments. Long before General Motors faced bankruptcy it decided not to renew it’s $800 million multi Games advertising commitment with NBC, preferring to move a substantial portion of it’s media budget to ‘new on line and social media platforms. The Financial services category was decimated with the recent economic crisis, with several traditional advertisers actually being forbidden from advertising in the Olympics, when they had to  accept US Government TARP funding. And Anheuser Bush, always one of the largest Olympic advertisers, has dramatically cut back on sports spending, after having being purchased by the Brazilian conglomerate In Bev.

So the IOC had no choice but to wait – to wait until the turmoil in the economy and the advertising markets had settled down, and the Networks could have some confidence that their multi $ billion bids would be supported by a strong and viable marketing community that was willing to spend.

NBC’s Vancouver ratings will have done a lot to boost confidence – delivering an average 14 ratings points against a guaranteed 12 points. Vancouver eventually proved an excellent value buy for advertisers, and going into London NBC has a good story to tell the market.

You Must Have Competition…….

Timing and confidence in the market is critical – but perhaps the most important factor of all, is ensuring that there is competition to bid, or at least, the perception that there will be a lot of bidders.

If there is no real competition, the rights owner risks seeing the value of his property tumble. So much of the analysis of the negotiating teams, on both sides of the table,  is understanding who will bid or who might bid and then ensuring that the market is at least convinced that there is a real race on – whether there is or is not.

For the 2010 / 2012 US package, the IOC President Dr Jacques Rogge overseeing the first negotiations of his Presidency, decided to break the traditional stranglehold that NBC had held on Olympic rights for over a decade, and open the bidding up to all comers.

With NBC having paid around $1.4 billion for the 2006 / 2008 package, the IOC elected to set a floor of $2 billion for 2010 /2012 – making it clear that if we did not get to this level, we reserved the right to call everything off and go back to market a year later.

It was a bold strategy – and one that more than a few players began to get cold feet in the final days before bidding, concerned that the IOC would be embarrassed if it did decide to walk and ignore the offers tabled.  But the IOC in the end held firm with it’s poker game.

 Three Networks finally came to the dance in Lausanne – CBS and Turner having decided to drop out in the preceding weeks. ABC / ESPN who initially had looked likely to be the strongest bidder – had backtracked somewhat in the final stages, and were pedalling a revenue share formula, something that was not very attractive for the IOC with it’s need for guarantees for Organising Committees and other stakeholders.

So it looked like it was going to be down to NBC and Fox, and Fox was making a lot of noise about wanting to do whatever it would take to get the rights, with rumours of even Rupert Murdoch flying in personally to make the final pitch. NBC was panicked by what they perceived, and the IOC fully expected, to be very aggressive bidding from Fox.

NBC was convinced that Fox would press beyond the IOC bidding floor of $2 billion, and decided to go  all out with what they rightly felt would be a knock out bid of $2.2 billion. Fox though turned out to be not nearly as aggressive as expected, only bidding $1.4 billion – some $800 million less than NBC.

 In the on going – political game play of rights negotiations between the various US bidders, some subsequently felt that Fox were just playing to get NBC to spend far more than they needed to – so they would have less to spend on other rights properties in future sports property negotiations.

There has been much subsequent debate as to whether NBC overpaid – maybe they did, and blinked at the threat of Fox stealing their Olympic franchise….maybe they did not, concerned that if the IOC did postpone the bidding a year or more, as it threatened, the competitive dynamic of the market could have been again very different and much tougher. In the summer of 2003, they could extend their Olympic franchise a further 4 years, protecting their interim Olympic investments, and this is exactly what they did.

However – one thing is for certain for the 2014 / 2016 negotiations….all of the Networks are now going to be investing a lot more time and resources into trying to analyse which of their competitors is willing to put hard cash on the bidding table and exactly how much. None of them is going to willingly accept an IOC arbitrary bidding floor. They are only going to bid what they need to bid to get the rights, and not a $ more…..nobody is going to risk the embarrassment of paying nearly $800 million more than the nearest competitor….even if at the time, the logic and number was well founded.

And How Badly does a Network really need the rights?

Now it gets complicated! Today one Network lagging in the ratings could really use the Olympic acquisition to send a strong signal about the future – albeit a future several years away. Another Network with a large sports budget – wants a marquee sports property, but can only afford one major property.

In the past few years, the IOC has often broken the traditional mould of rights negotiations, electing to jump ship from it’s long standing traditional partner….whether the EBU in Europe, opting for individual negotiations and an agency solution, or changing from the lead broadcast to the secondary player in markets as diverse as Brazil to Korea. There is no question, that for the second player in any market, acquiring the Olympic rights sends a very strong signal about it’s enhanced status, one that extends well  beyond just two weeks of Games programming. The IOC nevertheless needs to balance the increase in possible rights fees, with any possible risk of diminution in programming and audience levels.

In the US all of the major rights negotiations are in one way or another interrelated – with the major leagues of NBA, NFL, MLB and NCAA each commanding $ billion fees, and Networks treating acquisitions like a multi dimensional chess game.

With each major rights negotiations, the deck of cards get reshuffled. The recent NCAA negotiations a case in point – with NCAA electing to exercise an early option to opt out, and renegotiate terms. ESPN were known to be very interested – and had publicly stated that that they would unlikely go after both Olympics and NCAA. In the end CBS, the incumbent NCAA rights holder, kept onto the rights with a new consortium with Turner – thereby leaving ESPN still potentially very much in play – or at least with the bidding war chest for the Olympics.

ESPN’s room for growth though is limited – with their sub fees per home at the very top range, of $4 and 100 milion homes. As attractive as the Olympics are, they will not allow ESPN to increase the number of homes or their sub fees ….so the scope for additional revenue through their cable operations beyond traditional models could be limiting.

The IOC faces a fine balancing act calling when to go to market. It obviously needs to wait until there is market confidence, but wait too long and you could risk being on the wrong side of another property bidding….but that assumes there is a wrong side to begin with.  – and that all depends who wins and who loses each set of rights rights. The poker Game continues.

Life Beyond the Networks.

An important part of creating the competition ,will be expanding the list of likely candidates, and convincing the traditional Networks that there are, at least in the IOC’s eyes, viable new alternatives.

Even though the IOC will always mandate that around 200 hours of Olympic coverage of major events is carried on free to air Network, the Olympics offers such a unique wealth of programming options – over 3,000 hours for the Summer Games, that various interesting opportunities in the so called ‘new media’ space could open up.

The IOC has retained US agency CAA to look at possible alternatives – and it would not be the first time that CAA has succeeded in rocking an industry by thinking outside of the box. In the mid 90’s Coca Cola turned to CAA – who until then was only known as a Hollywood talent agency – to look at the creative direction of it’s advertising. The impact of this move was like an earthquake to the advertising agency industry – hitting them hard at their very heart….their creative agenda.

Whether CAA can map out an alternative road map for the IOC remains to be seen. Part of the agenda will be to come up with something sufficiently interesting to get the traditional Network’s attention – forcing them to come to the table to block a new comer from getting the necessary traction and profile that the Olympics would offer. The mere fact of the IOC retaining CAA sends an interesting signal to the market place.

One of CAA’s likely new options has just taken itself off the table and walked into the hands of one the Networks – or more accurately, the Network turned to Comcast to safeguard it’s own future. The breadth of Comcast’s cable network could well have made it a viable bidder in it’s own right against the main Networks – now, subject to FCA approval, Comcast will soon be the owner of NBC. Will that make Comcast – NBC an even stronger bidder? Well that all depends on who you are listening to!

There is no question that the advertising market, and how advertisers are spending their budgets is changing on a monthly if not weekly basis. Never in the history of the advertising industry has there been such rapid and dramatic change and it is a brave soul who is willing to forecast trends three years from now, never mind six years, when the Network will be broadcasting the Rio 2016 Games.

The Olympics has flirted with pay tv in the US once before – when NBC came forward with it’s triple cast package supporting it’s main Network coverage of the Barcelona Games. However the ‘ Olympic triple-cast proved to be ahead of it’s time attracting less than 250,000 viewers against a targeted 2.5 million, and ended up putting back at the time, the multi channel approach to Olympic and sports telecasting by several years.

The IOC negotiating team is faced with many challenges and opportunities.

The Olympics come off Vancouver 2010 stronger than expected – ratings were better than forecast, and notwithstanding the usual media debate about live or delayed programming, the Olympics is still one of the only properties left that can command the mega network audience, still so desperately sought after, in this ever more fragmented advertising market.

Rio 2016 does offer some confidence – an attractive dynamic destination in a favourable time zone…..Sochi is a bit more of an unknown entity, but can still have the potential with all morning events to offer an attractive live sports programme schedule…..whether the Networks make it a condition that Figure skating is staged in the morning, so as to ensure live US prime time coverage, will be another fine balancing act that the IOC will have to walk.

Does the IOC even consider going beyond 2016, and exploring a multi quadrennium deal through 2020. Such a move would allow a new player to more easily amortise evolution of the advertising and new media market – and to consolidate their position….but require a leap of confidence from the IOC that they were backing the right horse, and from the media player that they did not get stuck with a series of potentially very unfavourable venue time zones in Asia.

The poker game has begun – nobody yet knows how the final hand will be played.

Michael Payne – former IOC Marketing and Broadcast Right Director was intimately involved in Olympic broadcast rights negotiations from 1983 to 2003,leading the last round of US rights negotiations for 2010 / 2012 with the Chairman of the IOC Finance Commission, IOC Member for Puerto Rico, Richard Carrion.

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