Foxtel and the Free to Airs have reached, or are very close to reaching, ‘peak sport’ – They have little or no ability to further increase their spend on sports rights
The cost of the broadcast rights offered by the AFL, NRL, Cricket Australia and Australian Open has grown at nearly 8% CAGR over the last decade, with three deals worth more than A$1bn kicking off in the last three years
Viewership of tier one sports in Australia is flat or in decline, meaning that the ‘cost per viewer’ is on the rise, led by the AFL where cost per viewer has nearly double since 2015
The revenues of Foxtel, Channel 7 and Nine, the traditional buyers of sports rights, have decreased by, on average, (0.8%) CAGR since 2013, as they have been put under pressure by technologically enabled competitors
In response, we expect the tier one sports to develop rights packages that appeal to non-traditional players, such as telco and tech companies. By accepting reduced packages, current partners will be able to stay in the game without increasing their spend, but their ‘cost per viewer’ will increase further
The sports rights landscape will change as dramatically as when pay-TV was first launched, with top tier sports spreading across a much wider range of platforms. This will slowly put the anti-siphoning regime under more pressure and could be further compounded by the emergence of direct ‘over the top’ distribution models
It is Venture Insights’ view that traditional Australian broadcasters will be unable to fund further increases to the cost of tier one sports as they continue to suffer from declining revenues in hyper-competitive markets. As such, premium Australian sports are likely to further split their rights, selling portions to non-traditional telco or tech players. In the long-run, Australian sports may even look at selling their content direct to consumer through ‘over the top’ distribution models.
The recent round of sports rights deals has left us with three Australian sports generating over A$1bn in medium-term deals. This figure is high considering the declining revenues of broadcasters and the stagnating viewership numbers of some tier one sports. In this report we discuss the current state of the Australian sports rights market, delve into the current struggle of traditional broadcasters, particularly Foxtel, and contemplate what’s next for the delivery of sports content.
Australian sports rights are rising fast
Current tier one sports rights deals are growing…
Over the last two decades there has been a boom in the cost of sports rights in Australia. Sporting bodies have become more sophisticated with their understanding of the commercial value of their content and broadcasters understand the value of sports to advertisers as it has relatively inelastic demand compared to other content genres.
Figure 1. Australian big 4 sports rights cost over time
SOURCE: VENTURE INSIGHTS, MEDIA ANNOUNCEMENTS
Both Cricket Australia and the NRL have been able to grow the value of their average yearly rights deals at greater than 10% CAGR since 2007. The AFL, as the historical Australian powerhouse when it comes to the monetisation of sport, has managed to grow at 7.9% on average each year. Sports rights deals have now become a key source of revenue for sporting bodies[1]. In the 1990’s broadcast revenues only generated ~25% of total revenues for the AFL whilst in 2018 the AFL generated 58% of its total revenue from broadcast and AFL media[2].
…at a faster rate than audiences are growing, increasing the cost per viewer
The viewership numbers for Australian sports have not increased in line with the cost of rights. Curiously, the AFL, which boasts the country’s largest sports rights deal has seen its cumulative gross national audience drop from 109 million in 2014 to 89 million in 20182. The drop in viewership prompted an internal AFL review into the ‘state of the game’[3] after which the AFL decided to introduce new rules for the 2019 season. Despite these rule changes the number of viewers for the 2019 season remained steady at 89 million2. The NRL has managed to grow audience numbers over the same period from ~100 million cumulative viewers in 2014 to 116 million in 2018. However, the growth in NRL viewers is not in line with the growth in rights cost, resulting in an increase in the cost per viewer. The increasing rights cost of Australia’s two major winter sports is putting pressure on the rights holders who currently rely on advertising and/or subscription revenue.
Figure 2. Cost per viewer for AFL and NRL
SOURCE: VENTURE INSIGHTS, ANNUAL REPORTS
Australian broadcasters are struggling
The revenues of local broadcasters are declining…
Broadcasters have faced challenging market conditions with the birth of new technology-enabled players (e.g. Netflix, Stan) intensifying competition and challenging their dominant position within households. Foxtel, Australia’s incumbent pay-tv operator, has incurred the most damage from the rise of SVODs with a revenue CAGR of (2.6%) since 2013.
Advertising revenues are also declining as advertisers move online to Facebook and Google. Venture Insights highlighted this trend in our Australian Advertising Market Outlook as the digital advertising revenue generated by broadcasters (e.g. BVOD) is only partially offsetting the decline in traditional television advertising.
Figure 3. Australian major broadcasters’ revenues (2013A-2019A)
SOURCE: VENTURE INSIGHTS, ANNUAL REPORTS
Note: News Corp Revenue 2013-2016 is in USD, an exchange rate of 1.3AUD to USD is applied. Only television revenues for Seven and Nine are used
Despite declining revenues, broadcasters have continued to bid up the cost of sports rights because of the general appeal of live sports content. It is estimated that in the USA, 37% of all broadcast television advertising expenditure can be attributed directly to sports content[4]. Australians still consider broadcast television to be the number one viewing option for live sport[5], and as such broadcasters use sports to cross promote other shows during the coverage, as viewers are more likely to be watching sports live and not pre-recorded.
The large increase in the cost of tier one sports rights and declining revenues leaves broadcasters on an unsustainable path. The free-to-airs and Foxtel are either going to sacrifice their profits for the rights, bargain for a reduction in deal size for the rights, take smaller packages or start losing rights altogether.
… and Foxtel is cannibalising viewers with its new streaming platforms
As mentioned, the impact of SVOD platforms has been most severe on Foxtel and in response the News Corp / Telstra-owned pay tv provider released its own SVOD products, Foxtel Now, as well as sports-streaming platform, Kayo. There is no question that Foxtel had to act, but as Venture Insights highlighted previously (Foxtel and OTT – a tough balancing act…) it is perhaps structurally impossible for Foxtel to replace lost broadcast revenue with SVOD revenue.
The result has been falling ARPUs, as customers substitute their high margin IQ boxes for the cheaper sports streaming alternative. Similarly, users can easily share accounts between family and friends, further reducing the number of new Kayo or Foxtel Now accounts. As Figure 4 highlights, in both the third and fourth quarters of 2019 the increase in Kayo subscribers did not cover the loss in subscribers from either broadcast Foxtel or Foxtel Now indicating significant cannibalisation of the Foxtel base.
Figure 4. Change in Foxtel subscribers Q2, Q3 and Q4 Calendar 2019
SOURCE: VENTURE INSIGHTS, NEWS CORP SEC FILINGS, ANNOUNCEMENTS
Note: Includes only paying subscribers. Within Q4, Kayo’s subscriber numbers suffered extreme volatility as Rugby Union fans signed up for the Rugby World Cup before churning towards the close of the quarter.
As Foxtel Now and Kayo allow customers to cancel their subscriptions at any time, sporting fans will likely take advantage of this new flexibility by opting in and out of subscriptions based on when the sports they want to watch are on. This volatility in sports subscriptions was felt by Kayo during the Rugby World Cup of 2019 when it recorded a rise in total subscribers to 402,000 in November 2019 which fell to 370,000 by February 5, 2020[6].
Following a poor market update in May 2019, Foxtel flagged to investors that it would offload non-marquee sports to reduce the total cost of content – as presumably most of their sports-loving customers are interested in one or a combination of AFL, NRL or Cricket[7]. This strategy became evident in recent weeks as News Corp’s own publication, The Australian, reported a parting of ways between Fox and Australian Rugby Union during the most recent round of rights negotiations[8]. Whilst cutting non-marquee sports will help sustain near-term profits, it will not prove to be a long-term fix as the cost of tier one sports continues to rise and niche sport fans churn. Similarly, Foxtel has started to cut sports related production costs with popular Rugby Union commentators sacked for 2020 and the company indicating that these cuts may also impact top tier sports like AFL and Cricket[9]
It is not just Foxtel’s relationship with tier one sports that is shifting, a large selection of content is being taken back by the rights holders who are now releasing their own direct to consumer platforms. Disney has already announced that it has ended its agreement with Foxtel for rights to the Disney channel and HBO recently filed in Australia to trademark the name HBO Max suggesting the possible removal of premium HBO content from Foxtel[10].
Other dynamics are at play
Anti-siphoning – At what point does the Government review?
The unique anti-siphoning laws in Australia support the strength of free-to-air channels as certain marquee events such as the AFL Grand Final, Melbourne Cup and State of Origin are required by law to be offered to the free-to-air broadcasters first. Whilst no major sporting events have been removed from the list; several secondary sporting events such as Wimbledon and the FA Cup Final have over time been removed from the anti-siphoning list. Figure 5 gives an illustrated view of the changes to the list over the last two decades.
Figure 5. Changes in the number of sporting events protected under Anti-siphoning by sporting code
SOURCE: VENTURE INSIGHTS
If coverage and audiences decline further, there may come a point in time when the Government would have grounds to initiate a review into the effectiveness of the anti-siphoning regime. This could result in the opening of the regime or a broadening out of the participating platform types to include digital video forms (e.g. Facebook, Amazon). This is particularly relevant as in 2018, 87% of Australians had access to the internet (93% of which accessed the internet daily) whilst the weekly reach of free to air television was only 80%[11]
The gambling conundrum
To maximise revenues, broadcasters sell a portion of advertising space to gambling companies such as Sportsbet and Bet 365. As societal norms progress, a time is likely to come in which sports decide that the reputational damage from allowing gambling advertisements is greater than the revenue earnt and, as such, the value of sports rights to broadcasters and sporting codes could reduce significantly.
AFL Players Association (AFLPA) board member and premiership captain of the Western bulldogs, Easton Wood, has publicly declared that he would be happy to have his salary cut if it meant no more gambling advertisements are played during ad breaks[12]. The AFL has had several high-profile incidents where players have become addicted to gambling which has had a devastating impact on their lives, so much so that Collingwood coach Nathan Buckley called out the hypocritical stance of the AFL. How many more gambling-related controversies will need to occur before the AFL or other sports decide to reduce the reputational damage they incur?
Lessons from overseas – signals from the big leagues
Decline in other rights – Globally, sports rights auction results have seen a decline in broadcast rights. In the UK, the 2018 English Premier League sports rights had a 10% reduction in value from the previous deal[13]. Similarly, the UK auction for the UEFA Champions League rights saw the value of the rights remain unchanged from the previous deal (see Venture Insights’ global partner Enders Analysis’ recent report, Champions League senses end of growth cycle).
Direct to consumer - The NBA is the most prominent sport to be successfully utilising a direct to consumer business model through its own OTT platform, NBA League Pass. For US$249.99 a year, NBA fans have access to all games. The league has introduced tiered pricing structures, recently giving fans the ability to pay US$1.99 to watch the last quarter of a game[14]. It did not take long for the premier Australian codes to start investigating how they themselves can go direct to consumer with recent reports suggesting that the NRL is exploring the option of in-house production[15]. This would become more appealing for the sports if the value of the content they sell declines.
Tech and telco giants are circling
If Australian broadcasters can no longer afford the high cost of sports content, it is logical that telecommunications and tech companies pick up some of the tab. With Foxtel expressing a desire to cut non-marquee sports, tech and telco players may start to pick up the exclusive rights to upcoming tier two and niche auctions before having a genuine attempt at taking significant portions of the packages for Australia’s tier one sports.
Figure 6. Timetable of upcoming available sports rights in Australia
SOURCE: MEDIA ANNOUNCEMENTS AND VENTURE INSIGHTS
Note: There has been recent talk of the AFL extending its current deal with Foxtel/Seven/Telstra for two more years, pushing the next AFL rights deal to 2025[16]
Telecommunications consumer products are becoming increasingly commoditised and, as such, bundling in sports content with phone or broadband plans can help sustain ARPUs and grow market share. Spark sent shockwaves through the New Zealand media industry by purchasing the rights to NZ’s most sought after content, the Rugby World Cup to the detriment of SKY. The telco has since purchased the rights to more sport as it looks to use the content to maintain and even grow market share. Similarly, Optus gained notoriety in Australia when it purchased the rights to the English Premier League in 2015 and the subsequent 2018 World Cup. Optus is also rumoured to be in the race to acquire the rights to Rugby Union as Foxtel pursues its cost-cutting strategy[17]. Buying the rights to Rugby Union would put Optus on the map as a serious sports broadcast contender as the company would need to invest in game-day production which is not currently required for the soccer properties it holds17. Both Spark and Optus have had technical issues with their streaming platforms during sporting world cups which has illustrated the reputational risk for poor performance.
The tech giants are also likely suitors for Australian sports content as they fight for eyeballs and advertising revenues. Amazon has been leading the charge globally purchasing the exclusive WTA Tour rights in the UK as well as the rights to 20 December EPL games for the next three seasons[18]. In Australia, Amazon is an active party during the bidding process for Rugby Union and will continue to monitor possible sport acquisitions[19]. Affluent technology companies could easily take the rights from traditional broadcasters as they attempt to keep consumers on their platforms. It is plausible that the future of global sports content is going to be through Amazon, Facebook and the like. Whether these players are interested enough in Australian sport to bite the bullet remains to be seen due to the small size of our market, but if they do start seriously bidding, our local broadcasters may be in strife.
Something will happen…soon
As has been highlighted throughout this report, the cost of tier one sports rights in Australia is at an all time high, and it seems the incumbent broadcasters will no longer be in a position to increase funding for these rights. It is a real possibility that the tier one sports will further fragment their rights to increase the total return on their packages. Foxtel and the free to air broadcasters may indeed retain some of the rights, but other non-traditional players such as Optus or Amazon could pick up significant portions of these rights packages. This is likely to first occur during the next round of rights for Australian tier one sports, with the NRL and possibly AFL to lead the charge. The eventual long-term solutions for the premium Australian sporting codes may even involve selling their content direct to consumer.