NFL Network is in a showdown with the most powerful media organisation

The media shutout at NFL

The first year of Commissioner Roger Goodell’s tenure at the National Football League has been dominated by the launch of the NFL Network and a war with the big guns of the American broadcast media. At the heart of the issue is the NFL’s attempt to turn itself into a media company at the same time as making hay as a sports property. It literally wants to eat its cake, but there are many apparent contradictions to be overcome before that can happen.

The commissioner of the NFL, whoever he may be, up to now has had the need for three personas. One is as an obedient creature of the 32 teams and franchise holders and the second is as the ultimate league referee who must stand for fair play. Those two do not always run concurrently. The third, for which there has never been any conflict, is to be a marketing man whose sole role is to gouge as much money as possible money out of America’s TV channels.

It is undoubtedly the most important, and least conflicted role. But there is nothing pretty about this process, which relies purely on the fact that it is a seller’s market that creates an astonishing US$3.7 billion a year in revenues for the 32 teams of the NFL.

But now something is occurring that threatens the whole system and is producing huge conflict where previously there was none. That is the transformation of the NFL from being a sports property to being a media outlet, one that effectively competes with its own customers – in precise terms those same customers who pay it US$3.7 billion a year.

Add in the fact that those customers are some of the most powerful organisations in the world and one begins to observe the state of the problem.

Up to now the NFL, the most popular sport on earth, has been totally dominant. The American media conglomerates, which own most of America’s TV channels, have simply paid what the NFL has demanded.

Now, by the actions of NFL commissioner, Roger Goodell and his NFL media president, Steve Bornstein, the conglomerates, in the shape of America’s cable channels, are fighting a battle they know they cannot win, but equally are determined not to lose. It is by far the biggest challenge facing Commissioner Goodell, only elected to the top job as recently as 2006.

The original strategy was that of his predecessor, Paul Tagliabue, who hired Steve Bornstein, the former head of ESPN, to make the transformation of the NFL into a media owner happen and as a first step to that create its own TV network called the NFL Network. But the plan has backfired in the biggest possible way, on Goodell’s watch.

NFL Network was originally launched by Bornstein in November 2003 to broadcast to the United States, Canadian and Mexican markets as a showcase sport channel dedicated to the NFL. At the outset it did not feature live top tier games and was relatively uncontroversial. It cost the NFL US$100 million to establish, which mainly went towards a subsidiary called NFL Films whose job it is to produce feature programming for the network. In four years it has produced 4,000 hours of original material. The network is based in studios in Los Angeles and made its money from fees paid by cable channels, carrying the network, typically around US$8 a year per subscriber that the network was potentially available to. The standard business model depended on customers liking the network and gradually putting pressure on cable channels to carry it.

The NFL Network was successful, but not as successful as the NFL’s owners had hoped. It proved the case that the vast majority of fans’ interest in NFL was the first whistle and the final whistle of a live game. Fewer than 20 per cent were interested in consuming any more. It is a lesson that many media owners have expensively learnt over the years. But a lesson that Tagliabue and Bornstein seemed unable to accept, and at least wanted to challenge.

In reality, without really knowing it, the NFL had hit the sweet spot with the NFL Network and had persuaded many cable channels to put the network on its basic digital tiers giving it access (and payment) to millions of viewers. Being included in the basic tier gave the network potentially the chance to hit around a third of all digital cable subscribers in North America, which was about a sixth of all cable viewers. And cable operators appeared happy to pay NFL around US$7.50 a year per subscriber to carry the service. In fact all the NFL had to do was wait and see cable operators adopt the new network, under pressure from its customers. Digital cable had made the opportunity for specialist channels a big one. In reality all Bornstein had to do was improve the programming until the cable channels were forced to take it. It would make the network highly profitable, and as the channel was arguably one long advert for the league, it was a win-win situation and a simple management task.

But it was not enough for Goodell and Bornstein who wanted to earn hundreds, not tens of millions from the NFL Network. They figured out that live games would make the NFL Network a must-have channel across all the channels. The two men thought it had found a new way of doing business, effectively a new way of gouging.

It happened after launch in 2006, when the NFL decided to broadcast eight prime-time regular live season games, which it called ‘The Run to the Playoffs’, on the NFL Network. But before that it wanted to test the market value and offered the eight games out to tender.

America’s TV channels, both terrestrial and cable, have an insatiable appetite for live NFL matches. The games, packaged up and sold to different channels, consistently achieve high ratings across the American channels. They are always number one on any schedule. As a consequence, the NFL also attracts the highest TV fees anywhere  in the world. No other sport approaches it.

The NFL ultimately turned down a US$400 million-a-year bid from Brian Roberts of America’s biggest cable channel, Comcast. Roberts wanted the deal for his own sports network called Versus.

And that is what made it a real game changer.

In fact, Steve Bornstein’s decision to turn down US$400 million a year was crucial. It showed the NFL believed it could get much more than US$400 million from extra subscriptions from its NFL Network if it became a media owner and effectively broadcast the games itself.

But it was a cruel miscalculation as Bornstein’s decision suddenly turned all of the cable companies against it. It was a signal that the NFL had decided to become a media owner and it proved to be the proverbial red rag to the bull. The American media owners suddenly saw the writing on the wall. They saw what the NFL had really been up to in 2003 when it set the network up. And it decided the game was up.

The truth was, according to those that know, the NFL Network worked reasonably well whilst it did not broadcast live games. When that happened much of the cable TV industry went to war with the NFL Network. Some channels removed the network altogether. And many moved NFL Network from the basic digital tier to the premium sports tier. This move threatened to destroy the NFL Network’s business plan.

The premium sports tier only included sports fans who paid extra for the sports package. Crucially it consisted of about 10 to 20 per cent of the basic digital tier numbers. Instead of having tens of millions of subscribers pay US$7.50-US$8.50 a year, the NFL network now potentially had just millions.

Time Warner Cable kicked off the battle against the NFL in September 2006. It removed it from its system altogether. Officially Time Warner said that a channel with such marginal interest and a few live games with filler programming would be tough to sell during non-football season months.

But the reality was that Time Warner Cable tolerated the NFL Network when it did not show live games but now wished to kill it. Basically it feared if the NFL Network worked then traditional media companies could be cut out of the broadcasting loop altogether.

All the big cable channels felt the same way. The one exception was satellite service Direc TV which had made the NFL Network available to all its subscribers at basic level. It was part of Direc TV’s strategy against cable. Its president, Chase Carey, couldn’t have cared less about the “greater good”; he was on a mission to destroy the cable industry and convert America to satellite transmission instead. The NFL and other channels such as the MLB Network were very good news for him.

But Direc TV’s alliance with NFL Network merely hardened the resolve of the cable companies. Now they could fight two foes at once. In August 2007, Roberts struck and  Comcast removed the NFL Network from its digital basic tier. It placed it in its tier it called the ‘Sports Entertainment Package’. It was a hammer blow to the NFL Network. After having 13 million Comcast subscribers one day, it had one million the next. Overnight it suddenly lost 12 million subscribers. Comcast chief executive Brian Roberts had sent Roger Goodell a very big message.

The financial effect was heavy, some US$68 million less in cable fees from Comcast. NFL’s income went from US$75 million to US$7 million a year. A clause in Comcast’s contract, to carry the NFL Network, allowed it to take the decision. Other big cable companies followed Comcast’s lead.

Bornstein and Goodell decided to test Comcast’s decision in court. But unsurprisingly a judge ruled in favour of Comcast, telling the channel that under the terms of its contract it could basically do what it liked.

The body blow to the NFL Network of that decision cannot be quantified.

Roberts, one of the most powerful men in America, had put a marker down. His argument was simply that niche channels such as NFL Network belonged on the niche tiers where the fans who wanted it could effectively pay for it.

What happened next was as amazing and it was unbelievable and Bornstein and Goodell’s response was extraordinary. The NFL began an unofficial campaign encouraging its fans who were subscribers to leave Comcast and move to DirecTV.

At that one amazing moment of madness, it became a bare knuckle fight between Comcast and NFL execs with no one in any doubt that NFL execs were taking the juvenile roles.

The cable industry, used to plenty of rough and tumble over the years, had never seen anything as stark and basic as this. One observer said: “Goodell was operating in a parallel world at that point. I can only believe that Steve (Bornstein) was a bystander at this point. I think the league had been so used to the media companies rolling over continually that they had no past experience to fall back on and temporarily lost it. It should have been a wake-up call but instead was a return to base instincts.” 

Unsurprisingly the normally calm and collected Roberts went berserk when he heard what was happening. His in-house counsel simply couldn’t believe it, they thought there had been a mistake in the communication. When they realised it was true, counsel instructed Comcast’s external  lawyers to send the NFL a cease-and-desist letter to stop the practice.

Rationality appears to have returned to the NFL and Comcast’s lawyers appear to have been successful. But the relationship had been severely damaged. While before it was just business to Roberts, now it was personal. Comcast’s carry agreement with the NFL Network ends in mid-2009 and currently it is unlikely to be renewed. No renewal could be a fatal blow to the NFL Network.

According to insiders the problem for Goodell is that the NFL Network business plan is very inflexible. One said: “It was conceived on the basis of a seller’s market, which clearly this was not. The US$7.5 million Comcast is now paying the NFL for the broadcast is chickenfeed when the price for such a package is many times higher.“

Another said: “Bornstein has no leverage. Comcast is so big that it can call the shots. At that level the numbers do not make sense for NFL although they do for Comcast.”

It is indeed ironic now to many that it was Comcast’s own sports channel, Versus, which actually bid US$400 million a year for the live package of NFL games two years ago and was turned down by Bornstein. In hindsight this was a ‘no brainer’ and should have been snapped up, and the grand network ambitions of Bornstein put in the cupboard.

Roberts is in no mood to back down and neither has Bornstein any leverage, in fact the reverse. Roberts feels he is fighting a wider battle, that all the major sports like MLB and NHL will want to produce their own networks, with live games included in basic channels, and will end up gouging huge sums out of Comcast in the longer term. Roberts is fighting to prevent that.

That the battle has hurt the NFL is not in doubt. The NFL Network currently has only 35 million homes and revenues of just US$280 million a year. That is 15 million homes light of where it expected to be after four years and a financial shortfall of around US$120 million. And because it turned down Roberts’s US$400 million, it hurts even more. Goodell has admitted: “It’s far behind where we wanted to be.”

But for the moment, for good or bad, the 32 NFL teams are behind the NFL Network. They recognise that the NFL Network is a huge risk, albeit a “necessary risk” according to NFL insiders.

Goodell has done a good job and galvanised the league behind it.

And the fight is now open on two fronts. Goodell and Bornstein have taken the operation of the NFL.com website in-house and away from CBS, which previously paid to operate it.

Owners are themselves building their own media companies locally to promote their teams via NFL.com. And that brings them into competition with the media websites that currently cover the sport.

To help, the NFL has imposed restrictions on competing websites. The first manifestation of that has been Goodell’s decision to limit web broadcasts on non-match activities to 45-second sequences. It is a mini battle of what is going on in the broadcast battle, but on this front the NFL holds most of the cards in the still developing internet business where there are no big dominant players as there are in cable.

Whilst this fight has been going on the American terrestrial networks, which pay the really big money to the NFL, have stood by. Ostensibly they are not involved and it is nothing to do with them.

As Les Moonves, chief executive of the CBS network and a big customer of NFL, said of Roger Goodell’s role: “There is the businessman ferociously dedicated to protecting the league’s and owners’ interests. The two sides often mesh, but they also can collide.” Moonves is choosing his words carefully and there is little doubt that he is cheering Roberts on to win and is fearful of the consequences of another result.

One keen media observer said: “There is no doubt that there has been a lot of personal hubris here. One feels Steve has overeached and that Roger is not experienced enough to make things right again. That is why they have turned to Jerry.” ‘Jerry’ is Jerry Jones, who insiders have nicknamed “the fireman”. So far the fight has cost the NFL nearly US$500 million and unsurprisingly a ‘fireman’ has been called in to put the fire out and break the deadlock.

Jones, the owner of the Dallas Cowboys, is now the NFL’s point man on the tortured negotiations with Comcast. Jones is one of the sport’s power players. From being a brash league upstart just a few years ago he is now an admired member of the establishment.

But critics say that the appointment of Jones is a panic measure and that Jones doesn’t really understand what the modern media landscape is and that there is no real empathy with Bornstein. 

Maybe Jones does and maybe Jones doesn’t, but he certainly has grasp of the basics as he sees that everyone wants a piece of the media pie and his job is to get the NFL’s share as big as possible. Jones feels it is a “basic” problem that needs a “basic” answer. He has already had some success in persuading smaller cable channels to give the NFL what it wants. But Brian Roberts is a whole different story. Does Jones have his mobile number? Can Jones even get in to see him? Some doubt either.

And for some the battle is already over. When BusinessWeek magazine last October voted Roger Goodell the most powerful man in global sport, Tiger Woods could only make number two and Rupert Murdoch number 19. Brian Roberts barely featured at all and could only make no 24. But that was then and this is now.

When the US trade bible, Sports Business Journal, published its own ‘most influential’ list in late December 2007, Roberts had moved to number one and Goodell was down at number two – no longer the most powerful man in sport. It seems many people’s minds are already made up.