Apr 29 2014, 8:04am CDT | by Forbes
The National Football League announced last week that ESPN would host the first playoff game in its 35-year history in January 2015. The Wild Card playoff game is a carrot for the $15.2 billion ESPN committed over eight years in its latest NFL TV rights deal, which kicks off next season. ESPN’s commitment to the NFL is worth almost twice as much annually as the pacts signed by NBC, Fox and CBS. An NFL playoff game marks the latest milestone for the network and further strengthens the stranglehold it has on sports programming.
The NFL is the engine that makes ESPN go with year-round programming dedicated to America’s favorite sport, but the self-proclaimed Worldwide Leader in Sports has built an empire on the back of valuable programming across all sports that dwarfs any other network. The result is a company worth $50.8 billion, according to Wunderlich Securities research analyst Matthew Harrigan, who did a valuation analysis last month of ESPN’s parent Walt Disney based on discounted cash flows (the Mouse House’s current market value is $137 billion). The Disney-owned ABC Network is a footnote compared to ESPN at a valuation of $3.2 billion, according to Wunderlich.
The only U.S. media companies worth more than ESPN are Time Warner and Twenty-First Century Fox, and they are both conglomerates with a broad array of brands and assets (Comcast also fits the bill, but it is largely a cable distributor). The reality is there are not a lot of publicly traded companies worth more than ESPN’s $51 billion valuation (80 U.S. companies as of last week across all sectors led by Exxon Mobil at $432 billion). ESPN is more valuable than Hewlett-Packard, Lowe’s, Sprint and Twitter based on Wunderlich’s estimate and the most valuable media brand in the world.
ESPN’s value is derived from the massive cash flow the company generates, which is expected to reach $4.5 billion this year, up 39% from five years ago. For comparisons sake, CBS Corp., the highest rated broadcast network, had operating income of $1.6 billion last year.
ESPN’s advantage over its network and cable brethren lies in the affiliate fee and ad revenue model that generates huge sums of cash. ESPN’s average monthly affiliate fee was $5.54 in 2013, according to SNL Kagan. The next highest national cable channel was TNT at $1.33, followed by Disney Channel at $1.15 and $1.13 for the NFL Network. ESPN2 is not far behind at $0.70 with ESPNews, ESPN Classic, ESPNU and ESPN Deportes each around $0.20 a month says SNL Kagan.
While battles over affiliate fees for regional sports networks rage in Houston and Los Angeles, ESPN quietly bumps its fees 5% or more year after year with must-see programming that cable distributors can’t possibly live without. ESPN has splashed billions on sports leagues and college conferences to get its hooks in the NFL, NBA, MLB, championship golf/tennis, college football/basketball and dozens of additional offerings. The result is an expected $6.3 billion from domestic affiliate fees this year that acts as a consistent, guaranteed revenue stream for Disney.
The story is even better on the advertising side. The U.S. economy has been sluggish the past five years as it recovers from the Great Recession, but ESPN ad revenues are up 63% to a projected $3.9 billion this year, according to Wunderlich. Total ESPN revenue, including ads, affiliate fees as well as ESPN.com, ESPN The Magazine and the international business, is expected to hit $11.2 billion this year.
It has been expensive for ESPN to corner the market on sports programming, particularly with new entrants like Fox Sports 1 and the rebranded NBC Sports Network looking to make a splash on the national stage. ESPN’s sports rights costs jumped from $2.8 billion in 2009 to $4.1 billion last year. But ESPN has locked up many of its deals through 2020, and the only major sports TV packages coming up for bid are Big Ten football and the NBA, which ESPN is expected to back up the brinks truck to secure. Despite the jump in programming costs, ESPN’s profit margins stayed high by keeping the lid on production and other costs. Operating margins hovered around 40% in recent years and Wunderlich expects them to stay there for the next five years at least.
Sports programming remains one of the best bets on TV for advertisers because it is viewed live and commercials are not skipped with the push of a button. A study on time-shifted viewing habits by Discovery Communications found that 94% of programming on sports channels is consumed live (it is even higher for live sporting events) compared to 70% on network television.
One of the biggest winners from ESPN’s remarkable rise is publishing giant Hearst, which owns 20% of the company (Disney owns the remaining 80%). Hearst’s traditional newspaper and magazine businesses have been hammered in recent years by stiff economic headwinds and the shift to digital formats, but the company reported record revenue and profits in 2013 on the back of ESPN’s success. One estimate had ESPN responsible for half of Hearst’s profits last year. For ESPN’s corporate owners, the network is the gift that keeps on giving.
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