It sure looks that way. If the current arrangement breaks apart, giving way to a system where consumers can buy just the programming that they want, then high-priced channels such as the YES Network could lose their slugging power faster than, well, New York Yankees’ aging star Alex Rodriguez. That doesn’t seem to have factored into Rupert Murdoch‘s thinking for his deal today to buy 49% of the nation’s top regional sports network. The agreement values YES at $3B, or 15 times its annual cash flow. It also gives Murdoch an opportunity to buy 80% of YES with the channel valued at $3.8B, or 19 times cash flow. How high is that? If you applied the same back-of-the-envelope formulas to ESPN, it would be valued anywhere from $45B to $66.5B, Bernstein Research’s Todd Juenger estimates. Either number is far more than investors figure ESPN is worth; Disney’s entire market value — including ABC, the theme parks, and the studios — is $87B.
Even so, analysts like Murdoch’s deal, and his plan to keep building sports programming to give ESPN a run for its money. Juenger, for one, would rather see News Corp invest its cash than sit on it. Wells Fargo’s Marci Ryvicker says that YES “fits within [News Corp's] core cable business, and is a good addition to its substantial regional sports network portfolio.” And UBS Investment Research’s John Janedis says that even though many investors would rather see News Corp return cash to them — by repurchasing shares or awarding dividends — “we think the deal has some strategic value to [News Corp] and the company will still have the capacity to buy back the stock it has committed to” in the current fiscal year.
But consider what could happen to YES if sports were taken out of the basic cable bundle. The bottom line would melt without the roughly $3 a month that some 12M pay TV subscribers — including lots of people who couldn’t care less about baseball — are required to shell out for YES, according to SNL Kagan data. These fees account for about 85% of the $500M in revenues that YES is expected to generate this year. If you just asked the 85,000 households that YES typically attracts in primetime to pick up the tab, then each subscriber would have to pay nearly $390 a month. The outlays also would have to rise every year. Just before cutting the deal with News Corp, YES extended its programming agreement with the Yankees to 30 years — guaranteeing the team a 5% price increase each year — Bloomberg reports. YES currently pays about $85M a year for the team’s games.
Just about everyone except for sports programmers seems to agree that something needs to be done to tame the rising demands. Sports accounts for about half of all programming costs, even though it only represents 20% of all viewing hours. Sports fans “are overwhelmingly being subsidized by non-sports fans,” Bernstein Research’s Craig Moffett says. Following the recent fracas in Los Angeles over the high price that Time Warner Cable demanded for Time Warner Cable SportsNet and Time Warner Cable Deportes — which carry the Lakers — DirecTV CEO Mike White told analysts this month that “the industry is broken…. We’re going to continue to see very, very tough discussions by all distributors with content providers to try and mitigate these outrageous cost increases that are unaffordable to the average customer.” Even Liberty Media Chairman John Malone, who loathes government regulation, told the LA Times this week that the FCC might have to step in because “the control of sports rights by a few entities has almost created a redistribution of wealth.” You can imagine Malone smiling at the prospect of using the same attack lines against Murdoch that the owner of The Wall Street Journal and Fox News used against President Obama during the recent election campaign. It’s just a reminder to Murdoch, if he needed one, that his bet on YES won’t just be fun and games.