From a distance, Time Warner seems to be a corporation at odds with itself.
One the one side, you’ve got HBO slowly breaking away from the cable bundle. Not only has HBO launched an over-the-top internet video service that’s already pretty successful, but it’s teamed up with all the major cable companies to create “Internet Plus” bundles that include only local channels and HBO for TV service.
On the other side, you’ve got Turner Broadcasting, which remains relatively entrenched in the cable bundle. Turner felt confident in committing more than $10 billion to broadcast NBA basketball games from 2016 to 2025, to say nothing of the $350 million per year it’s paying Major League Baseball through 2021 and the roughly $470 million a year it’s committed to the NCAA Men’s Basketball Tournament through 2022.
TNT, meanwhile, has lost roughly 2.5 million subscribers since July of last year — a 56% jump from the previous 12 months. TBS has also lost more than 3 million subscribers in that same time frame, thanks to cord cutting and cord trimming. Some of those losses could be fueled in part by HBO’s recent moves to separate itself from the cable bundle.
One imagines two siblings fighting in the back seat while a flustered Jeff Bewkes, CEO of Time Warner, sits in the driver’s seat shouting, “Settle down back there! I swear I will turn this car around right now!”
Despite this internal friction, Turner actually has less to worry about when it comes to its sports properties than ESPN does, largely because Turner does not have a dedicated sports network. It did at one time — the ill-fated CNNSI, which lasted only 5 ½ years, never managed to show much in the way of live sports, and was ultimately blown off the dial by ESPN. Since then, Turner has shown nearly all its sporting events on TBS and TNT instead.
This strategy has succeeded for Turner. TBS and TNT are run more like traditional broadcast networks, in that they have a lineup of original TV series and theatrical movies mixed in with their sports programming. Plus, by becoming more selective with its sports choices — focusing on basketball and baseball, and ending its NASCAR contract last year — Turner is able to use advertising to cover its rights fees, rather than carriage fees. Yes, those carriage fees have grown in part because Turner channels have high-value sports content, but unlike ESPN, Turner doesn’t rely on carriage fees to pay the bills.
Case in point: in 2010, Turner and CBS signed a 14-year, $10.2 billion deal with the NCAA to broadcast the aforementioned men’s basketball tourney. That’s an average of $771 million per year. Since 2012, March Madness has generated more than $1 billion per year in ad revenue.
Advertising, of course, is how sports on TV made money before ESPN started using its huge carriage fees as a weapon against other networks. For many broadcast networks, however, the advertising model still works.
For example, NBC currently pays the NFL $950 million per year for the rights to Sunday Night Football, assorted playoff games, and a few Super Bowls. Because so many football fans are watching, NBC can demand a large amount of money for commercials — $627,300 per 30-second spot, to be exact. At an average of 112 commercials per game, each regular season game brings in $70,257,600 in ad revenue. Multiply that by 17 regular season games, and you get $1,194,379,200 in ad revenue.
Now throw in two NFL playoff games every year and the Super Bowl once every three years. Suddenly, $950 million a year for broadcast rights doesn’t seem so ridiculous, does it?
Compare that to ESPN, which pays $1.9 billion per year for Monday Night Football, but only commands $400,000 for a 30-second commercial. At 112 ads per game over 17 weeks, ESPN only gets $761.6 million in ad revenue during the regular season. They rely on carriage fees to plug that gap — carriage fees that start dwindling as cord cutting increases.
That brings us back to Turner and the billions they’ve promised to pay the NBA. Is it advertising or carriage fees that foot this bill?
First, let’s take another look at how much ESPN and Turner will pay the NBA over the lifetime of that new TV deal:
TNT will broadcast 53 regular season games, all of the All-Star Weekend festivities, and playoff games up to and including the Eastern Conference Finals.
Let’s estimate that there are roughly 90 commercials during an NBA game, with that number increasing to 100 commercials during playoff games. We know that TNT charged $240,000 per 30-second spot during All-Star Weekend coverage. That’s about 200 ads right there — a cool $48 million.
Let’s presume for a moment that TNT gets about one-third of that 30-second spot price ($80,000) for regular season games:
$80,000 per commercial * 90 commercials per game * 53 games
Now let’s presume further that NBA playoff games command the same price on average as All-Star Weekend, since more basketball fans tune in during the playoffs. (Remember, this is an average for all playoff games. Conference Finals by themselves will command a lot more than $240,000 for a 30-second commercial, especially if LeBron James is involved.) Last season, TNT aired 41 NBA playoff games.
$240,000 per commercial * 100 commercials per game * 41 games
That adds up to more than $1.4 billion in annual advertising revenue for NBA coverage on TNT, which covers the average $1.2 billion per year TNT is expected to pay the NBA for broadcast rights. You can expect advertisers will continue to foot this bill for as long as basketball fans are watching.
And basketball fans are definitely watching. The 2015 NBA Finals had the largest TV audience for any finals since Michael Jordan’s last title in 1998. The most recent NCAA Tournament experienced its highest TV ratings in 22 years. What’s more, the NBA viewing demographic skews younger than similar demos for the NFL, MLB, and NHL. That suggests that more young people are watching basketball, and while young people are less likely to pay for cable, they’re better-informed customers in general, and they know that if they need a hoops fix, Sling TV is cheap and includes TNT.
Thus, Turner may have protected itself from the cord-cutting phenomenon far better than ESPN has, and it’s done so by operating more like a traditional broadcast network — focusing on high-value sports properties, making sports a small part of its overall programming strategy, and relying on advertising to cover its costs instead of cable carriage fees. Having those carriage fees available to them doesn’t hurt, of course, but as a famous football coach once said, depth is great until you have to use it. If the advertising market stays strong for basketball, Turner won’t have to use its depth for quite some time. That’s a luxury ESPN might be wishing it had by decade’s end.