Australian athletes may be amassing a tally of medal-winning performances but the Seven Network that is broadcasting the games is no shoo-in for a financial gold-winning performance as its profit is weighed on by the costs of buying the rights and staging the broadcast of this massive event.
There is nothing new about the cost of the Olympics being greater than the revenue generated from the actual event. Seven reckons it isn’t losing any money from the Rio Olympics – but that depends on your definition of revenue. More on that in a minute.
The broader issue is that Australia’s two biggest commercial television networks may be living with the new reality of smaller audiences and declines in advertising but their decisions to continue to outbid each other for increasingly expensive premier sport harks back to a predigital era when television captured all the eyeballs.
It’s the perfect storm for any company – revenue under pressure and costs rising. Australian free-to-air television is under immense structural pressure but caught in the horrible dilemma that to abandon these big ticket sporting events – they figure – would leave them worse off.
Seven’s parent company Seven West Media issued a profit warning last week that earnings could be down by as much as 20 per cent this year on the back of weak revenue and higher costs –including the costs of these marquee sporting events.
Complicating the investment in sports is that a deal like those in AFL and Nine’s NRL span several years – boxing them into costs in much the same way as a company with a progressive dividend policy is stuck giving a set amount back to shareholders regardless of changes in the revenue environment.
As digital disruption continues to eat into traditional free-to-air audiences it is hard to see how the revenue side of the equation is going to improve in any meaningful or sustained way.
This means for any free-to-air player to stand, still profit wise, it needs to increase its share of the audience and thus the advertising pool or cut costs.
Seven takes the view that it has to invest in sports to win a bigger slice of the audience and that the investment in premier sports is the safest way to achieve that. It argues that there is plenty more certainty of an audience watching a Collingwood v Essendon game in 2018 than there is in them watching another series of My Kitchen Rules.
And then there is the halo effect of having two weeks of overwhelming ratings dominance during the games. It allows them an unparalleled ability to spruik new shows, stitch up advertisers for bundles before and after the games and to cement other internet delivery channels like streaming. (And while there is lots of streaming going on the service has been crashing and – not surprisingly – whipping up a social media storm.)
If one takes all that into consideration in the definition of the return investment, Seven can boast that the Olympics made it money. (It also argues that it paid less for Rio than Nine did for the 2012 London games.)
In other words, the investment in big sport has a longer tail of benefits than those that are obviously using a narrower definition of the quantum of advertising revenue made during the actual games versus the cost of broadcasting them.
And of course there is the damage having the Olympics allows Seven to extract on its rivals – priceless.
These are all fair arguments – but this does not address the concerns from investors that the networks are still overpaying for some sports rights.
Ten is the only network right now that is improving its overall medium-term ratings position and is doing so without any major sporting items on its schedule other than Big Bash cricket – which is expensive but not eye-wateringly so.
Ten’s share price has continued to firm over the past couple of months – albeit off a very low base. Nine and Seven has fallen from $1.16 to around 80 cents over the past three weeks and Nine has also moved south during that period.
For Seven, the wall-to-wall sports line-up it has secured over the next couple of years should ensure it retains the number one ratings position – but this is now considered “stay in business” capital expenditure.
It is hard to see how the network is going to get costs down at a time when advertising markets are showing few signs of even a cyclical improvement
But Seven would argue that when it comes to paying for premier sporting events it’s damned if it does but even more damned if it doesn’t.
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