Amazon Bids To Buy 22 Fox Regional Sports Networks

On Thursday CNBC reported that Amazon was amid the bidders for the 22 regional Fox Sports Networks that Disney is being forced to sell as part of its acquisition of 21st Century Fox assets. We don't know what Amazon bid or how serious they are as potential acquirers of these assets, but CNBC reported that Apollo Global Management, KKR, The Blackstone Group, Sinclair Broadcast Group, and Tegna also made first round bids for the assets. (The New Fox company, the assets left behind in the wake of the Disney purchase, may also bid for the regional networks in a future round).

The name Amazon, however, is the one that truly pops here because it represents, potentially, what has long been rumored and discussed -- the idea that a major tech company might decide to jump into the sports rights arena and compete with the existing media companies.

Amazon, with a market capitalization of $731.2 billion even after the recent tech sell off, is larger than CBS, Fox, Disney, and Comcast -- the four current NFL rights holders -- combined. (Those four companies are worth a combined $443.5 billion at Thursday's market close.)

Amazon, through its subscription Amazon Prime service, produces a bevy of original shows but has not yet purchased original sports content in America on an exclusive basis.

This could be a huge move into the exclusive sports marketplace.

Why would Amazon do this?

The first thing you need to consider is the business angle.

Right now sports rights are purchased by media companies, who make money off those sports rights in two ways: 1. by selling advertisements 2. through monthly carriage costs in the case of cable companies like ESPN, FS1, CBS Sports Network, and NBC Sports Network or through retransmission fees in the case of the major broadcast networks.

Sports rights are a narrow margin business, by and large. That is, the media companies don't typically reap massive profits over what they pay for the sports programming. In fact, sometimes they lose money on the sports deals.

The simple way to think about this for a broadcast or cable network is that whether you are CBS, NBC, Disney/ESPN/ABC, or Fox, you make money through subscription fees and advertising. (Significantly, the pot of gold that has been subscription fees as part of the cable and satellite bundle is under significant strain).

But what about Amazon, how do they make money?

Amazon makes money all over the place, but it makes money, at least so far, at a very low margin basis. Amazon has been building out a massive firewall, becoming experts at selling us everyone online. But so far the profits have been relatively insubstantial.

A significant part of Amazon's investment and revenue comes from Amazon Prime, which CEO Jeff Bezos revealed in April of this year now has over 100 million subscribers. Amazon Prime costs $99 a year and, as part of that cost, offers free shipping and access to all Amazon original shows. You can also pay $12.99 for a monthly subscription.

This year Amazon is reportedly going to spend $5 billion on original shows for Amazon Prime, which has morphed into an HBO or Netflix like business for the online conglomerate. But so far, significantly, Amazon doesn't seem intent on making much money from Amazon Prime, it seems intent on getting you to spend more of your day with Amazon.

If you just do basic math here it would suggest Amazon Prime now does revenue of roughly $10 billion a year, which would make it, were it on cable or satellite channel producing this revenue, the single most lucrative media channel in the world in terms of yearly revenue.

Now, to be fair, all of those subscribers aren't buying Amazon Prime for the shows right now. Most of us were doing it, at least initially, for the free shipping.

What's difficult to determine, of course, is how much of the Amazon Prime revenue is predicated on the shows produced by Amazon. In other words, how many people would still pay for Amazon Prime if they were only paying for the free shipping and no shows were available at all? And also how many people would choose not to subscribe if the premium shows didn't exist? In other words, what makes people sign up for Amazon Prime?

For instance, my family subscribes to Amazon Prime, but I have never watched an Amazon show before. My wife, on the other hand, has watched many of the shows produced by Amazon and loves them.

Would we be subscribers even if no shows existed?

Probably.

But we are less likely to leave now that my wife is addicted to some of these shows?

For sure.

Presumably Amazon has a formula to create a value for Amazon Prime and if they are serious about bidding for these regional Fox Sports networks then they must believe they can increase Amazon Prime revenue based on these asset purchases.

But how?

The easiest way would be to add these regional sports shows and then increase the cost for Amazon Prime. Could, for instance, Amazon charge $119.99 a year and include all these local sports shows as part of the reason for the increase in cost? Potentially. If so then that would be an extra $2 billion a year in revenue per year. (Amazon could also start a sports tier of Amazon Prime and charge only those who want to watch the channels, but the bundle -- where everyone pays the same -- seems like a more attractive option).

But remember, you'd only be able to watch your local sports channel in your regional footprint on Amazon Prime. In other words, I'd only get Fox Sports Tennessee since I live in Nashville and if you live in, say, Ohio you'd only get your Ohio teams. Here are, by the way, all the regional Fox Sports channels, which are up for sale.

Here's the other complicating factor -- these networks are available right now, primarily, through cable and satellite subscriptions. The moment that Amazon puts these offerings under the Amazon Prime umbrella then the cable and satellite companies might threaten to stop carrying the network on cable and satellite meaning everyone would have to watch them online and their existing value could crumble, potentially forcing Amazon to make up billions in revenue.

Maybe that's what Amazon wants though.

Because, after all, Amazon is already spending billions on original programming that it doesn't directly monetize. If they believe $5 billion a year is providing good value, maybe they think $10 billion, spent on sports programming, would too.

I'll discuss this a bit more later in the article.

Right now these sports channels are profitable, but their long range future is murky. Remember, what you're purchasing is the contracted rights for local team games in local team markets. If the teams decide to pull the games off these stations as part of future contract decisions then the stations have no reason to exist. (At least not to exist and produce substantial audiences).

Effectively the entire station is predicated on the existing sports contracts and on their continuing in perpetuity. Some may wonder why not just wait until all of these contracts expire and sign individual deals then. That's one option, but all the deals don't come up at the same time and all of these contracts typically have a window of exclusive negotiation, so you'd have to hope these teams all allow their rights to come to the open marketplace and then poach them off one at a time. If you believe this is a long range plan, why not start working on the relationships now and lock in much higher odds of an extension?

The other wrinkle, of course, is that many are cutting cable and satellite subscriptions so the overall business plan is premised on charging more per subscriber, not less. You can no longer rely on the number of subscribers continuing to grow so increasing overall revenue is, at least in the long term, challenging.

As if this weren't enough, Disney has an interesting decision to make here too. Should CEO Bob Iger sell to Amazon if it provides an access point to sports competition for a much deeper pocketed spender? If Amazon buys the regional sports networks what's to stop them from stealing away Monday Night Football in a couple of years from ESPN? I'll discuss this a bit later as well.

In the meantime, let's presume this report is true and Amazon is actually making a run at buying these 22 regional sports networks from Disney. From a business perspective what are they trying to accomplish?

It's not altogether clear, but the questions are fascinating.

Here's some analysis as to what Amazon might be thinking.

1. It's the content, stupid.

The simplest reason why Amazon would buy these 22 regional sports networks is because they believe the content they offer -- nearly half of all the local telecasts of MLB, NHL, and NBA games -- will make the Amazon Prime offerings more competitive.

That's the foundational question Amazon is answering by bidding at all.

This has to predicated on making Amazon Prime's content more compelling.

As the media world becomes more competitive live sports retain fan eyeballs and ultimately if you want to sell anyone anything you need their attention.

Since Amazon sells everything, why not sell to sports fans everywhere too?

What's more, if Amazon believes streaming is the future what do they care about the loss in TV viewing or revenue in future years. Buying these channels allows Amazon to lock in these teams for the next several years and maybe Amazon sees the cloud and its streaming businesses as the perfect way to directly offer every local team's games to its customers in the future.

After all, remember, Amazon knows where we all live.

If the teams are going to directly offer their games to fans in the future via streaming, why wouldn't Amazon see itself as that conduit?

This just accelerates the process.

Amazon becomes the bridge to the streaming future, the connection between the past, traditional cable and satellite, and the future, games streamed directly on the Internet.

2. Everyone is competing for time and attention in our modern era and sports cut through the noise because we care about our favorite teams. 

Unlike, say, Netflix or HBO which just sell us top shows and do not feature advertising, Amazon wants to sell us everything.

Wouldn't it make me more likely to spend money on Amazon if I were spending more time on Amazon Prime? If I watched Nashville Predators games on the Amazon Prime app couldn't Amazon deliver the best targeted ads to me predicated entirely on what they knew I was already buying?

This already works in a fantastic way every time I buy a book on Amazon from my Amazon Prime account.

Amazon can use their shopping algorithm to suggest books to me they think I would like. That algorithm is uncanny because it often suggests books I have bought from traditional bookstores. (Netflix does the same thing, by the way, with its shows).

What's more, I don't feel like my privacy is being violated, I like these suggestions. I'm being bombarded with marketing all day for products I'm not interested in, seeing a book suggested which Amazon thinks I will like gives me a feeling of pleasure. "Wow," I think, "Amazon is showing me something they think I will like that I might not otherwise have known existed."

It's commercial word of mouth.

I'll often click on those book suggestions and read their reviews. And do you know what I also do? Buy them, often.

And then like them!

Amazon is great at knowing what I will like and that makes me like them more.

Do you know where I enjoy shopping the most? Amazon and Costco. This is where 95% of the things I buy come from. I love both places.

But Costco needs me to come to their store to buy things.

I'm on Amazon a couple of times a week. What if Amazon could get me on their site more to watch sports and then they were able to serve commercials during games that were specially directed at me based on my own buying interests? In other words, what if Amazon could do for advertising all products what it already does for books?

How much more valuable could that be for advertisers?

Especially if I could click directly through and order what they advertised to me during the game.

This could be revolutionary.

Think about all the potential impacts. Imagine, for instance, political advertising. Amazon could sell to advertisers what kind of ads would likely work to me based on what I'd already purchased and politicians could craft ads designed to appeal directly to me.

Some of you might find that creepy, but I wouldn't. Companies are already trying to sell me things all day long, I'd rather they try to sell me things I actually want than make me sit through another insurance commercial.

And that's just one example.

Instead of trying to appeal to everyone with their ads, Amazon could allow companies targeting sports customers to go after targeted niches.

Remember, unlike competing with Netflix and HBO, where customers have become conditioned to there being no ads at all during the shows, sports viewers expect ads as part of the viewing experience.

Hell, sports ads are so ingrained as a part of the viewing experience that the Super Bowl celebrates the advertisements as part of the viewing experience. How much more targeted and fun could companies be if they were only trying to reach men between the ages of 18 and 45, for instance, instead of trying to reach every consumer?

This could open up a brand new world of smart, funny, targeted and funny advertising.

Amazon unlocking targeted ads for sports viewers could be a total game changer, a direct assault on the massive ad businesses Google and Facebook have both built up.

And, significantly, it could be wildly lucrative.

Particularly compared to the way ads are served on traditional sports broadcasts.

3. This could be Fox in 1993 all over again.

In 1993 Fox bid an exorbitant amount to steal away the NFL from CBS and everyone said they were crazy.

Only Rupert Murdoch was crazy like a Fox.

Here is the New York Times opening paragraph from 1993 on that deal:

"The tradition of watching Sunday afternoon pro football took a startling turn yesterday when the National Football League announced that Rupert Murdoch's Fox Network -- the network of Al Bundy and Bart Simpson -- had outbid CBS for the right to televise National Football Conference games, beginning next season.

...

Fox's offer -- coming from a network whose sports expertise has been largely confined to a raunchy live episode of "In Living Color" opposite CBS's Super Bowl halftime show in 1992 -- apparently invigorated team owners, who have looked warily, even askance, at past network pleas for financial relief." 

Twenty five years later Fox still has the NFC and it now has the World Series and many of the baseball playoff games, a deal recently extended until 2028, the US Open in golf, the World Cup, Thursday Night Football, and, soon, the WWE.

The genius of Murdoch's acumen was both the legitimacy the NFL conveyed, but also the shoulder programming ratings increases that come from the massive audiences brought in to watch live sports and exposed to other Fox shows.

Amazon jumping into the sports arena could do for the company what Fox grabbing the NFC did for Murdoch's company.

What's more, if you read that article you learn something interesting, owners sell to whoever has the most money.

If Amazon has the most money why couldn't these regional sports networks be the beginning of a sports powerhouse just like Fox's audacious bid for the NFC?

Okay, all of this sounds great, what are the potential obstacles?

4. Would Disney CEO Bob Iger sell the regional sports networks to Amazon knowing that it would be creating a competitor?

This is a fascinating question because it also raises an intriguing possibility -- if Amazon is bidding for regional sports rights wouldn't Amazon also bid for national sports rights?

In particular, couldn't Amazon try and steal away Monday Night Football from ESPN in two years when the deal goes to market?

Furthermore, since Iger wanted these regional networks for ESPN+ -- theoretically ESPN could have offered these games to you the same way Amazon can, on a regional basis -- does he really want to buttress a streaming rival as he prepares to debut his own Disney+ offering?

Or, in a high stakes poker move, does Iger, who likely believes he knows the sports business better than Amazon as a result of ESPN's experience, foresee Amazon losing substantial amounts of money on these channels and being even less interested in bidding for national sports in the future as a result? Further, if you drive up the price for these assets could you actually eliminate a future competitive bidder for Monday Night Football in the process?

Meanwhile does Bezos believe his technology allows him to unlock revenue potential that Iger and ESPN don't have the ability to unlock? This is just fascinating to contemplate.

Remember, Netflix exists today as a tech behemoth because media CEO's couldn't turn down the money they offered for archived programming. In taking Netflix money, media companies created the rival that has helped to destroy their existing businesses.

Does Iger take that risk with Amazon here when it comes to live sports, which is the foundation of ESPN's business?

5. Could Amazon's knowledge of its customers provoke a tech rebellion?

Personally I like that Amazon makes book suggestions to me based on what they know about my reading habits, but only I see those.

That wouldn't be the case with targeted advertisements airing during a game.

You can imagine a future where a girl you just started dating come over to watch a game at your place and you see ads for herpes treatment during every commercial break.

Awkward.

Or what if you and your wife are trying to get pregnant and Amazon sees you've been buying a bunch of baby products and every ad during your local team's game is about diapers. Only you haven't told your parents about your wife's pregnancy yet because she's still in her first trimester.

What if you have been pretending you're a Democrat at work because almost everyone else is, but during your sports broadcast when you have your buddies over every ad is a positive endorsement of Donald Trump?

I think you can easily see how this knowledge could lead to a significant violation of privacy.

And that doesn't even consider the inevitable hacking of this information which seems to occur all the time now.

These could be problematic issues that become more apparent as the advertising becomes more targeted.

6. The business of the regional sports channels is low growth and low revenue increase, but what if Amazon believes they can make even more money through streaming and doesn't care about the declining subscribers because they would rather have streamers than cable and satellite viewers.

Again, what if instead of worrying about declining viewership, Amazon welcomes it because it leads to more time spent on their online network.

The future isn't about channels, it's about time spent on a series of apps or networks.

If Amazon wants to continue to dominate online commerce, doesn't it also have to dominate the places people spend their time online?

My bet would be yes.

In fact, I think that's why they want people to sign up for Amazon Prime, so they can sell us more products. What better way to gain eyeballs in the 21st century than with big sports events that combine massive live audiences?

7. What if Amazon is planning a big move into sports gambling?

This is my final thought because I believe sports gambling offers massive new revenue streams.

Right now it appears sports gambling is going to be added on a state by state basis and that will play out over the next decade, much like the state lotteries did. Presently 44 states allow the lottery, I think the same number of states will eventually allow sports gambling.

This means geotargeting and local audience analysis will be paramount when it comes to sports gambling.

Can you imagine the gold mine that could come from live game wagering during a sporting event? Even if Amazon doesn't get into the business, they could set up affiliate deals with every gambling company licensed in a state and extract a killer percentage of that revenue as a part of the direct relationship they have with the teams.

As sports gambling becomes legal across the nation, I believe there will be much more value to be found in streaming of sports rights than in the traditional airing of sports on television networks.

When it comes to sports gambling streaming offers the potential to unlock a pot of gold for the teams and their business partners.

...

Ultimately when you consider all of these factors, while the 22 sports regional networks may not make immediate sense from a business perspective, they offer a tantalizing possibility for Amazon when it comes to investing in a streaming future.

And if Amazon has shown us anything, it's a willingness to invest not for now, but for ten or twenty years in the future. Indeed, that's the entire foundation of their business, to do now what everyone will want to do in twenty years.

So here's the big question: will Amazon leap into the sports business now and will Disney allow them to do so?

It appears we may be about to find out the answer to both of those questions.