Stoke City v West Bromwich Albion - Barclays Premier League

So yesterday a colleague emailed a story that flew below the radar but I think is worth talking about at post length. The director of TEAM Marketing, the Swiss company that sells the rights to the Champions League on behalf of UEFA, painted a rosy picture for future revenue growth. This, as I’ve mentioned in this space before, is particularly important as club revenues are even more intimately tied to performance in a post-Financial Fair Play world.

The basis for this optimism is interesting. Here’s Fox Soccer:

“What you get now, you have in the future,” Wagner said of broadcasters’ sports-led business model. “Bidders like Sky, they need to do the job now because then they have the so-called inertia benefit, meaning people are then reluctant to change to other systems.”

The 2015-18 deals will likely be the last when a winning bid gets the broadcast rights across all digital platforms.

“The bidders know that something is coming,” Wagner said, predicting big change driven by social media and young fans. “All the companies who try to sell devices will be strong bidders in future.”

Change should also be lucrative for UEFA and clubs, with screen technologies such as virtual advertising set to “revolutionize everything,” Wagner said.

“You can put your message regionally, you can target your groups better, so this will generate more income,” he said.

Wagner is clearly intimating that UEFA will split TV and digital rights bids for the Champions League. It seems to me that if this happened, it’s equally plausible that TV companies would bid less because they will lose exclusivity and be further undercut by online companies, and digital companies would bid less because they can’t match the revenue of traditional TV (more on that below). Finally, advertisers will hate this set-up because they’ll have to pay twice to cover the entire football audience—digital and TV. Even with these negative effects, would the two bids combined be “more” than the current TV rights only bids for Champions League football? I don’t know. But I doubt it.

Perhaps the end game is that one day, Google and Apple will join the rights bidding game as independent bidders competing directly with cable TV in order to further drive up the price of Champions League rights. Surely as broadband technology and streaming improves, they could compete with traditional TV?

Okay. Well let’s consider how TV companies manage to earn a profit from rights to competitions like the Premier League even though they pay billions of pounds for the privilege. Sporting Intelligence’s Nick Harris wrote a detailed article on this subject in June of 2012. Harris details how for example BSkyB “managed to get into a position where the rights largely pay for themselves.” Harris wrote:

Let’s look at what [Sky] paid last time, for 2010-13. They spent £1.623bn for three years for five packages of rights, of six available. That works out at £541m a year.

Sky recoup a big chunk of that immediately by selling their games to pubs, clubs, hotels and other ‘public space’ buyers.

As I have detailed before, a spokeswoman for the Association of Licensed Multiple Retailers tells me there are 55,000 pubs and clubs in the UK, and that around 20,000 of them subscribe to Sky.

There are, apparently, 26 different pricing bands, but the ALMR says the average pub subscription cost is £15,000 per year, and on that basis Sky makes around £300m a year from the pub/club trade alone.

The other revenue comes from selling ads during the games. This before we even factor in cable and satellite subscription fees, and before we even consider the why and how of bids like Sky’s and BT’s for the Premier League, which are also a means to expand their customer base using sport as a lure. This strategy means they are willing to bid increasingly astronomical fees, even at smaller profit margins, for live sports.

It should immediately obvious that this marketing strategy cannot simply be grafted onto a company like Apple or Google. For one, would pub/hotel/gym licensing be a viable financial vehicle for a digital platform to recoup costs? How would they sell this to public venues that already have traditional TV and satellite set up unless it’s at a smaller fee? If this isn’t a reasonable avenue for these companies, what source of revenue could replace it?

What about increased user subscription fees for digital access? It’s not certain how much viewers would be willing to spend on digital subscriptions, but the broadband technology would have to improve to the point where it was as reliable as satellite and cable, in HD, and able to play on regular television for picture quality (think Apple TV) as well as personal devices like smart phones and tablets. And even at significantly marked up subscription fees (would likely have to be higher than TV), it’s not clear whether they would charge enough to recoup the kind of bids TV companies are willing to make for live sports.

What about advertising dollars? The targeted strategy might take advantage of scale from better aimed ads to recoup some of the cost of the rights bid. Yet despite rosy forecasts, in 2013, it’s estimated that $0.57 of every dollar spent on advertising “was outlaid on reaching TV viewers.”

That gap will almost certainly close in the future, but the crucial question is how quickly? Because in the meantime as the market changes, TV money will slowly leak from TV, subscribers will continue to cut cords and spend less on on-demand digital viewing services like Netflix, and digital companies will bide their time figuring out a model that can financially compete with TV. TV companies will pay hand over fist for a while to consolidate their hold on their one sure thing until they can’t sustain rights bids with slowly flat-lining ad revenue any longer. As for Wagner’s remarks about targeted ads earning more money, that’s a possibility, but I’m not sure it could sustain the kind of bids that they currently enjoy for the Champions League.

None of this screams “more money for TV/digital rights in the future!” to me, at least, at least in the near to mid term.