To Recoup Billions in Sports Rights Fees, Peacock Needs To Participate in Fandom
Good afternoon!
The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
There is a fascinating subsection within The Wall Street Journal’s “NBA Nears $76 Billion TV Deal, a Defining Moment for Media and Sports” that the potential NBA deal "has created some tensions between the units overseen by Mark Lazarus, chairman of the NBCUniversal Media Group, which is leading the NBA charge, and Donna Langley, who oversees movie and television entertainment in her role as chairman of NBCUniversal Studio Group and chief content officer.”
At the root of these tensions are significant budget cuts in the entertainment division: “NBC won’t need as much prime-time entertainment content, with the NBA taking that real estate a few days a week, and Peacock’s original content budget will likely be reduced significantly.”
The underlying business logic of the bid seems obvious: NBCUniversal sees more upside in sports as a core value proposition that will help to scale Peacock. Entertainment is increasingly less important to scaling the subscription business model or reducing churn.
But, in practice the economic rationale of the bid is questionable. There is not much market evidence to support the strategy that sports will deliver subscription growth and low churn where legacy media's “big IP” and prime-time entertainment have failed. The rationale also flies in the face of Netflix Co-CEO Ted Sarandos’s argument that the “economic models [of big sports] are built around the economics of pay television and [are] different on streaming.”
Sarandos contradicted that statement recently with a recent deal for NFL games on Christmas over the next three years. Netflix is reportedly paying $75 million per game for two games in 2024, whereas NBC will be paying $25 million per game to the NBA for 100 games per season, or $2.5 billion per year.
Given Comcast owns NBCUniversal, perhaps the question we should be asking is whether Peacock's pivot to sports solves problems for Comcast that NBCUniversal’s Entertainment division is increasingly less equipped to solve.
Key Takeaway
NBCUniversal is pivoting Peacock towards sports with over $5 billion in pay-TV economics. It needs Peacock subscribers addicted to watching their own local and favorite sports teams. The problem is, Peacock is currently not that product nor is it on a five-to-ten year path to becoming that.
Total words: 1,600
Total time reading: 6 minutes
Comcast's Entertainment OS
Comcast, Charter and Cox now collectively reach over 69 million broadband subscribers (up 2% year-over-year). As IAC Chairman Barry Diller told CNBC’s Andrew Ross Sorkin in a May 2021 interview, Comcast is the only company "with both feet on both sides” of the streaming marketplace. Meaning, Peacock reaches 34 million subscribers. Also, Cox licenses Comcast’s Entertainment OS platform (née X1) for its 6.5 million broadband households, and Comcast’s recent Xumo joint venture with Charter is also built upon this platform.
Peacock currently has a 7% monthly churn, according to a report released today by research firm Antenna. Comcast’s broadband business recently reported a 0.2% churn rate, having lost 65,000 subscribers in Q1 (and 34,000 subscribers in Q4). Marketing Peacock on third-party platforms is costly, but marketing Peacock within the Entertainment OS ecosystem of Flex and Xumo has zero marginal costs.
Broadband is a better business model for Comcast than Peacock, and it is worth much more annually: $25.5 billion in revenues from domestic broadband with 37.5% Adjusted EBITDA margins versus $3.4 billion from Peacock at a loss of $2.7 billion in 2023. It is significantly cheaper for Comcast to market Peacock to its installed broadband customer base than to market the app across third-party Smart TV and mobile OS platforms.
But, it still needs as much scale as possible to justify $2.5 billion per year in fees to the NBA, on top of $2 billion per year to the NFL and $287 million per year to the WWE. It also must justify the remainder of 2014 for the Olympic Games between now and 2032.
Peacock, The Product…
NBCUniversal properties “Suits” and “The Super Mario Bros. Movie” both have performed better in Nielsen ratings by also being on Netflix than on Peacock, alone. A more recently licensed show—“Girls5Eva”—is reportedly doing better, too. So, it is obvious why NBC Entertainment now may be less important to Comcast’s streaming strategy
But, given Netflix has just over 2x the domestic scale of Peacock’s 34 million subscribers and 8x the international scale, this is as much a question about product as it is about strategy. I argued in Monday’s essay:
“‘winning’ a consumer-first, retail-first marketplace is as much about product development as it is about scale. But, not just the product development, a long-term capital commitment to a vision.”
As I quoted from early stage investor Gokul Rajaram on Monday, winning in a consumer-first, retail-first technology marketplace requires “the resilience, stamina and capital to run a marathon comprised of 5+ sprints, each over 1-2 years, before you can even think about winning your category.” Peacock is lagging in the proverbial streaming marathon, in large part because Comcast originally bet on the value proposition NBCUniversal’s “storytelling moat”—its storytelling expertise and the deep content library—over technology.
Because this “storytelling moat” has largely been disproven as an advantage in the marketplace, and consequently both the Peacock product and NBC Entertainment seem adrift. There is no 10-year path to Peacock winning against Netflix with “big IP” or “prime time” entertainment. The simple logic of NBCUniversal’s expensive bet on an NBA rights deal is that live sports is the better “moat” for Peacock.
Scale
As I wrote back in January, Peacock's success with an NFL Wild Card game—averaging 23 million total viewers across its linear and streaming platforms, and Nielsen reported the game reached 27.6 million viewers overall—points to that conclusion. It seems to be that the bulk of its customers’ “passions” are event-driven, but neither monthly or daily.
There is evidence that the WWE has been important, too. As WWE President Nick Khan told the Marchand and Ourand Sports Media Podcast in March 2023, NBCUniversal has been happy because “a significant number of Peacock’s paid subscribers… is because of WWE.” I argued then that he seemed to flip any perception that NBCUniversal may be subsidizing the WWE and instead, the WWE may be subsidizing Peacock’s success (that assumes he was leveraging the opacity of the data in his favor, which he probably was).
In both instances, Peacock has been able to find scale that it simply has not been able to replicate for its exclusive content library. Perhaps that scale can be primarily attributed to the reach of Comcast’s Entertainment OS platform across 69 million households. But, given research shows Samsung’s Tizen (54%) and Roku (55%) are the top operating systems of Smart TVs and Streaming Media devices in the U.S., that may be more of a marketing advantage. In terms of actual usage, Comcast’s Entertainment OS has less usage than Comcast’s reported household numbers suggest.
Some mix of factors are driving Peacock's growth, but it is not clear what they are or which ones are working best.
But, Amazon
There is a very good reason for Peacock to bet on live sports telecasts: Nielsen’s seven-day ratings for the 2023-24 TV season show sports dominating the top of the rankings among all viewers and the key ad-sales demographic of adults 18-49. In total viewers, live sports telecasts capture nine of the top 10 spots and 12 of the top 20 among primetime cable shows. Peacock’s success with the NFL’s Wild Card game in January suggests it is as well positioned as Amazon—which averaged 11.86 million viewers in 2023-24—to capture audiences at scale for NBA games.
That said, Amazon reaches 165 million Prime members in the U.S. across its website, apps and Fire TV devices. Its investment in sports is both a perk for subscribers to its Prime service and also a growth engine for its rapidly emerging advertising business: In Q1, Amazon’s ad revenue rose 24% to more than $11.8 billion, 8% of total revenue. The Information reported today that Amazon expects a total take from current upfront negotiations to be “several billion dollars.”
The implication from both data points is that the better business model lies with Amazon because the marketing costs are cheaper. Amazon Prime Video is a better product than Peacock for sports streaming, too, because it offers multiple broadcasts of the same event to NFL viewers. It is unclear whether the NBA will pursue something similar.
Effectively, Amazon is in a better position to recoup $1.8 billion per year than NBCUniversal to recoup $2.5 billion per year because it has a better product with lower marginal marketing costs than Peacock.
Peacock Needs Fandom
If Peacock is truly going to pivot towards sports, then it is worth considering a business rationale from David Perpich, a NYT executive who is currently Publisher of The Athletic. He argued for killing the Sports section and instead making The Athletic a product for sports fans within a larger bundle of product offerings at The New York Times:
“Even though we have great sports coverage at the Times, it’s really targeted more towards the general interest audience,” he said. “Fandom is so huge—how could we actually participate in that?” The Athletic offered the Times an audience of nearly one million subscribers addicted to coverage of their own local and favorite sports teams.
That decision transformed The New York Times sports section from a news offering to a more personalized, direct-to-consumer news service for fans of specific teams.
The implication is that if NBCUniversal is willing to pivot Peacock towards sports with over $5 billion in pay-TV economics, then it needs Peacock to be a platform that gets its subscribers addicted to watching their own local and favorite sports teams.
In short, NBA, NFL, WWE and Olympics fans are going to need more from Peacock than just broadcasts. It is not on a product development path to deliver that. Moreover, political tensions within NBCUniversal will cloud the strategic clarity that Peacock needs for these deals to succeed.