March Madness Puts Time Warner's Big Bet on Sports to the Test

Sports Comprise More Than One-Third of Turner's Programming Costs

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Credit: Courtesy TBS

CBS Corp. has reigned for more than three decades over the final game of the NCAA men's college basketball tournament. Next month, the champion of March Madness will be crowned for the first time on a cable network: Time Warner Inc.'s TBS.

The cachet of airing the tournament comes at a high cost for Time Warner, which along with CBS will carry all 67 games starting this week on three of its cable networks: TBS, TNT and truTV. Time Warner has spent billions of dollars buying the rights to air NCAA, Major League Baseball and NBA games to lure viewers and ad dollars.

It's also a critical time for Time Warner. Like other media companies, its share price has slid since last summer amid concern that consumers are abandoning traditional TV for cheaper online alternatives like Netflix Inc. Some analysts say the company, which also owns CNN, HBO and the Warner Bros. studio, may face pressure to sell itself or spin off parts if the stock price doesn't rise.

More than a third of the $4 billion in programming costs this year at Time Warner's Turner Broadcasting will go toward sports rights, John Martin, chief executive officer of the division, said at an investor conference last month. The company owes $10.7 billion to the National Basketball Association and $7.3 billion to the NCAA over the next nine years, and $2 billion to MLB over the next six years, according to a company filing. Turner also airs golf and will soon broadcast a competitive video-gaming league.

Broadcasting the tournament has become "increasingly profitable" for Time Warner and CBS because advertising is growing faster than the cost of the TV rights, said John Janedis, a media analyst at Jefferies LLC.

While this has been a successful strategy for broadcasters in the past, Time Warner's big bet on sports could eat into profit over time if more people cut their cable cord, threatening the main sources of revenue that pay for pricey sports contracts: fees based on how many people subscribe to cable and satellite service, and advertising based on how many people watch their channels.

"That's the big risk," Mr. Janedis said. "When a lot of those deals were done, I don't think they expected to see this kind of cord-cutting."

TNT and TBS each lost more than 2 million subscribers last year, according to Nielsen. The company said in a filing last month that it expects "further modest declines."

"There is cord-cutting," David Levy, president of Turner Broadcasting, said in an interview. "We're not blind to what's happening."

Youth appeal
In response, the company is trying to deliver more programming, including sports, to younger audiences on new digital platforms, Mr. Levy said. Last year, it introduced a March Madness YouTube channel that broadcasts tournament updates. Turner recently signed a multiyear deal with Snapchat, the app for sharing disappearing photos and videos. Starting with this year's NCAA tournament, fans can contribute to a collective Snapchat video, which includes advertising, that will be broadcast around the world.

In some ways, sports has helped Time Warner navigate the choppy waters of the TV landscape. Big games are one of the few things that people still watch live, making them especially attractive to advertisers. And sports has enabled the company to charge pay-TV providers higher rates to carry its channels and helped ensure that its main channels are included in slimmer TV services like Dish Network Corp.'s Sling TV. TNT, which airs a mix of sports, movies and TV dramas, is the second-priciest cable channel behind Walt Disney Co.'s ESPN.

While Time Warner is spending vast sums on sports, the company has its limits. In 2014, it ended a deal to broadcast Nascar. The company also decided recently not to bid on the TV rights for the NFL's Thursday Night Football, which went to NBC and CBS, because it was a short-term contract, Mr. Levy said. The company is focused on owning TV rights to playoff and tournament play, which is "must-have content with our distributors," he said.

"We're moving into an environment where not having sports puts you at a competitive disadvantage in terms of negotiating renewals" with pay-TV providers, Mr. Janedis at Jefferies said.

Sports isn't always a panacea for ratings woes. While the numbers are up at TBS, TNT's ratings are down 12% so far this season, with even some NBA games drawing lower viewership, according to Geetha Ranganathan, an analyst at Bloomberg Intelligence. Disney triggered a drop in media stocks in August when it announced subscriber losses at the sports network ESPN. Since mid-July, Time Warner shares have dropped about 21% to $71.50 at the close Wednesday.

March Madness draws more advertising revenue than any other post-season sports franchise besides the NFL playoffs, according to research firm Kantar Media. Last year's tournament delivered its highest viewership in 22 years. Advertisers spent $1.19 billion on TV ads -- a 4.8% increase from 2014 -- and are expected to exceed that amount this year.

Like previous years, fans can also stream March Madness online, though many games will require logging in as a cable subscriber. Online advertising for March Madness totaled $86 million in 2015, up 19% from a year earlier, according to Bloomberg Intelligence, which cited data from SNL Kagan.

Some marketers have created new commercials this year for each week of the tournament, including unique spots for online viewers, Levy said.

"From an advertising perspective, we have seen tremendous growth year-over-year," Mr. Levy said. "There's no other event like it in the sports marketplace. Yes, there's the Super Bowl, but that's one day. This is a three-week event."

-- Bloomberg News

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