How the NFL juggles the future of streaming, the decline of TV, and billions of dollars

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Back in October — in the midst of what ended up being one of the NFL’s worst stretches for TV ratings in years — CBS CEO Les Moonves sat puzzled onstage in front of an audience of tech and media executives in downtown San Francisco.

Moonves, whose company pays more than $1 billion per year to broadcast NFL games, including “Thursday Night Football,” was asked why the country’s most popular sport was suddenly taking an NFL linebacker-sized hit to its TV ratings.

Moonves ticked off a number of possible explanations: Suspensions to star players; the rise of fantasy-football-focused shows, like the NFL’s RedZone channel; and Donald Trump.

Then he suggested a possibility that, unlike the others, couldn’t be chalked up to a one-off blip.

“Have they sliced it and diced it too much?” Moonves asked, referring to the league’s many content distribution deals. “Is there too much product out there? I really don’t know.”

Moonves voiced what many in the industry have started to consider — ratings might be down because there’s simply too much football.

That stands in stark contrast to where the NFL is headed. The league wants to sell more content than ever, and it is finding new ways to get NFL games onto the internet through partners who are clamoring to get their hands on TV-quality content to distribute on much smaller screens.

It’s a strategy that should help the NFL grow its revenues, but it might also come at the expense of its media partners. In other words: the pie could get bigger, but everyone will get a slightly smaller slice.

NFL football is still the most valuable TV product on the market, which means that traditional networks like NBC and CBS, cable networks like ESPN and Fox Sports 1, and even digital players like Twitter and Amazon are all clamoring for a piece of that pie.

Cable companies need the NFL to stopgap subscribers cutting the cord. Digital players need it to become more like TV, and in turn, gain access to lucrative TV advertising budgets.

It’s a cushy position for the NFL to be in. The league, which generated about $7 billion from TV rights deals alone in 2016, has most of its TV contracts locked up for at least five more years.

But not all of the NFL’s rights are locked up that long. The broadcast rights for one of the league’s prime-time games, “Thursday Night Football,” expire after this season. The league will be looking for a new deal, and it could get creative.

How the NFL chooses to slice those rights, and who it offers those slices to, will offer a glimpse into how the world’s most valuable television property thinks about the future of TV. And whether we actually have too much football.

To understand the NFL’s thinking when it comes to carving up its content rights, you need to understand the League’s “tri-cast” distribution model, a strategy the NFL started promoting for the first time in early 2016 for its “Thursday Night Football” rights package.

The simple premise behind the model is that NFL games should be watchable in three places: On broadcast television via NBC and CBS; on the league’s cable television channel, NFL Network; and via the internet, either streamed for free on Twitter or as part of Amazon’s Prime subscription offering.

This digital element is the new part. NFL fans have been able to stream games before, but only through the league’s existing TV partners.

Now the NFL is bringing in new digital-only players, though it’s still in the “learning phase” when it comes to delivering games to people over the internet, says Vishal Shah, the NFL’s senior vice president for digital media.

In 2016, Twitter was the NFL’s first major partner in this endeavor, paying just $10 million to stream 10 of the league’s “Thursday Night Football” games, a fraction of the $450 million the league made in TV broadcast rights from CBS and NBC for the same games.

This season, the NFL says it will “learn” from Amazon, which paid $50 million for those same 10 “Thursday Night Football” games — again, the ones that CBS and NBC are paying the league $450 million to broadcast on traditional television.

There’s a simple reason for the steep discount: Digital audiences are a fraction of the TV audience. Even though the NFL’s “Thursday Night Football” TV ratings were down 9 percent in 2016, the games still brought in an average of nearly 15 million viewers per week on CBS this season, according to Nielsen.

During Week 6 of the season, when the San Diego Chargers beat the Denver Broncos, digital streams across Twitter, the NFL and CBS averaged just 369,000 viewers combined. The next week, when the Chicago Bears played the Green Bay Packers, that average was just 341,000 viewers.

In other words, people still watch football on TV much more than over the internet. By a wide, wide margin. And the NFL knows that.

“We’re still at a point where television is still at a beachhead. We view [the digital streams] as all additive at this point, and not cannibalistic,” Shah explained. “Television will continue to be the mass market where we’re aggregating audiences.”

Twitter’s audience was small despite streaming games for free to anyone online — you didn’t even need a Twitter account.

Now the league will see if NFL games perform any better behind a paywall. Amazon Prime has at least 66 million subscribers, and though that’s smaller than Twitter’s overall audience, Prime subscribers are paying customers who expect some kind of high-quality content in exchange for their $99 annual fee.

Even so, CBS and NBC are fully distributed networks available in more than 100 million U.S. homes. They’re also known for producing big-time live sports. Amazon is not.

So why is the NFL bothering with digital alternatives when television still dominates? These internet partnerships are a way for the league to make a little more cash now, test a number of new distribution models and, most importantly, set up a scenario down the line in which internet giants like Facebook and Amazon are bidding on the League’s distribution rights against existing partners like NBC and CBS.

More bidders ultimately means more money for the NFL. At least that’s the hope.

“I think certainly they’ll be viable bidders even sooner than a lot of people anticipate,” Shah said when asked whether the league expects its digital distribution partners, like Amazon and Twitter, to ultimately bid for larger TV-style packages. “All the partners and all the bidders have shown an interest in developing long term relationships. I do think they will be a meaningful sort of option, even in the short term.”

Those seeds have certainly been planted. Following its 10-game streaming package last year, Twitter CFO Anthony Noto said in February that he wanted to “extend that relationship to things beyond just the regular season.”

Amazon is hopeful NFL games can help lure in new Prime customers, especially in international markets like Australia and New Zealand where Amazon Prime video distribution is still new.

“I think [these games] will be a reason why a lot of people there just start the seven-day trial and test out the service,” said Jeff Blackburn, Amazon’s senior vice president of business development.

Amazon, unlike Twitter, seems less interested in recouping its $50 million from the NFL in the form of advertising revenue, and more interested in using the games as a way to promote its own original shows coming out in the fall. “We already knew we were going to be doing a lot of marketing around this time, and the combination of doing this deal with the NFL and kicking off a lot of this marketing made sense to us,” Blackburn said.

If Amazon’s strategy plays out, it could be a possible bidder for even bigger packages down the line.

“I wouldn’t rule it out,” said Blackburn, when asked if Amazon would consider bidding on other rights deals in the future. “We just have to learn more and see how much our customers like this content and how engaged they are.”

The question is whether a digital partner like Amazon or Twitter can handle the kind of distribution the NFL expects from its TV partners. Based on the league’s previous experiments, the answer is a definite no. Not yet, at least.

There’s an easy solution for those who believe the NFL has too much football: Eliminate “Thursday Night Football,” the only batch of NFL games that aren’t already locked into a long-term TV contract.

Many players don’t like the games, and those worried that the NFL has gotten too violent believe the Thursday games — which usually give players just a few days to prepare both physically and mentally — are dispensable.

Unlike “Sunday” or “Monday Night Football,” most NFL teams only play once per season on “Thursday Night Football,” which means you don’t see popular teams like the Green Bay Packers or Pittsburgh Steelers repeatedly show up on Thursday nights like they do with other prime-time games.

“They’ve expanded the number of windows, but the schedule formula hasn’t changed,” explained one high-ranking TV executive. “If you expand the number of windows but don’t do anything to create more national-quality games, then you are stretching the inventory pretty thin.”

Even the league’s most storied program, “Monday Night Football,” is feeling the pinch. ESPN is paying a whopping $1.9 billion annually for the rights to “Monday Night Football,” has the smallest audience of the league’s prime-time games and took the biggest hit to its ratings in 2016. ESPN is, perhaps unsurprisingly, struggling under the weight of its licensing commitments.

The NFL won’t be easily convinced to scale back its programming, though. Between its broadcast partners and its new deal with Amazon, the league will make $500 million on just 10 “Thursday Night Football” games in 2017.

“How do you put that toothpaste back in the tube?” this TV executive asked. “It’s just such easy money for ownership.”

Instead, “Thursday Night Football” looks like it will be the league’s testing ground for digital distribution.

“By its nature, it’s not tied down to any one distributor for a long period time,” explained Amanda Herald, director of media strategy and business development for the NFL. “We can pretty much do whatever we want with it.”

Herald said it was too soon to tell if the league will continue to keep its “Thursday Night Football” deals short — one or two years — for experimental purposes, and Shah declined to say whether the league was already holding conversations with bidders around the rights to “Thursday Night Football” beyond 2017.

But the NFL believes the potential revenue it can make from digital streams will continue to climb, even if TV rights eventually depreciate in value.

“Fans will drive and sort of dictate where they’re consuming content and the dollars should follow where that fan consumption is,” Shah explained. “Whether [TV and digital rights costs] meet in the middle or not, who knows. But the value of digital rights will continue to increase.”

One scenario would be to simply carve out more games for digital partners from the existing schedule. Right now the NFL is streaming 10 games through Amazon that are also available on broadcast TV.

There are seven other “Thursday Night Football” games airing only on the league-owned NFL Network that could also be sold to a digital partner, including Saturday night games that fall under the “Thursday Night Football” umbrella.

The NFL is also looking for a partner to stream a single game from London this year, and multiple industry sources think it’s possible the NFL could create a broader digital package tied to the league’s international games. The NFL will play four games in London this season and one in Mexico City.

Another possible scenario is a joint bid — imagine Google or Facebook teaming up with an NBC or CBS to bid on rights together. In such a scenario, the broadcaster such as CBS might produce the show and air the games on TV, while Facebook or Google would stream the games online.

“I think our TV partners were pleasantly surprised by how well the model worked [last year],” Herald said, referring to the league’s deal with Twitter. “I think that could certainly warm them up to a concept like that. So I wouldn’t be surprised.”

The NFL also didn’t dismiss the idea of cutting some kind of digital deals around its existing prime-time games, like “Sunday Night Football” or “Monday Night Football,” similar to how it sliced up its “Thursday Night Football” distribution rights.

“That hasn’t necessarily been a discussion we’ve looked into yet, but nothing is off the table,” Shah said.

Right now, NBC owns the TV rights for “Sunday Night Football,” and ESPN is paying nearly $2 billion per year for “Monday Night Football” rights. Those partners own most of the digital rights for those games, too, but the NFL’s deal with Verizon to stream games via smartphones is up after the 2017 season and might provide another opening.

“Mobile and mobile devices is the one area where we have carved the rights out and have more flexibility to continue to try new models,” Herald said.

The NFL also likes to keep a small handful of games exclusive to its own channel, NFL Network, and it’s possible the league could simply control all of its own distribution someday. Simply cut out the partners.

That is unlikely, Herald said.

“When we think about what’s going to maximize the reach of our audience for the games, partners are a really important part of that,” she said. “We certainly have the media platforms and capabilities to distribute more games than we do today, but the [partnerships] are really important to make sure that they’re incentivized with us to continue building the sport.”

This means that there’s a lot of football coming your way, and more and more of it will be through a mobile device or a set-top box. As young people move away from traditional cable television, the NFL is hoping to meet them wherever they may be spending their time.

How do the league’s TV partners feel about digital players like Twitter and Amazon butting their way into the conversation? It depends on who you ask. Twitter’s small audiences for NFL games didn’t scare off TV partners we spoke with. Amazon, though, might be a different story.

“Amazon comes into the space with such unbelievably deep pockets and a clearly demonstrated willingness to operate at either extremely low profit margins or no profit margins at all; it does make them kind of a threatening player,” said one high-ranking TV exec. “The potential for increased tension is definitely there.”

Moonves agrees that tech companies are here to stay.

"Look, the tech giants all want to be involved in the NFL,” he said at a banking conference back in March. “As we head toward that large deal, I think these companies are going to be part of it, [but] I think the NFL still believes in the sanctity of broadcasting."

This story was also published on our sister site, SB Nation, as part of its relaunch today.

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