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In late 2009, the NFL was wrapping up its biggest season in twenty years, with each of the league’s games averaging well over sixteen million US television viewers. Yet Brian Rolapp, then the NFL’s senior vice president of media strategy and digital media, had little time to celebrate the league’s latest milestone. As fans across the country eagerly anticipated a round of play-off games that would culminate in the forty-fourth Super Bowl, Rolapp and his digital media team faced a decision regarding the league’s strategy for the mobile space. Various potential allies were vying to replace Sprint as the NFL’s official wireless partner. With the fate of valuable rights for the mobile platform hanging in the balance—such as video highlights, access to live games, and even live streaming of the NFL’s flagship cable channels NFL Network and NFL RedZone—a lot was riding on the choice.
“We are a media company as much as we are a sports company,” the Harvard-educated Rolapp, who had been with the NFL since 2003 and in charge of the league’s digital media group since 2005, told me. “We are focused on monetizing the game of football as best as we can, and media rights are a critical source of revenues.” He had a point: the NFL collected $8 billion in revenues in 2009, about half of which came from media licensing—primarily from contracts with television networks—and a quarter from ticket sales. Cable channel ESPN annually paid the league well over $1 billion, while the broadcasters CBS, FOX, and NBC paid $600 million to $700 million each and satellite provider DirecTV another $700 million. Broadcast partners also played a key role in building the league’s brand. “The NFL only has a small marketing budget,” said the NFL’s vice president of fan strategy and marketing. “We buy very little media. But we receive over $200 million in media from our broadcast partners as part of the deals with them, in the form of spots we can run during the games.”
For the distribution of content on mobile phones—or, to be more precise, smartphones—the NFL had partnered with Sprint since 2005. The carrier paid the league $100 million per year to be the NFL’s exclusive wireless partner, with about half that amount earmarked for NFL-related advertising and promotion. Because the partnership was set to expire in April 2010, however, the NFL had begun discussions with other parties. Determining the right approach was far from easy. “We want to be where the fans are and have a partner that can deliver the best quality experience for our fans,” said Rolapp, “but at the same time we do not want to lose sight of the fees we can collect in the fierce competitive landscape of the wireless space.”
Rolapp’s team had identified three strategic options. First, the NFL could pursue an exclusive partnership with one wireless carrier, much as it did with Sprint. “This may be the last exclusive deal cycle for us in this sector,” said Rolapp, pointing out that the wireless industry was changing fast. “The avidity of our fans is amazing, which enables us to be more selective,” added Hans Schroeder, vice president of digital media. Second, the league could push for a set of non-exclusive deals with wireless carriers such as AT&T, Sprint, and Verizon, giving each the right to carry NFL content on mobile phones, but no one party the exclusive right to do so. “An exclusive deal can severely limit the number of fans reached, as even the biggest carrier can only deliver twenty to twenty-five percent of the total audience,” noted Schroeder about the market conditions in late 2009. “Non-exclusive deals could help the NFL reach a bigger audience on mobile devices, much like the current deal structure allows us to do on television.” A third option was to work with current or new broadcasting partners on a joint television and wireless deal. The league had excluded mobile phone distribution rights in the latest round of negotiations with broadcasters, so the NFL could go back to the networks and offer the rights to show live full-game video or in-progress highlights, as well as the rights to live video from NFL Network and NFL RedZone. Rolapp knew that the broadcasters, which he called “strategic partners,” would consider the mobile rights highly valuable. ESPN, for instance, had its own product for mobile phones, ESPN Mobile, and the network was keen to add NFL content to its line-up.
Significantly upping the ante and underscoring how much the NFL was seeking to expand its business, NFL commissioner Roger Goodell had recently set a goal of $25 billion in revenue by 2027. Rolapp’s task was to develop a strategy for the mobile space and do his part to help the league achieve that ambitious number.
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The NFL is not known for leaving money on the table when negotiating business deals—and that is putting it mildly. The country’s richest sports league achieved its leading position by being smart about getting the best possible contracts when licensing its content to media companies. The NFL’s approach to mobile phone rights is no exception: spurred on by Goodell’s bold targets, Rolapp ultimately chose to pursue a partnership with only one wireless carrier, and that decision led to what sports industry insiders regard as a landmark licensing deal. When the agreement was announced in March 2010, the sports world learned that Verizon would pay the NFL $720 million over four years—the most valuable wireless agreement for the league ever. (The deal was renewed in 2013 for a fee of $1 billion, nearly a forty percent increase.) To some, the outcome was surprising: why, they wondered, would the NFL choose to form an exclusive partnership, and how did that fit the league’s overall distribution strategy? The answers to these questions go to the heart of why the NFL has become so powerful, and how it uses advances in digital technology to its advantage.
Media producers often face difficult trade-offs when they, like Rolapp, have to decide which distributors to partner with. Those trade-offs can be captured by what I call the “three Cs” of media licensing deals: compensation, coverage, and cooperation (also because alliteration makes everything sound more interesting). Companies can maximize compensation by pursuing the deal that yields the highest fee; maximize coverage by choosing the set of partners that collectively provide the broadest audience reach; or maximize cooperation by avoiding actions that upset their partners—what marketers call avoiding “channel conflict.” But content producers can rarely do all three at the same time. In fact, in most situations they can only maximize one C: focusing on one C almost unavoidably comes at the expense of the other two Cs.
Rolapp found himself in precisely that position when choosing among potential wireless partners. The third option, partnering with one or more television networks, would have helped solidify the relationship between the NFL and its existing media partners, thus maximizing cooperation. Because television rights are so critical to the NFL’s bottom line—Rolapp labeled television networks “strategic partners” for a reason—and because wireless rights are still only a fraction of the value of television rights, selling wireless rights to a television partner such as ESPN would have been the path of least resistance.
Pursuing the second option—a series of non-exclusive deals with several wireless carriers—would have helped the NFL increase the number of fans they were reaching. It would have maximized coverage. This would have been a significant benefit since at the time, as Schroeder pointed out, no single carrier could deliver more than a quarter of the total potential audience. The financial opportunity would have been appealing, too: if the NFL had been shrewd in its approach to the negotiations with multiple partners, it could have ended up securing a very high total rights fee.
But in the end Rolapp and the NFL pursued neither option because they knew that the first option—making an exclusive deal with one carrier—came with the highest potential rewards. Choosing this option maximized compensation, as suggested by the large sum that Verizon paid for the right to carry NFL content on smartphones. The league’s rich deal stems from the fiercely competitive nature of the wireless market, where growth has stalled and each rival carrier appears to take a now-or-never approach to striking deals in order to survive. And it follows from the unavoidable fact that only an exclusive deal will allow Verizon to fully benefit from its association with the NFL’s brand in the form of a sponsorship commitm
ent: as the lone rights holder, the carrier can claim to be the “official wireless partner of the NFL,” and for that it gladly pays a premium. Fittingly, influential trade magazine SportsBusiness Journal described the deal as marking “the biggest overlap between a sponsorship and media deal in American sports league history.”
The NFL’s strategy is the polar opposite of MLBAM’s in a number of ways. For instance, while the NFL focuses on licensing partnerships with media companies, BAM puts more emphasis on its paid-content offerings to consumers. The NFL has integrated its digital operations and its traditional media activities—Rolapp and his group are based at the league’s headquarters in New York City—whereas MLB has set up BAM as a relatively separate arm. And while the NFL takes a less proactive, more deliberate approach to the development of digital media—as Rolapp put it: “We don’t have to be first, we have to be good. We are fine with not being the most aggressive of the sports leagues”—BAM’s Bowman emphasizes the need to be first on a given platform, focuses on experimentation, and spearheads the development of technology.
In one respect the two sports leagues’ strategies are a match, however: like MLB, the NFL also uses new distribution channels, made possible by the development of digital technology, to gain leverage over its media partners. For the NFL, snubbing existing television partners when selling wireless rights is not a sign of a diminishing role for television or other substantial shifts in the media landscape—it is a way to achieve a more powerful negotiating position. When explaining his strategy, Rolapp talks about “three pillars” of his team’s activities: “First, we want to reach fans through new platforms. Second, by developing rights and products for those new platforms, we can pursue new partners who are interested in buying those rights and in reaching our fans. Third, new platforms force our existing partners to compete, which should make our packages more valuable.” Rolapp’s last point is crucial: the NFL wants to foster a rivalry between its partners, because with more partners vying for rights, prices for its content will go up.
Having a way to distribute content directly to consumers supports that philosophy. The NFL has two of its own cable networks: NFL Network and NFL RedZone. NFL Network airs pre-season games, past NFL Super Bowls, and other NFL “Classics,” as well as shows about coaches, players, and fans, and the annual NFL Draft during which teams select new players. NFL RedZone, launched in 2009, allows viewers to follow multiple Sunday games at the same time: whenever a team is inside the twenty-yard line (the “red zone”) and about to score, the channel cuts to that game. Thanks to these channels, the NFL is no longer at the mercy of its television partners’ distribution infrastructure, enabling league executives to more forcefully negotiate contracts with current or potential licensing partners. “Television is important to our business, so it’s good to have our own beachhead in television for the distribution of our games,” Schroeder told me. “NFL Network gives us that.” Direct-to-the-customer channels are great tools for content experimentation, too: the more the NFL knows about how consumers are interacting with its content, the better the decisions it can make.
One look at the list of distribution partners reveals just how far the NFL has taken the concept of encouraging competition among its licensing partners. After the NFL closed its new wireless deal, football content was available through the broadcasters CBS, NBC, and FOX; the cable network ESPN; the satellite television provider DirecTV; satellite radio network Sirius; wireless carrier Verizon; and the NFL Network, NFL RedZone, and NFL.com. The NFL is a master at “slicing and dicing” its content, giving each of its distribution partners an exclusive piece—such as American Football Conference (AFC) or National Football Conference (NFC) divisional games for CBS and FOX, Sunday night games for NBC, Monday night games for ESPN, or the rights to mobile phone content for Verizon. Meanwhile, the league has consistently put what Rolapp called “a premium on control.” Citing just one example, he said: “When renewing broadcast rights in 2005, we held back many of the digital rights. We figured if partners want those rights, they should tell us what they are going to do with them and what they are worth.”
This strategy—and the resulting proliferation of the ways in which fans can consume NFL content—creates some tensions. Shortly after the Verizon deal was announced, SportsBusiness Journal reported that “companies that spend nearly a combined $4 billion a year on TV and satellite rights” were “closely watching how the league’s recent moves” would affect their business. One executive whose network owned the rights to some NFL content was quoted as saying: “We are keeping our eyes on this. It’s starting to nibble at the edges.”
So far, television executives’ worries seem to center on NFL Network and NFL RedZone. There was an outcry among those executives when, in 2006, NFL Network made a move into live game programming and began to exclusively produce and air eight regular-season NFL games as part of a new Thursday/Saturday package. Soon the league found itself battling with cable providers such as Time Warner Cable and Comcast, who balked at NFL Network’s high fees per subscriber and its insistence that the network had to be included in those cable providers’ basic packages (as opposed to being bundled only with other sports content). And RedZone, by giving viewers access to all games, competes with DirecTV’s NFL Sunday Ticket. It also may draw viewers away from regular games airing on Sundays on CBS and FOX, especially those fans who are more passionate about following the league as a whole than about following one particular team. That the league often reminds users they see all touchdowns and no advertisements could be a sore point for television executives who have coughed up billion-dollar rights fees—and so could the league’s slogan: “If you want the NFL, go to the NFL.”
Why do the NFL’s distribution partners allow the league to get away with these practices? The answer is familiar: because the NFL gives them the blockbuster content they desperately need. It is hard to overstate the mass appeal of NFL games: over 70 percent of all Americans proclaim themselves football fans, and half of the people in that group consider themselves avid (as opposed to casual) fans. More US fans cite football as their favorite sport than any other sport. The league’s fans spend an average of well over nine hours per week engaged with the NFL, including almost four hours watching live games—both numbers that dwarf those for other sports. Seven of America’s top ten favorite professional sports teams are NFL teams. Viewership for major NFL games regularly beats that for events such as the Academy Awards and the American Idol finale. And the annual Super Bowl, the game that determines which team can call itself champion, has become an unofficial American holiday. Over a hundred million people tune in to the Super Bowl broadcast nowadays. In fact, as of early 2013, four Super Bowls belong to the top five most-watched American shows of all time. The Super Bowls in 2010, 2011, and 2012 each set ratings records; 111 million viewers watched the broadcast in February 2012.
Although ratings for the big five broadcast networks have declined in recent years, the NFL seems immune to this trend. No surprise, then, that television executives seem willing to run through a formation of 250-pound linebackers to get their hands on a slice of the ever more popular NFL content. Longtime NBC Sports chairman Dick Ebersol called the NFL “the surest bet in the television universe” for programmers. “The dominance has been mind-numbing,” he said. “The NFL is more of a guarantee of success than if you’ve got Brad Pitt, George Clooney and Angelina Jolie doing a drama series for the network.” The numbers prove him right. Advertisers like their odds, too: in 2013, they reportedly paid as much as $3.8 million for a thirty-second advertising spot during the Super Bowl, a sum that far exceeds any other placement on television. CBS, FOX, and NBC, among which the game rotates annually, directly see those benefits. ESPN, which pays more for NFL content than any other form of programming, receives about $5 per cable subscriber per month from cable providers—more than any other cable network—so it, too, will do whatever it can to maintain its winning formula. And just as DirecTV relies heavily on NFL con
tent to acquire and retain satellite customers, Verizon expects the league to help it improve its market position in wireless.
NFL executives are acutely aware of the value of their blockbuster content. “When the NFL puts content behind a platform, we can drive growth for it,” Rolapp pointed out. Schroeder agreed: “The NFL has a pretty good track record of people building businesses around our content.” And so the NFL will continue to push its distribution partners for top-dollar payments. But competing head-to-head with its partners or locking them out of its marketing channel entirely is not an aim. The NFL relies too much on the lucrative licensing income—paid up front—that it receives every year from its existing media partners, and on the marketing power that those partners provide.
The NFL’s goal is clear: the league wants to increase control and leverage for the benefit of its existing business model—not to replace it with a riskier proposition that relies less on channel partners. The league thrives as a result of the proliferation of ways in which its games can be delivered to fans. Like MLB and other smart producers, the NFL takes full advantage of an unrelenting demand from distributors for content that can command an audience. And like those other producers, the NFL understands that those who offer blockbuster content will only gain in power.
Chapter Seven
THE FUTURE OF BLOCKBUSTER STRATEGIES
When Shawn Carter—better known as hip-hop megastar Jay-Z, and one of the world’s best-selling musicians of all time—in 2010 insisted that his publisher launch his memoir, Decoded, in a way that was different from every other book release in history, he got his wish—and some of the strangest of bedfellows any product launch has ever seen.
Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment Page 24