Can broadcasters afford the premium for live coverage of leading events?

Netflix spent $100m on two series of House of Cards. Walt Disney invested significantly more in the last instalment of The Pirates of the Caribbean film franchise. Both were seen as paying high prices but in the race for content, not even those blockbusters come close to the cost of live sport.

Both Netflix and Disney were making a statement of intent. This week Sky and BT made their own statement, paying a combined ￡5.1bn for a three-season deal to broadcast live English Premier League football — a 70 per cent rise on the existing deal. The agreement represents a windfall for clubs — and their players — but raises questions about the sustainability of such prices.

The four big US sports, American football, baseball, basketball and ice hockey — have all recently secured hefty increases from broadcasters. The most recent deal was struck by the National Basketball Association, which will nearly triple its annual television revenues under a nine-year, $23bn contract with Time Warner and Walt Disney.

Some commentators wondered in 2010 if the value of global sports rights might have peaked. Since then the value of top-tier events has increased by one-third to $28bn, according to Deloitte.

Is the bubble going to burst? We see no sign of it,” says Austin Houlihan, a senior manager at Deloitte. “The trend of the past 20 years suggests that it won’t.”

The boom in sports rights reflects fundamental shifts in the TV industry. Viewers are watching programmes on demand, skipping the ads. Live sport is therefore crucial for advertisers, particularly in the US. The other major shift — more evident in Europe — is competition between pay-TV companies and telecoms groups. Sky and BT both sell television and broadband packages to consumers, and will soon add mobile phone contracts. Sports programming is a loss-leader for those other products.

The bidders also have deeper pockets. BT, which makes substantial profits on broadband, can pay more for sport content than Sky’s previous rivals for the Premier League rights — Setanta and ESPN — which only had subscription and advertising revenues. Since BT entered the market three years ago, the UK rights for Premier League games have nearly tripled to ￡1.7bn per season.

Other European telecoms groups have yet to be as aggressive as BT, although Spain’s Telefónica and Germany’s Deutsche Telekom have shown interest in sports content. Sky has agreed 90 per cent of its sports rights until 2020. US broadcasters have also been seeking to lock in their costs through long-term deals. That could make it harder for tech companies — such as Netflix, Google or Apple — to buy into the market.

￡1.7bn

Cost per season for UK rights to English Premier League games

In the short term, investors may ask if sports rights are overpriced. But Sky shares fell just 2 per cent after the deal was announced and the company argues that viewers will pay more. European TV subscriptions “are way below the average $80 per month pay-TV pricing in the US,” says Simon Baker, an analyst at Société Générale. But already Sky’s sport packages start at ￡46 ($70) a month, and the market is competitive.

The balancing act is clear in the US. NFL games helped CBS increase its advertising revenues by 4 per cent in its most recent quarter. But the costs of the programming weighed on the company’s profitability, with operating income down one-third. ESPN, the leading US cable network, has lost 2m subscribers over two years, as consumers switch to cheaper TV packages without sport. The decline is symptomatic of inflation in the cost of rights, which means ESPN has to charge operators more to carry its channels. The operators pass these costs on to consumers.

For the sports themselves, the current boom is an opportunity to shore up finances. Premier League clubs operate on slim margins, with the new TV money quickly spent on transfer fees and player salaries. Lord Sugar, a former owner of Tottenham Hotspur, has called the money “prune juice” that will “go in one end and out the other”. But the League argues only significant revenue growth can help its teams compete in Europe with Real Madrid and Barcelona. The Spanish giants both received €140m for broadcast rights last season — under the new deal some English clubs could top that.

Sky’s money therefore may help English clubs compete in the European Champions League. The paradox is that, from next season, that competition will be broadcast exclusively on BT.