Strictly Business

Sports fans are watching less of NBC. That's because NBC Sports, which at one time was home to the MLB playoffs, the NFL, and the NBA, has very little to show. Today's NBC Sports line-up is diverse but unimpressive, including Wimbledon, the PGA Tour, NASCAR, Notre Dame football, and the Olympics - now its cornerstone.

NBC decided not to make a significant push to retain broadcasting rights for three of the four biggest sports for financial considerations. For example, in 1998, the NFL signed an eight-year, $18 billion contract with CBS, FOX, and Disney - which owns both ESPN and ABC - forcing out NBC. Afterwards, NBC Sports chairman Dick Ebersol called the deal "reckless," saying his company would "not go after any property that would lose $150 million a year." Similarly, NBC refused to renew a contract with the NBA on its terms, having lost $300 million broadcasting basketball in the final two years of the contract after 10 years of profitability. Ebersol made an exception with the Olympics, signing a $2.2 billion deal to broadcast it for two more years, through 2012, commenting that the Olympics has not "gotten out of hand" like other sports in America.

In light of FOX Entertainment's $387 million in losses from the NFL deal - $909 million in sports losses overall - and its admission that it overpaid for football, it's difficult to argue with Ebersol about the financial soundness of broadcasting major sports on network television. Indeed, Ebersol noted recently that it is nearly impossible for networks that strictly rely on advertisements for revenue to compete with cable networks like ESPN - which receives $250 per household that has the network - with two revenue streams. In the near future, he suggested, sports on "free" television may end.

But as rational as Ebersol's argument for dumping the expensive sports is, CBS and FOX both know the power of sports and what may happen without it. In 1998, NBC was outbid by CBS for football because the latter was willing to get it at any cost. CBS itself was outbid by FOX in 1994 and was left with little sports programming. In the ensuing four years, the network suffered a ratings drop and lost numerous local affiliates. While CBS suffered, FOX soared, its NFL broadcasts propelling the network into a major presence on TV and prompting them to add baseball. As FOX recognized with the baseball playoffs this year, a major benefit from sports is that it guarantees a strong male viewership, which gives networks a reliable target audience. For NBC, it has established shows that require less exposure, but as those shows are replaced with new ones, its lack of sports programming may come to haunt the network.

This dilemma with sports programming is essentially an issue of a foundation on which to build a business. CBS and FOX discovered that sports is a proven core of a business; NBC is calculating that it costs too much and is replaceable. Networks are not the first to face such a dilemma. During the '70s and early '80s, consumer electronics companies that manufactured televisions faced stiff competition from abroad and eventually bailed out of the business. Although television was followed by VCRs, Walkmen, CD players, and DVDs, no American firm was ever able to make significant contribution in consumer electronics until it found a new foundation in personal computers.

What those companies and NBC faced is a catch-22. If the company fights to protect its financially draining core, it may prove too high of a cost and the company may fail. If it searches for a replacement, it may find that there is none, and the company may still fail. This conundrum is what makes NBC Sports worth keeping a close eye on in the next several years.