NBC Deal: A Second Opportunity for a First Impression
Kevin Sheller
Thursday July 11, 2002
NBC and the Arena Football League have entered into a profit-sharing venture. This is different from other broadcasting deals in that the network is not paying the league a licensing fee. CBS, ABC, and FOX all pay the NFL a licensing fee for the rights to air games on their network. This is great for the league, and costly for the network.
“What’s happened over the last several years is that the costs for those rights fees has spiraled out of control to the point where not only is it not possible to make any money or break even,” said Kevin Sullivan, V.P. of communications for NBC Sports, “but you go into it knowing you are going to lose hundreds of millions of dollars.”
In the AFL deal, the two entities will share in those profits and share in the growth. NBC gets a share of the Arena Football League’s earnings, and the Arena Football League gets a share of NBC’s earnings. But how does it work?
“As new owners come in and pay expansion fees [to the AFL], or teams get sold above a certain benchmark, NBC would share in those profits,” said Sullivan. ”Both parties have great incentive to grow the fan base and increase the audience for Arena Football.”
Sullivan gave an example to help illustrate. The last team to be sold went for $12 million. If the next team sold for $15 million, the $3 million incremental difference from the original benchmark would be shared with NBC. Unfortunately details on the specific percentages have not been disclosed.
This is all fine and good, but how does the league earn revenue from NBC’s advertisers and sponsors?
“There are various milestones,” said Sullivan. “First, production gets paid for, the league takes the next bunch, and then there’s a level shared by both parties. As each party does well, it’s good for the other.”
Again, Sullivan wasn’t able to go into the milestone breakdowns, but the overall picture is clear: NBC uses advertising revenue to pay its expenses. After that, the AFL gets a chunk of money, and then all the leftovers are split between the two. This middle “chunk” of money is a direct replacement for the license fee. Using this model, a league couldn’t charge more than the network could possibly earn on the broadcast of the games.
Glenn Horine, Executive V.P. of Business Development for the Arena Football League, is very excited about the broadcast deal.
“The NBC relationship has clearly opened up doors that were shut to us before,” said Horine. “And the unique opportunity to go into meetings side by side to develop and craft a program is really a unique opportunity that very few leagues or properties have.”
The AFL will truly make money from the profit-sharing venture. It isn’t set up so only NBC will capitalize. And the money isn’t just made indirectly from the additional exposure. The deal itself will provide revenue for the league.
“This is real. I think this is going to be big money for the AFL,” Horine said. “There is real money to be earned and captured here, but we have to perform. We have to have people in the building. We have to have people watching.”
However, due to the profit-sharing nature of the deal, NBC will not be giving up on the AFL like they did the XFL at the end of the ill-fated league’s first season. By contract, NBC is in for two years, no questions asked, no minimum ratings required. If the ratings are poor, the AFL and NBC must find a way to boost them for their own best interest.
If, after the first two years, NBC is happy with the arrangement, the deal can be renewed with the same conditions for another four years. In addition, no other network can come in and outbid NBC. Finally, every four years, NBC has the option to renew or cancel, and the four-year renewal option goes on indefinitely. This is a far cry from other sports broadcasting arrangements.
“The other networks, in one form or another, have acknowledged that in 1998, when NBC walked away from its long relationship with the NFL, that NBC was probably ahead of the game in arriving at that point,” said Sullivan. “NBC at that time was viewed as a lone wolf, but now it’s accepted in the industry."
The end of the 2002 NBA season marked the end of its contract with NBC. The network made the same decision as it did with the NFL.
“[The NBA deal] was no longer economically viable. As a unit of GE, we are part of one of the best-managed companies in the world. NBC offered the NBA $1.3 billion a year for four years, and that was as far as we could go.”
When the NBA said they wanted more, NBC said goodbye.
The deal with the AFL comes only one year after the disastrous foray into minor-league football by way of the XFL. The question has been ever-present since the announcement in March. Will the AFL follow the same path as the XFL?
“There’s really nothing about this that’s like the XFL,” assured Sullivan. “With the XFL, we owned half the league – it was a startup. [The AFL] is an established product. I wouldn’t make that comparison.”
Nonetheless, the XFL had large opening night exposure because of the way NBC promoted it.
“This was the same promotion that created must-see TV on Thursday nights, as well as a lot of real creative things over the years,” said Sullivan. “That promotional firepower, coupled with the strength of NBC as a network – number one in news, number one in primetime, number one in late night, and number one in the morning – will give the AFL prominent exposure.”
Despite this, the network is unlikely to promote the AFL like it did the XFL. Rather than glorify the league as an unbelievable property that will revolutionize the way you view life, the AFL will be promoted as a solid, professional product. The XFL simply didn’t live up to expectations created by all the hype. NBC doesn’t want to make that mistake again.
“People are familiar with our product,” said Horine. “We don’t have to go to that extreme. We don’t need to have any theatrics or anything like that.”
“We think [the AFL] is a really good product that has been established for 16 years,” said Sullivan. ”We think it appeals to young fans, which is something that the advertisers like. You have a game with a ton of scoring, a game for two-and-a-half hours long, give or take a few minutes. It’s a terrific product.”
NBC wants to make sure that people tune in to watch games, expecting exactly what they will get – a quality sport. That’s the way to build long-term viewership.
And a long-term partnership is exactly what the AFL and NBC are looking for.
“Now we have a promotional partner that is going to raise the awareness level of Arena Football that we’ve never seen before,” said Horine. “It’s very rare that you get a second opportunity to make a first impression, and we are at that doorstep.”
Kevin Sheller ia founder of Arenafan Online and was the principal owner until 2004. Kevin graduated from the University of Akron with a degree in technical writing, and has been a member of the Arena Football Internet community since 1993. He has worked as a professional web programmer and is also the executive producer for a computer/video game company. The most recent Xbox title to his credit is called Hunter: The Reckoning.
