Netflix (NFLX -1.44%) has long eschewed live sports rights as a meaningful endeavor for the streaming platform. In 2015, CEO Ted Sarandos (who was the content chief at the time) argued the value Netflix provides its subscribers is that they can watch what they want, when they want, how they want, and without commercials. Sports doesn't fit that model.
But Netflix is making some changes to its platform after reporting disappointing first-quarter results, which may open the door for live sports on the global leader in streaming video.
Image source: Netflix.
Some big changes coming to Netflix
The big news from Netflix's first-quarter earnings call was CEO Reed Hastings' announcement that the company will explore an ad-supported tier of service. The ad-supported tier may help Netflix attract more price-conscious consumers who don't mind watching ads if it means they can save money. And if it mimics the success of other streaming services, the ad-supported tier could actually provide superior revenue per account.
Advertising is a necessary part of live sports programming. Many events have natural ad breaks. And sports fans are used to watching commercials. So, even ad-free subscribers wouldn't complain about ads during a live broadcast on Netflix.
While Netflix could theoretically provide commercial-free programming, its competitors will be bidding on sports rights with plans to monetize them with advertising. Thus, Netflix must show ads in order to offer a competitive bid for most sports rights, and integrating ads into Netflix is a first step.
The second thing Netflix is working on is a live streaming platform. Major competitors, including Amazon (AMZN 1.92%), already have live streaming capabilities. Amazon notably uses live streaming for its Thursday Night Football games, but it also runs Amazon Live on its retail website and operates the Twitch streaming platform. Netflix is exploring the possibility of live competition shows that allow for audience interaction.
It's already showing interest in some sports rights
Netflix is reportedly in talks with Formula 1 for the U.S. media rights to the open-wheel racing league. It'll have to outbid Disney's ESPN, which has held the rights since 2017 and currently pays just $5 million per year. That number is expected to climb significantly after Netflix's Drive to Survive documentary series boosted viewership 50% on ESPN last year. F1 is reportedly now seeking $100 million per year.
The average F1 race brought in just under 1 million viewers on ESPN last year. And there are slightly fewer Netflix subscribers in the U.S. than ESPN cable subscribers. It's hard to say whether Netflix could do better at growing the audience than ESPN, a dedicated sports network. And if it manages to draw about 1 million viewers per race, will that be enough for Netflix to justify the price?
Amazon paid the NFL around $100 million per year to simulcast 10 Thursday Night Football games per year in 2020 and 2021. The stream brought in an average audience of 1 million viewers. The addition of advertising for those games is minimal since most ad slots went to the original broadcasters. Still, Amazon saw enough success to make a massive 11-year, $11 billion deal with the NFL to get exclusive media rights to 15 games per season.
In that light, the F1 rights might be a bargain. There are over 20 races per season, and the growing popularity of the sport could draw in new subscribers and improve retention in the U.S. while cross-feeding its other sports documentary content.
While Netflix might not end up with the Formula 1 media rights, the fact that it's in the discussion means it's taking the idea of including sports in its library seriously. Indeed, Sarandos has changed his tune on sports, albeit only slightly: "I'm not saying we never would do sports, but we would have to see a path to growing a big revenue stream and a big profit stream with it," he said during the company's earnings call. With the upcoming changes to the streaming service, that path may become more clear.
