The National Football League has found a new home for the NFL Sunday Ticket content package. After almost three decades as an exclusive offering on DirecTV, including six years of the satellite service operating under the ownership of AT&T, Sunday Ticket is going online instead.
Starting from the 2023 NFL season, Sunday Ticket will be available through Google's YouTube TV and YouTube Primetime Channels services. The Alphabet (GOOG -1.96%) (GOOGL -1.97%) subsidiary is paying $2.5 billion a year for a seven-year deal, according to multiple sources.
This is a seismic shift in the power balance between traditional TV services and cord-cutting media streamers. At the same time, YouTube probably won't turn a profit from its premium football deal, at least not at first.
What Google is getting
NFL Sunday Ticket is a subscription service offered by the National Football League that allows fans to watch live out-of-market NFL games on Sunday afternoons. It gives fans access to games that are not being shown on local television stations, which is especially useful for fans of teams that are not based in their local market.
In addition, NFL Sunday Ticket offers several extra features and options, such as the ability to watch multiple games at once on a single screen and access to the Red Zone Channel, which shows live highlights and scoring updates from around the league. NFL Sunday Ticket is a helpful option for football fans who want to follow their favorite teams and players more closely. It's also a popular service for sports bars and restaurants that want to feature a wide range of NFL games.
How will this agreement work?
The core of YouTube's Sunday Ticket offering will be substantially identical to the existing DirecTV service, apart from how the broadcast signal is delivered. However, moving the games to a streaming platform will invite adding new features that take advantage of the broadband connection, like adding more game stats and better scheduling options. More detail on the upgraded experience will come later, along with the monthly subscription fee schedule.
Extra features will be nice, but the pricing announcement will speak volumes about YouTube's motivation for this deal.
DirecTV paid approximately $1.5 billion per year for its Sunday Ticket rights in recent seasons, charging subscribers $300 per season for the basic NFL Sunday Ticket package and $400 per season for the Max version, which includes several additional channels packed with football content.
And DirecTV never made a profit from its NFL Sunday Ticket deal. The company needed roughly 20% of its satellite TV customers to sign up for the Sunday Ticket package in order to turn a profit, but that ratio reportedly never rose above 15%.
So Google's video service is paying a premium for a premium football content package that wasn't profitable under the previous broadcasting partner's gentler fee structure. Furthermore, DirecTV has more than twice as many customers as YouTube TV. How is this supposed to work out financially for YouTube and its parent company?
Two roads diverged in a yellow wood
I see two possible ways forward. In one scenario, YouTube TV sets its subscription fees very high, hoping to generate profits from a smaller group of deep-pocketed subscribers. Unfortunately, this idea would probably backfire in a hurry. Raising prices on an unpopular content service rarely saves that media service in the long run. See, for example, decades of rising movie ticket prices and falling ticket sales. The leading movie theater chains were on the ropes many years before the COVID-19 pandemic turned up the heat. Higher fees are a temporary band-aid for weak revenue, not a permanent fix for the underlying problem of limited consumer demand.
The other option is to keep Sunday Ticket prices steady or maybe even slightly lower, using this service as a loss leader to attract lots of new subscribers in a hurry. A dramatic price cut is out of the question due to existing contracts between the NFL and local broadcasting partners.
Many consumers have no idea that YouTube TV provides a full-featured package of live TV channels, similar to the cable and satellite bundles of yesteryear but delivered through YouTube's video streaming platform. And YouTube Primetime Channels is a brand-new à la carte service, launched less than two months ago.
You may have noticed Primetime tucked away in the "Your moves & TV" section of the YouTube interface, but maybe you missed it. This bucket of pay-per-view movies and premium network subscriptions is not exactly marked with blaring sirens and neon lights. This option probably needs every trick in the book in order to build a sustainable business platform. The NFL deal should help.
What YouTube TV wants from this costly contract
So I don't think the NFL Sunday Ticket deal will make money for YouTube TV, either. That was probably obvious to insiders on both sides of the negotiating table. Amazon was an early frontrunner to take over after the DirecTV era. Other suitors included Apple and Walt Disney, who would bundle Sunday Ticket up with their Apple TV and ESPN+ streaming platforms, respectively.
But they all got cold feet, letting the contract slide into YouTube's hands. You know the stakes are high when these deep-pocketed media and technology giants are throwing in the towel after months of intense negotiations.
In my view, YouTube is paying dearly for an instant subscriber-grabbing solution that may set its live channels service up for a brighter future as a whole. The deal will be a drag on YouTube's and Alphabet's bottom lines, at least at first and maybe until the seven-year agreement expires.
The trick is to turn the business plan away from maximum subscriber growth and toward profitable revenue growth at the right time, when subscribers are coming in slower and investors are crying for bottom-line profits. Only time will tell whether YouTube sticks the landing on that transition, many years from now.
And it might just be worth it in the end. Just don't expect financial fireworks early on.
