Leo Kirch has always relished secrecy. His eponymous media empire now crumbling under the weight of up to $10 billion in debt and other financial obligations is so complicated that even seasoned observers are unsure of what is pledged to whom. His network of political and banking connections seems virtually impenetrable. He rarely gives interviews. He will not even say publicly which football team he supports. It's an interesting stance for a man who built his company in part on the loyalty of sports fans.
In an attempt to draw viewers to Premiere, his pay-TV service, Kirch has in the past two years paid more than $2.5 billion for a slice of Formula One racing and the rights to screen live German football matches from Berlin to Munich. But the audiences have failed to appear big time. The service is currently losing up to $2 million a day. Now, as his empire founders, Kirch has put his Formula One stake up for sale, with pundits predicting he will be lucky to get half his original outlay. Although the rights for soccer World Cups 2002 and 2006 are bringing in some income, rumors continue to swirl that Premiere will soon seek to renegotiate its $330 million annual deal with Germany's domestic league double the amount of the previous contract. "We have to bring our agreements into line with reality," Georg Kofler, the head of KirchPayTV, told the German newspaper Süddeutsche Zeitung. That reality: 2.4 million subscribers for the station, less than half the 6 million once projected. Says Kofler: "We can't continue to pay for subscribers who aren't there."
Though the prices for sports broadcasting rights have soared, audiences and advertising dollars have failed to keep pace. Kirch is not the only one to have been caught in the squeeze play. Last year, the Swiss-based sports-rights agency ISL collapsed after overpaying for the commercial rights mainly for broadcasting and sponsorship to a wide range of sports, including $1.2 billion over 10 years for men's professional tennis. Last month Rupert Murdoch's News Corp. wrote off $909 million on contracts to broadcast such sports as Major League baseball. Murdoch's BSkyB also wrote off the value of its investment in KirchPayTV to the tune of a whopping $1.4 billion. This week in Britain, broadcaster ITV Digital is expected to conduct frantic talks with the English Football League, to renegotiate a $446 million rights contract that is now threatening the financial health of the strapped service, co-owned by Granada and Carlton. "The market's been plagued by excessive optimism," says Bill Gerrard, a specialist in sports finance at Leeds University Business School. "It's coming back to earth."
The situation is traumatic enough for those networks that put too much faith and cash in the ability of football striker Michael Owen or Formula One champion Michael Schumacher to draw viewers. But it's likely to be just as bad for the football clubs, car-racing teams and other sports organizations that have become overdependent on the broadcasting cash. Their costs are going up; their revenue ... well, that's the problem. And in the long run, as pay-TV networks consolidate they will have no other choice a two-tier rights hierarchy could develop, even in the same sport, in which marquee events draw the big television money while the routine competitions have to make do with the broadcasting crumbs, aided mainly by income from tickets and merchandise sales.
That's not to say those who have been burned will stay away from the fire for good. Even as Rupert Murdoch rebalances his books, he is keeping his eye on the long-term ball. The media mogul may have written down his KirchPayTV stake, but he still holds a $1.5 billion "put" option a risk-averse instrument that gives one the right to sell an asset at a pre-determined price in the business that he could use as leverage to get his hands on any part of the Kirch empire that interests him. Including Formula One.
It seems fitting that Murdoch could be the last man standing in the current sports-broadcasting dilemma. He was, after all, present at the creation. Before the 1990s, Europe's airwaves were ruled mainly by public terrestrial television stations, which paid, by today's standards, mere pocket money for the rights to screen football and other sports. But with the advent of private and pay-TV networks came the search for content that would not only attract viewers, but also build the kind of loyal subscriber bases and demographics that advertisers love. The answer? Sport, once famously described by Murdoch as pay-TV's "battering ram." Broadcasters piled in, sparking a bidding war for sporting content that drove the price of rights for many major events through the stadium roof.
These ever-inflating prices created a sports-rights bubble that grew ever bigger. Case in point: FIFA, the body that governs global football, says it got $79 million for the broadcasting rights for the 1998 World Cup. Would you like to wager a guess on the same rights for the 2002 World Cup? How about $761 million, a tenfold jump.
Such sharp increases over a short period are unlikely to be repeated, say analysts. Their consensus is for a nasty short-to-medium-term correction and maybe even a dip in prices, followed by a slow, steady return to growth. A Merrill Lynch report released last year suggested that if the most recent English Premier League contract which involved a number of broadcasters including BSkyB and ITV and was valued at $2.35 billion over three seasons were to be renegotiated, it would be worth only about 60% of current levels. Figures from across the sports world joined in the chorus of doom. Daniel Beauvois, the ex-ceo of ISL, issued a harsh warning that the same revenue-reduction fate could befall other sports-rights agencies. In Formula One, the fans seem to have sped away: viewing numbers for the motor sport have dropped about 5% since 1999. And both Greg Dyke, head of Britain's bbc, and Gerhard Aigner of uefa, which runs pan-European football competitions like the Champions' League, wondered whether the audience appetite for televised football had peaked.