Why ESPN Won’t Sweat Fox Sports’ Upfront

New network set to be unveiled Tuesday

The wraps will come off a new national network when Fox Sports Media Group holds its first upfront Tuesday.

The timing is apropos as talk of escalating rights costs dominates the industry and sports may be the surest way today to guarantee large, live TV audiences.

But Wall Streeters, busily crunching numbers ahead of launch, don’t predict a new Fox Sports 1–and maybe a 2–will put much of a squeeze on Walt Disney juggernaut ESPN, whose wide-ranging contracts are locked up for the foreseeable future. But they see a hefty revenue bump for News Corp., which can rely on existing sports packages, infrastructure and talent from its regional sports networks and broadcast net.

“The key is, they already secured the rights and the costs are already baked in, though revenues aren’t,” wrote David Bank of RBC Capital Markets who sees “massive margin expansion” at the business.

Fox Sports, which declined comment on its upfront plans, is expected to build the new network(s) on re-branded Speed TV and Fuel channels, which already have about 80 million and 30 million subscribers each.

Credit Suisse analyst Michael Senno pegged Speed and Fuel affiliate fees at 26 cents and 15 cents, respectively. He projects News Corp. will negotiate about $1.25 per subscriber for Fox Sports, although he expects it to push hard for more. A long-term target, he said, could be the $2.50 a month commanded by regional sports networks.

ESPN, in comparison, takes in over $5 per sub–tops among all cable networks. Michael Nathanson of Nomura Securities called the Disney net “well protected for many years thanks to both its long-term affiliate fee deals, which will be all done by the end of 2014, as well as almost all major sports rights locked up well into the next decade.”

Even in the best-case scenario, he calculated, News Corp.’s affiliate fees from these new national sports networks would still be only roughly a quarter of what he estimates ESPN makes today from affiliate fees– not even enough to pay for ESPN’s NFL package alone.

News Corp. chief operating officer Chase Carey has been sometimes reluctant to compare the network he’s been hinting about for months to the industry’s gold standard. But it’s inevitable that everyone else would: the juicy face-off between giant media congloms; the fact that News Corp. chairman, Rupert Murdoch, isn’t known for relishing second place for long, and sports being the high-profile, lucrative biz it is.

Murdoch, Carey and deputy COO James Murdoch are expected to join Fox execs and talent at the upfront event with advertisers Tuesday afternoon at the Marriot Marquis in Times Square, followed by a party at the Roseland Ballroom.

James, who is Murdoch’s youngest son and, apparently, his on-again heir apparent, jumped to prominence on the sports side last fall by spearheading the company’s acquisition of 49% of the New York Yankees’ YES Network regional sports net.

News Corp.’s long-term cable TV rights deals includes Major League Baseball, college conferences Pacific-12 and Big 12 (Tier 2), NASCAR, Ultimate Fighting Championship (UFC), and FIFA World Cup.

“While some of these rights are arguably not must-have for sports rights-weary distributors, we would expect News Corp to flex its negotiating leverage to include these networks within its larger portfolio of broadcast and cable networks,” Nathanson said.

ESPN’s portfolio includes NFL Monday Night Football, Major League Baseball, Pac-12, the Atlantic Coast Conference, Big 12, Big Ten, and BCS Championship series.

The industry’s main expiring rights include the NBA, currently held by ESPN and Turner (the two also hold NASCAR, set to expire over the next few years); the Big East conference at ESPN; and the UEFA Champions League at Fox. The biggest unknown, Nathanson said, is whether or not the NFL sells an additional package.

Credit Suisse’s Senno calculated 2015 affiliate fees for Fox Sports of $1.4 billion and advertising sales of over $600 million. That comes to total revenue of $2.1 billion and earnings of about $700 million, compared with a projected $470 million in revenue and $160 million in earnings for a combined Speed/Fuel the same year. He used $1.25 for Fox Sports’ affiliate fee and picked 2015 as the year the network exits start-up into “steady-state” mode.

But Senno stressed the fee is still a question. So is whether News Corp. will be able to re-open its affiliate deals for the two channels immediately.

The bigger industry question is whether the ecosystem of programmers, distributors and consumers can support the cost of sports and for how much longer.

“Is the industry setting up a massive arms race, on a national as well as local, level? Increasingly, the incumbents are being challenged, fragmenting the market, driving up rights fees, and pressuring affiliate fee costs across distributors without really driving a meaningful increase in actual sports content. Over time, it might very well be the case that affiliate fee growth has to slow,” wrote RBC’s Bank.

Battles are already breaking out in non-sports content with some high-profile blackouts last summer as operators push back where they can. Cablevision sued Viacom last week for forcing it to take weak channels with strong ones.

But consensus seems to be that distributors and customers, who bear the weight of pricey sports, are likely to keep doing so for the foreseeable future. A handful of MSOs themselves are partners in their own regional sports networks and benefit from affiliate fees.

“We think the torrid pace of affiliate fee growth could slow a step in some cases, but over the next few years, it should still grow high singles to low double digits,” said Bank.