Discovery's Olympics Rights Win in Europe to Boost Ad, Carriage Clout, Analysts Say
Wall Street observers call the rights deal "intriguing strategically" and say it "bolsters its overall international portfolio."
Analysts have given Discovery Communications mostly positive reviews for acquiring pan-European rights for the 2018-2024 Summer and Winter Olympics on Monday.
"Discovery's surprise acquisition of pan-European Olympics rights from 2018 to 2024 seems intriguing strategically, with seemingly beatable guidance for "positive" cumulative free cash flow," wrote FBR analyst Barton Crockett in a report.
He cited a management target of getting back about half of the $1.45 billion cost for the Olympics via sub-licensing deals in some countries to other TV networks, particularly in countries where Discovery does not operate broadcast networks. "This strikes us as a reasonable target," Crockett said. "Furthermore, advertising revenues will clearly rise with the event. But even if ad revenues did not pick up, a 10 percent rise in affiliate fees above 2015 levels for the 60 percent of Discovery's international segment derived from U.K., Nordic and Euro-area operations should cover the balance of the license fee. This seems very doable, given the must-see nature of the Olympics."
Macquarie analyst Amy Yong in a report also highlighted the ad and affiliate fee benefits to Discovery's pan-European sports network Eurosport. "First came pan-European scale, now comes must-have sports programming," she said. "The ability to secure the rights to the 2018-2024 Olympics across Europe raises the relevancy and brand of Eurosport with pricing power to negotiate improved ad/affiliate fees."
She predicted "significant upside to our three-year ad and affiliate compound annual growth rates of about 5 percent post-2018," explaining: "European carriage deals are generally 2-4 years and we expect this shorter-term cycle will likely drive pricing power. Specifically, we expect this to improve most of Eurosport's affiliate agreements before the 2018 Games. We also anticipate a significant boost to ad as Discovery will have access to a sizeable Olympic archive."
Morgan Stanley analyst Benjamin Swinburne said Discovery's acquisition of the European rights to the Olympics "bolsters its overall international portfolio and potentially provides increased heft with its advertising and affiliate fee negotiations."
Drawing a comparison to the U.S. market, where Disney's ESPN is the leading sports content brand, he said: "While buying its way into a substantial position in sports rights domestically will likely be prohibitively expensive, Discovery is uniquely positioned internationally to purchase rights on a pan-European basis."
In a more cautious comment, Swinburne added: "Nevertheless, similar to ESPN, we see potential challenges related to taking on fixed, long-term sports liabilities while attempting to address a growing population of broadband-only and non pay-TV homes. While we see an opportunity for Eurosport's OTT product to leverage Olympics IP and drive increased adoption, Discovery will likely need to strike a careful balance between developing its direct-to-consumer model and pushing for higher affiliate fees from distributors."