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Facebook Vs. NFL: Right Battle, Wrong Battlefield

Summary

Facebook's recent decision to withdraw from the NFL bidding because it was required to show ads was a sound one.

However, the NFL's decision to insist on ads was also sound.

Facebook and the NFL would still make great partners, but they should focus on a different category of football content than exclusive nationwide games.

The conventional view that sports is a natural place for ad breaks is not wrong, but it is incomplete. There is substantial potential for an ad-free sports service.

Facebook's willingness to invest heavily in providing such a service is, I believe, an extremely bullish indicator for the stock, even if it missed out on this round.

Introduction

It certainly wasn't an outcome anyone saw coming. For years, media analysts have wondered when the major tech players would break down the old Pay-TV walls and yank away a major sports contract into the digital realm. Not long ago Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Verizon (NYSE:VZ), Yahoo (NASDAQ:YHOO), and Apple (NASDAQ:AAPL) were all fighting for the privilege, with Facebook supposedly in the lead.

However, it then decided to back away from the bidding. Somewhat surprisingly for an advertising powerhouse, Facebook refused to agree to allow any commercials during the broadcast. When the NFL wouldn't go along with an ad-free experience, Facebook backed out. The deal ultimately went to Twitter (NYSE:TWTR), a name that had hardly been mentioned before then, and for maybe a tenth of what others were offering.

Facebook Live

Facebook CEO Mark Zuckerberg has made it clear he sees ads as a non-starter in Facebook's new Live platform. On the one hand, whether he is right or wrong that users will not put up with ad interruptions in a modern service is not the point. The CEO thinks ads will kill the experience, so ads are not coming to the service for the foreseeable future.

On the other hand, Zuckerberg may well be correct in his belief that ad breaks, even rich ones like the NFL's, are not worth the blemish on the customer experience. Netflix (NASDAQ:NFLX), the king of video streaming, has never had them, and its customers frequently list ad-free viewing as one of the biggest benefits of their Netflix subscription. Amazon Prime Video, another ad-free service, has vaulted to second place in streaming video, just behind Netflix and ahead of Hulu Plus despite the fact that Hulu is two years older. Is that because of its lack of ads? Hulu itself seems to think so - it recently announced its first completely ad-free offering.

NFL Dealmaking

But at the same time, the NFL's reticence to disrupt the advertising paradigm of its content is understandable. A deal with Facebook's ad-free format would have been highly problematic for three reasons.

First, finance. 30-second ad spots are going for north of $700,000 each on Sunday Night Football right now. Which, extrapolated over 256 regular season games with twenty in-game commercial breaks, four 30-second ads per break, plus half-time commercials and playoff games, yields an annual advertising income of well north of $1.5 billion per year. Just for the advertising. That is roughly $60 million per game. Facebook's reported offer of less than 10% that...


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