Apple: Overpaying For Sports Rights (NASDAQ:AAPL)

Suddenly, Apple (NASDAQ:AAPL) is spending aggressively on sports rights content despite all of the players in the media sector bowing out of the race. The tech giant might build a large sports media business, but building a highly profitable business is a far different story. My investment thesis remains Bearish on the stock with Apple straying away from past game plans of building the business from the ground up and not overpaying to enter a sector.

Massive $3 Billion Cost

After Apple recently won the MLS streaming rights, one shouldn’t be surprised to hear the tech giant is the leader for the bidding in the NFL Sunday Ticket rights. What is surprising is that Apple might outbid Amazon (AMZN) by bidding a massive $3 billion annually. The incredible part is that Disney (DIS) apparently stopped bidding at below $2 billion.

The problem here is that consumers don’t want to pay higher rights fees just because the tech and media giants want to outbid each other. Apple would have to give away the content in order to attract the types of consumers to use the NFL Sunday Ticket to drive subs to other services. Apparently though, the contract language is likely to require Apple to continue charging at least $300 for the service likely to keep the majority of NFL viewers focused on the broadcast games.

AT&T (T) famously bought DirecTV in a large part to acquire the valuable NFL Sunday Ticket, but the media business never boomed from owning the service. Remember, the service just offers out-of-market NFL games while the professional football league already offers so many games to fans on multiple days including most of the best games. The service only has a few million subscribers due to the costs and limited amount of consumers wanting out-of-market games. The media company has no interest in still owning the service that cost $1.5 billion annually for the upcoming season.

Additionally, Apple is apparently busy bidding for the UEFA Champions League domestic rights at a cost of $2 billion for 6 years. The tech giant can package these sports media rights into a sports streaming service to rival ESPN, but Apple will need to derive a service that either adds vastly more subs or charges 2x as much.

Apple appears to be playing the same failed game of overspending on content. AppleTV+ appeared a success via owning interesting content and charging a minimal cost to viewers. With sports rights cost approaching $3.75 billion annually, Apple opens the door for a business where revenue might fail to match costs.

As a streaming service, Apple has the potential to attract more consumers that weren’t willing to own a satellite subscription to DirecTV. Note though, the business owned by AT&T, until recently, isn’t willing to double the rights fees despite collecting monthly satellite payments on top of the NFL Sunday Ticket fees. Apple won’t collect other subscriptions in order to have the ability to subscribe to the NFL service, though the tech giant can sell other services to such subs.

Disney+ just hiked the cost for ESPN+ by 43%. The sports focused streaming service generally focused on secondary sporting events recently decided to hike monthly fees from $6.99 to $9.99.

The big question with the ESPN+ service and the moves being made by Apple is whether the companies are only passing through ever escalating rights fees versus extrapolating higher value from subscribers.

Media Overhyped

The sudden splurge in the media business by Apple is odd considering where the media stocks trade. All of the stocks are under immense pressure due to streaming revenues struggling to keep up with escalating costs.

Disney just hit a new 52-week low and new Warner Bros. Discovery (WBD) has absolutely collapsed after the CEO claimed the Warner Media division acquired from AT&T wasn’t even cash flow positive any more. On top of this, the top streaming service in Netflix (NFLX) has to change the business model to ad-supported options after the stock has collapsed with subscribers overloaded with paying for the influx of streaming options.

Over the last year, Apple is up 6% while the 3 primary media companies focused on streaming have fallen at least 40%. The media companies should want into the tech businesses of Apple, not vice versa where the tech giant is trying to expand aggressively into the media business.

The big unknown is whether Apple can pull off a new sports media game plan such as the one with the MLS. The company has the global sports rights to the U.S. soccer league at a minimum cost of $250 million annually with some revenue sharing of the subscription fees. Remember though, some of the major weekly games will be simulcast on broadcast channels, thereby reducing the desire for average fans to pay a subscription service.

Takeaway

The key investor takeaway is that Apple is on the verge of building a sports media empire. The tech giant is also on the verge of paying double the price of the prior rights owner that no longer wants to pay big sums for the NFL Sunday Ticket.

Apple straying away from their core competency isn’t positive for shareholders, especially when my previous research already built the case for the stock being far too expensive for the forecasted minimal growth rates.