In an interview over the weekend with Richard Deitsch of Sports Illustrated , Chairman of the NBC Sports Group Mark Lazarus declared himself very satisfied with how the Rio Olympics have gone for NBC:

“I’m obviously biased but I believe once again we have created a masterful production job, from the quality of production, the quality of storytelling, our preparedness for whatever stories developed as evidenced by what people are seeing on all of their screens,” says Lazarus.

“Everyone is talking about these Olympics versus London. London was an A+ and Rio is an A. It’s been really good for us, and as media habits as evolved, we have evolved and are leading with some of the ways we are structuring our programming.”

The London comparison has been a tough one for NBC, at least in the ratings department. Even with the benefit of showing Usain Bolt live in prime time for the first time, NBC’s Sunday night telecast earned a 14.9 rating and 26.7 million viewers, down from a 17.5 rating and 31.3 million viewers for the same night four years ago, and a 16.0 rating and 27.2 million for the Beijing Olympics eight years ago. In fact, it was the lowest rated middle Sunday since 1984 (the addition of streaming and alternate channels improved the numbers somewhat, but they were still less than either of the last two Olympics); nearly every night of coverage has seen similar declines, resulting in an average of 17% fewer viewers than four years ago.

And yet, Lazarus has good reason to be pleased: NBC sold $1.2 billion worth of ads before the Olympics even started, 20% over London’s pace, and while NBC may need to offer some “make-good” spots to those advertisers to make up for lower ratings, the total amount of advertising 1 is expected to surpass London’s $1.33 billion, leading Lazarus to declare on a conference call that “this will be our most economically successful Games in history.”

This bifurcation between viewership and profitability is a fascinating one: how is it that NBC can sell more ads for more money for fewer viewers? The answer is very much in line with what has become a theme for Stratechery this summer: NBC’s advertisers have nowhere else to go.

The Symbiosis of TV and Its Advertisers

In TV Advertising’s Surprising Strength — And Inevitable Fall I noted that TV’s biggest advertisers were all (unsurprisingly) predicated on scale and serving the mass market; the list was dominated by industries like consumer packaged goods, telecoms, automobiles, retailers, and credit card companies. Those same industries dominate Olympic advertising; according to Kantar Media the top ten Olympic advertisers include General Motors and BMW (automobiles), P&G (CPG), AT&T (telecoms), and Visa (credit cards), and while no retailer cracks the top ten, the retailer category is the second biggest spender overall.

The big takeaway from that article was not only that the traditional TV industry is intertwined with its advertisers, but that the forces chipping away at TV viewership, particularly amongst young people, were acting on TV’s advertisers’ as well; the next few weeks gave several examples, including Unilever’s relatively cheap acquisition of Dollar Shaving Club and Walmart’s (expensive) acquisition of Jet.com . Yes, there are digital ad dollars to be had from the old guard, but maybe less than expected ; probably the biggest opportunity for Facebook et al will be companies predicated on the social network’s existence .

Still, the symbiosis of TV and its advertisers paradoxically meant that both would likely stay stronger longer than you might expect; it’s easy to envision a future of fully on-demand streaming and digital advertising from niche products delivered via e-commerce, but less clear is what will be the triggering event that gets us from today’s post-war landscape to that future. That’s why I’m so interested in these ratings.

The Sports Linchpin

The importance of sports to TV is well known, but perhaps not fully appreciated; when I wrote three years ago that live sports were perhaps the most irreplaceable “job” done by TV the context was the sustainability of the cable bundle. Pressure on said bundle continues to grow, yet so do the affiliate fees charged by sports networks: last year ESPN had by far the highest fees and the biggest increase, followed by TNT (basketball) and the NFL Network. The story is even starker when you include regional sports networks.

That said, the secular shift to a subscription model for television (whether affiliate fees or direct subscriptions) is a broad-based one; what makes sports unique is that it is also the most important category for TV’s other big revenue stream — advertising. For broadcast networks , sports accounts for 37% of ad revenue, up from 29% five years ago; this despite the fact sports only makes up between 10%-12% of programming. Sports-focused cable channels make big bucks off of advertising as well, led by ESPN with $2.4 billion (plus $360 million for ESPN2) and $407 million for the NFL Network. Basically, sports advertising is growing for everyone (from a 4% compound annual growth rate for Fox to 15% for NBC), while non-sports advertising has decreased by a 1% rate over the same five year period.

The reason to point out all of these facts that you probably already know, at least in broad strokes, is this: I would argue sports are the linchpin holding the entire post-war economic order together. Because sports are consumed live, with significantly higher advertising load and viewer retention, sports are increasingly the only viable place for mass-market consumer companies to reach customers at scale and fight off niche e-commerce companies slicing off their customer base. That in turn helps preserve retailers, themselves both big advertisers and big targets for internet-based companies, particularly Amazon, and so on down the line. This effect is magnified by sports’ role in preserving the cable bundle, which keeps more channels — and thus more inventory — viable (not to mention that some of TV’s biggest advertisers — entertainment companies — also own the cable channels).

This raises big questions about NBC’s disappointing Olympic numbers: if sports are losing their hold on the population broadly then entire industries are at risk, not just NBC.

Good and Bad News

That said, it’s probably too soon to panic: the easiest explanation for these numbers is that NBC is violating the biggest precept underlying sports’ continued strength, which is being live. In 2005 14% of the top 100 programs watched lived were sports; last year, thanks to the rise of first DVRs and later streaming, that percentage had risen to an incredible 93%. 2 I certainly understand that a sport like gymnastics is difficult to show live even if it took place in primetime instead of the afternoon, but getting a push notification about the results hours before it airs can’t help but depress viewership; true, the Internet has been around for a while and NBC has used tape delay for decades, but over the last four and especially eight years it has become exponentially more difficult to avoid the results of events you didn’t even know you wanted to watch until NBC stuck them in front of you. Certainly this new reality is bad news for NBC, and calls into question Lazarus’ description of NBC’s production as “masterful”, 3 but everyone else dependent on sports can breathe easier.

Not too easy though: NBC’s numbers are far worse amongst younger viewers. That 17% ratings slump over the first 10 days is 25% when you consider only 18-49 years olds, echoing a pattern seen amongst other major sports including the most important sport of all in the U.S., American football. Yes, the NFL has record ratings , but over the last ten years the average viewer has increased in age from 43 to 47 (admittedly, that’s not nearly as bad as baseball’s increase from 46 to 53; basketball has stayed steady at 37), while streaming alternatives like Twitch ( 8.5 million daily users in 2015 , mostly 18-49 males) are skyrocketing in popularity. In short, it’s not clear why over the long run sports should be exempt from the explosion in alternatives that have fractured markets for every other post-war institution.

Young people are still following the Olympics: NBC’s streaming is up significantly, and 50 million people are watching Olympics highlights on Snapchat . The latter data point, though, indicates a deeper weakness: the demotion of sports from mass media centerpiece to just another bit of content available on an aggregator. That’s why this was the most worrisome thing Lazarus said on the aforementioned conference call:

[The] NBC broadcast is not the only way people are consuming the Olympics, just as newspapers and magazines are not only consumed in print. While primetime broadcast TV viewing on NBC will remain the biggest way that people consume the Olympics, we also understand that to millenials and younger viewers, primetime is really, quote/unquote, “my time”. They want to watch on their terms, and that’s why moving forward we’ll continue to adapt to viewer behavior with our coverage on multiple platforms.

Here’s a rule of thumb: anytime you compare your situation to newspapers and magazines, you have a big problem; yes, publishers of all types have a far bigger audience than ever before, but their business is no longer a canvas for advertisers but content for Facebook. One of the biggest questions in my mind — and what should be the biggest question in the mind of executives everywhere — is whether or not sports broadly is on the same path: must-see TV today, just another stream on Snapchat tomorrow. The implications of the latter for industries everywhere cannot be overstated.

1. Including digital and affiliate advertising [ ↩ ]
2. Via Nielsen [ ↩ ]
3. To be fair, NBC is streaming all events live [ ↩ ]