Murdoch Says ‘YES’ to the Yankees: Why the Deal Could Help Fox Take On ESPN

News Corp.’s blockbuster deal to buy 49% of the Yankees Entertainment and Sports (YES) Network is the latest confirmation that televised sports has become one of the hottest areas in the media world. With newspapers, magazines and even Hollywood facing continued disruption thanks to the relentless rise of Internet-based alternatives, good ol’ fashioned TV sports remains a massive and highly lucrative market.

News Corp., the giant media conglomerate run by billionaire mogul Rupert Murdoch, has made sports a key component of the company’s portfolio. But this deal, which values YES at a whopping $3 billion, takes the company’s sports position to a new level, for three reasons.

First, News Corp., which also owns cable news leader Fox News Channel, Hollywood stalwart 20th Century Fox and 20 regional sports networks, gains a nearly 50% stake in YES, the country’s most valuable regional sports network. Second, the deal puts the media giant firmly in bed (so to speak) with the New York Yankees, arguably the most valuable professional sports franchise in the world. Third, and perhaps most important, the deal significantly bolsters News Corp.’s strategic negotiating position as it lays the groundwork for a new national sports network to compete with cable sports leader ESPN.

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Under the terms of the deal, which were announced last week, News Corp. will pay about $1.5 billion for a 49% stake in YES, which broadcasts live Yankees baseball and Brooklyn Nets basketball games. (That amounts to little more than chump change for News Corp., which has a market value of $58 billion, and is currently sitting on $12 billion in cash.) After three years, News Corp. has the right to increase its stake to 80%, according to a statement released by the company and Yankee Global Enterprises, which owns the Yankees and also a stake in YES, along with Goldman Sachs and other investors. The deal, which will keep Yankees baseball on YES through 2042, allows Goldman Sachs, which was an early investor in YES and owns 30% of the network, to cash out some of its stake.

Since its founding in 2002, YES has become a major force in the nation’s top media market — the tristate area, which includes New York, New Jersey and Connecticut. Over the past decade and a half, the Yankees, arguably the country’s most loved and loathed professional-sports franchise, has become a perennial postseason contender, having won five World Series titles over that period. “The YES Network represents the gold standard for regional sports networks and is a pioneer in sports media,” James Murdoch, News Corp. deputy chief operating officer — and Rupert Murdoch’s second eldest son — said in a statement. “Partnering upstream with rights holders is even more important today in the dynamic media marketplace in which we compete.”

Indeed, “partnering” with rights holders is a key task for News Corp. as it lays the foundation for a national Fox sports network to compete with ESPN, which is owned by Walt Disney Co. and produces sports programming for ABC, which is also owned by the Mouse House. As of now, Fox is the only one of the big four networks that does not have a national sports outlet. (Comcast-owned NBC Universal has NBC Sports Network; CBS Corp. has CBS Sports Network.)

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Earlier this year, Bloomberg reported that News Corp. was working to acquire the programming rights from pay-TV carriers and sports teams that will be crucial to the viability of a national Fox sports network, which is reportedly being developed under the working name Fox Sports 1. “The success of all these networks will depend on the quality of their sports rights,” Miller Tabak & Co. analyst David Joyce told the news service. “There’s been a lot of competition for those rights and that’s driven up costs.”

It’s no surprise that Fox is keen to enter the national sports market, given that ESPN is able to command $5.15 per month for each subscriber from the major cable-television companies, according to data from media-consulting firm SNL Kagan cited by Reuters. That’s the highest subscription fee of any cable channel. By comparison, Fox Sports North, among the most lucrative of the Fox regional sports channels monitored by SNL Kagan, can only command $3.68 per month, according to the Reuters report. (YES currently charges $2.99 per month for each subscriber.)

Neal Pilson, president of Pilson Communications and a former head of CBS Sports, told Bloomberg that in order to be successful, the new Fox sports network, which could debut next year, will need to entice major sports teams to sign on to its new initiative. Needless to say, News Corp.’s purchase of 49% of YES puts the entire sports-broadcasting world on notice that it is serious about this market. Barclays analyst Anthony DiClemente told CNBC that he predicts “revenue synergies from News Corp. negotiating on YES’s behalf in carriage negotiations, incrementally improving both News Corp.’s and YES’s bargaining power.”

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News Corp.’s YES deal comes as the media giant is beginning to regain its footing after a tumultuous period during which the company was rocked by a devastating phone-hacking-and-police-corruption scandal involving its U.K. tabloid the Sun, which was ultimately closed. That imbroglio was the impetus, at least in part, for News Corp.’s decision to spin off the conglomerate’s newspaper assets from its more lucrative entertainment holdings, creating two companies. The split calls for 20th Century Fox, the Fox network and Fox News Channel to be separated from a second, smaller entity that will contain the newspapers, the HarperCollins publishing house and News Corp.’s education business. Fox Sports 1 will undoubtedly be part of the larger, entertainment-based company.

Over the past six months, News Corp. shares have soared 26%, prompting Murdoch to begin hunting for acquisitions. “Rupert has his mojo back,” Todd Juenger, a media analyst at Sanford C. Bernstein, told the New York Times. “The stock is up, investors are happy with the company’s recent decisions.” News Corp.’s YES deal shows that the company is serious about focusing on the most lucrative components of its business, including the company’s highly profitable cable properties. And by teaming up with the Yankees, Murdoch has delivered the media equivalent of a “brushback pitch” to ESPN, as the entire sports world awaits the arrival of his company’s new national sports network.