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Fox Challenges ESPN With Pursuit of Time Warner

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James Stewart of The New York Times says that Rupert Murdoch’s pursuit of of the biggest media deal in more than a decade faces tough regulatory hurdles.CreditCredit...Adrees Latif/Reuters

Rupert Murdoch loves nothing more than taking on an entrenched powerhouse, and with his audacious $80 billion bid to purchase Time Warner, he showed a willingness to go up against one of the industry’s most powerful players — ESPN.

Among the top reasons Mr. Murdoch’s 21st Century Fox covets Time Warner, according to analysts and industry executives, is the opportunity to acquire more sports rights and bolster his fledging Fox Sports 1 network, which made its debut last summer.

In a rapidly shifting media landscape, live sports remains one of the industry’s few sure bets. Game broadcasts, especially marquee live events like the Super Bowl and the World Cup, are still watched live by mass audiences, attracting advertising dollars. And a network with a robust roster of sports programming commands more lucrative fees from cable and satellite companies.

“It’s the most important programming out there and probably gets more important as everything else fragments,” Chase Carey, the president and chief operating officer of 21st Century Fox, said in a conference call in February.

For decades, Mr. Murdoch and others have sought to challenge the sports hegemony of Walt Disney’s ESPN, but they either employed the wrong strategy or came late to the party. Since ESPN’s founding 35 years ago, the value of sports rights has soared, and contracts that used to last three or four years now extend up to two decades.

By adding Time Warner’s sports and broadcasting assets, which include the National Basketball Association and the N.C.A.A. men’s basketball tournament, Mr. Murdoch would gain a stronger position in the sports world, not only eliminating one bidder from a competitive field but also giving the combined company more leverage with sports leagues.

On Wednesday, Time Warner disclosed that it had rejected a takeover offer from 21st Century Fox, the conglomerate controlled by Mr. Murdoch. Such a deal — which Mr. Murdoch is likely to continue to pursue — would create a behemoth in the television and film industries, bringing together the Fox Broadcasting network with Time Warner’s premium cable channel HBO as well as the movie studios Warner Bros. and 20th Century Fox.

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Fox camera crews at an N.F.L. game in 2013. Acquiring Time Warner would give Fox a robust roster of live sports programming to attract higher fees from cable and satellite companies.Credit...Rick Osentoski/Associated Press

But the deal is also a rare opportunity for 21st Century Fox to acquire a host of sports rights in one fell swoop. In addition to the N.B.A. and college basketball, Time Warner, home to the TBS and TNT networks, also holds sports rights for Major League Baseball and the P.G.A. Championship, a property of P.G.A. of America. Those rights, along with Time Warner’s ownership of digital properties like the Bleacher Report, would complement Fox Sports 1, which carries baseball, Nascar, college basketball and college football. And having a lockdown on those sports rights would be a valuable bargaining chip in fee negotiations with pay-television distributors, such as cable and satellite companies that are in the midst of a wave of consolidation of their own.

Pay-television operators are battling to defend themselves against so-called cord cutting, or the trend that people cancel their pay-television subscriptions in favor of cheaper streaming alternatives, such as Netflix, YouTube, Amazon and Hulu. Live sports are a valuable defense. About two out of every five adults report that they wouldn’t cancel their pay-television subscription because they want access to live sports, according to a recent Harris Interactive Poll.

And marketers continue to pour escalating sums to advertise next to sports programming. TV ad spending generated by sports increased nearly 50 percent to $12 billion in the United States in 2013, according to the Interpublic Group’s MagnaGlobal ad buying firm. “It is DVR-proof,” said Kevin Collins, head of sports ad buying for MagnaGlobal. “Viewers are not skipping over the commercials.”

Mr. Murdoch has long realized the value of sports. Over the years, Fox has amassed a sizable American sports footprint, buying rights to football, baseball, Nascar and the 2018 and 2022 men’s World Cup. Internationally, his businesses have long profited from a roster of international sports-rich channels in Europe, Asia and Latin America.

To date, Fox Sports 1 has not given ESPN reason for great concern. Over the last 11 months, Fox Sports 1 has averaged 88,000 male viewers 18 to 49 years old in prime time, and 122,000 people of both sexes 18 to 49 years old in prime time, compared with ESPN’s 762,000 and 1,070,000, respectively, according to Brad Adgate, director of research for Horizon Media.

Those ratings translate into affiliate revenue, or the fees cable and satellite companies pay to the entertainment companies to distribute the networks. The average affiliate revenue per monthly subscriber is $6.04 for ESPN, nearly 10 times the fees of Fox Sports 1, according to SNL Kagan. (Time Warner’s TNT generates $1.48 per monthly subscriber, and TBS makes $0.72.)

The expense of taking on the Time Warner rights fees for M.L.B., March Madness and the N.B.A. would delay profitability for Fox Sports 1, which could be somewhat offset by higher affiliate fees, said David Bank, an analyst with RBC Capital Markets.

But Mr. Murdoch has a history of playing the long game when he takes on the establishment. In 1986, he started the Fox Broadcasting Company, which soon became a formidable competitor to the big three broadcasters. A decade later, he started Fox News Channel, rivaling CNN and ultimately attracting more regular viewers than other cable news networks.

Executives at 21st Century Fox have said they expect big losses for Fox Sports 1 for some time.

“Chasing ESPN is a nice aspirational goal, but it’s going to take a generation to get there,” said Michael Nathanson, an analyst with MoffettNathanson.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Murdoch Challenges ESPN With Bid to Purchase Time Warner. Order Reprints | Today’s Paper | Subscribe

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