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#30 OTT-Technology in Sports (Part I): “Buy or Make” - Decision for Legacy Media

In this first part of "OTT-Technology in Sports," the origin of "Over-the-Top" delivery in sports and the emergence of a completely new, but fragmented industry, that is characterized by a lot of small and uniquely positioned players, will be covered. Also: How have legacy sports media companies tried to adapt to the new media world? For many of them, it came down to either scoop up one of these small innovative technology companies (e.g. Disney/ESPN, Turner Sports) and integrate the newly-acquired expertise into their own media conglomerates or to spend significant resources on in-house developments (e.g. NBC Sports Group, BBC). The digital-only competitors entering the sports broadcasting market, on the other hand, define technology as one of their core competency and usually bet on proprietary backend solutions from the beginning. In the grand scheme of things, it should be remembered that over-the-top delivery currently only provides complementary distribution, especially in the premium segment of global sports rights market. It also continues to struggle for mainstream adoption in less digital-savvy age groups as adoption significantly drops for sports fans aged 45 years and older. It is more about building viable OTT solutions for the time when the tipping point is reached at which OTT consumption will inevitably reach mainstream adoption. In the second part (Part II: Limitations, Risk of Independency & Conclusion), I tackled the risk for sports media service providers (e.g. OTT, sports and betting-related data) of remaining independent, the current limitations of over-the-top delivery as well as my conclusion: Why do not I expect legacy sports media to be replaced as the primary consumption platform for sports over at least the next 3-5 years?


The increasing number of sports-dedicated "Over-the-Top" platforms as well as the growing ambitions of technology firms in acquiring sports media rights has seemingly prompted PwC, one of the four leading professional services firms together with Deloitte, EY, and KPMG, to take a quite bullish stance on the transition from the linear consumption of live sports on television to digitally delivered short-form content on mobile devices in its recent "Sports Survey 2018." Even more surprisingly, the audit firm does not consider pure OTT platforms (e.g. DAZN, ElevenSports) as the leading consumption platforms for sports content going forward but the large technology firms who have became increasingly interested in sports media rights as a user acquisition vehicle and engagement driver: Without having a clear path to profitable refinancing of the acquisition costs for expensive rights in the sports market's premium segment (e.g. domestic rights of leading sports properties) due to several factors such as the strategic misfit (e.g. territory-based logic in media markets vs. global business model) and reliance on advertising revenue as singular revenue stream (e.g. no subscription-based paywall on Facebook or Twitter), PwC still expects Amazon, Facebook & Co. to play THE dominant role in the future's sports broadcasting market. (see Twitterpost)

Although I strongly disagree with that bullish stance and expect linear television plus broadcasters’ own OTT offerings as complementary distribution channels to be the primary consumption platform for at least the next five years, I rather want to focus on how these legacy companies have been adapting to this new media world in this first part, becoming highly innovative companies themselves.

(Note on implications of PwC's "Sports Survey 2018: As discussions over the burst of the "media rights bubble" continue, the biggest leagues and federations expand aggressively into international markets to overcome their seemingly saturated domestic market, and public backlash due to increased fragmentation of media rights and staggered match schedule increases, the expected shift from linear to digital consumption entails another risk: Limited ability to monetize short-form content compared to full-length live broadcasts. Any international growth, appreciation in value of highlight formats as well as establishing new revenue streams such as the integration of gambling, social media, or data-rich experiences could be outweighed by a downward-correction of rights fees for full-length live broadcasting rights. Regardless of whether new or old/legacy ultimately emerges triumphant.)

Emergence of "Over-the-Top": Origin of OTT-Streaming in Live Sports with

Although being already widely adopted by the mainstream consumer for on-demand video content, distributing live sports content as a standalone product directly to viewers over the Internet and, thereby, bypassing telecommunications, multichannel video programming distribution (MVPD), and broadcast television platforms that have traditionally acted as a controller or distributor of such content, is far less established. Purely sports-dedicated OTT offerings such as DAZN, Eleven Sports, Telekom Sport, and ESPN+ simply cannot match the brand awareness, trust factor, distribution, and accessibility from the consumer's point of view yet. Anecdotally, DAZN, probably the most interesting project since being coined "Netflix of Sports" upon its launch in Germany in 2016, had an aided brand awareness of merely 27% among football fans in Germany (14 - 59 year-olds) via Nielsen Sports (2017) - at a time during which it had already been holder of highlight rights to the country's premier football competition ("Die Bundesliga"). In the general entertainment space, however, stand-alone OTT offerings have been pioneered by Netflix / Amazon Prime / Hulu (Video) as well as Apple Music / Spotify (Music) and are already deeply entrenched in today's society: Having most recently reported 57.4m subscribers in the United States implies a (TV) household penetration of 45.5% (48.0%) for undisputed market leader Netflix.

The idea of bypassing traditional intermediaries and aiming at creating a direct relationship with the end consumers in sports is actually originated from a sports property ("original rights holder") itself: The Major League Baseball first streamed selected live games via Internet back in 2002, before launching for the following season. However, said innovation, which also entailed the foundation of MLB-owned BAMTech Media, was rather a desperate initiative to boost the reached audience as television viewership for "America's Pastime" continued to slide down. As other leagues, federations, and also legacy media players became aware of this complementary distribution medium to reach a more complete audience, BAMTech Media started to offer its market-leading capabilities not only to third-party customers (e.g. NHL.TV, WatchESPN, HBO Now, WWE Network, Eurosport Player), but also sparked the creation of a whole new industry of OTT back-end providers offering white-label solutions: Akamai Technologies, PhenixP2P, Ustream (acquired by IBM for $150m in 2016, rebranded as IBM Video Cloud), NeuLion, Brightcove (all U.S.-based), Sportradar AG, OverTier, and Deltatre (all European-based) are just a few examples for players in this still relatively immature, fragmented industry of OTT streaming and hosting providers. These companies have made developing technology stacks for the biggest streaming challenge their core business: live-streaming of sports or other events in real-time. Nonetheless, slightly different USPs in their market positioning based on my subjective observations can be identified: individualization of consumer experience (e.g. NeuLion), flexibility to host the broadest range of different sports (e.g. Sportradar), and minimizing latency (e.g. PhenixP2P, Akamai Technologies) are some sought-after attributes.


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"Auswirkungen der Digitalisierung auf den Sportrechtemarkt in Deutschland"

Wertschöpfungskette des „Sports Broadcasting Market“ im Mediensektor

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Given the live nature of sports consumptions, there is only a limited possibility of pre-loading video data packages in contrast to on-demand content (so-called "buffering"). By implication, many sports fans associate problems such as latency (72%), buffering (64%), delays (42%), lackluster video quality (32%) as well as disruptions (30%) with today's OTT live sports experience via YouGov (2017).

Although improvements are made from year to year, there is an inevitable trade-off between quality/reliability and latency: There is still a 30-to-40-seconds delay at the minimum, compared to a two-to-seven-seconds delay for the linear TV broadcast depending on the underlying technology (i.e. satellite vs. cable). Becoming of particular importance with the legalization of gambling in the United States, I was especially intrigued to have recently read the following headline: "The BBC Says It Has The Answer To Minimizing Live Sports Streaming Delays," via Forbes (2018). Just to be disappointed once I read beyond the attention-grabbing opener. (see Twitterpost)

Generally speaking, achieving a delay of below two seconds, an objective which has been publicly communicated by companies such as PhenixP2P and Akamai Technologies, would virtually erase any implications for the sports gambling industry. Other parties of the sports media industry, which were also affected by any latency for live sports broadcasting, already adjusted to the implications of the increasing importance of the digital distribution: As of January 2018, Nielsen US increased its threshold for measuring "Live Audience" (vs. "Delayed Consumption") from 25 seconds to 270 seconds to account for the technology's current limitations and any implications for the broadcast's potential to be monetized against the advertising industry. Joe Brown (Senior VP Research @ NBC Sports Group) summarized the rights holders' problem before the change succinctly: „Every week that goes by is lost revenue for every broadcaster who guarantees on a live rating.” via SBJ/SBD (2017). However, there are no obvious solutions for the sports gambling industry to do the same, having to hope on continuing improvements over the next years.

"Make or Buy" - Decision for ESPN, NBC, Turner Sports & Co.

From legacy media's point of view: With tech firms (e.g. Amazon, Facebook) as well as purely sports-dedicated OTT offerings (e.g. DAZN, Eleven Sports) having entered the their home turf recently, it would have been plainly irresponsible on their part to not at least building solutions that can adapt to those newly emerging media consumption habits once the tipping point is reached at which OTT consumption will have entered mainstream adoption. Those new entrants into the sports media market have often developed proprietary streaming and hosting technologies and position themselves rather as technology than media companies. Amazon's in-house development of AWS Elemental Media (incl. "Live" / "Package" / "Store" / "Cloud") for streaming live sports is an example. After delivering market-leading capabilities for internal demand (e.g. NFL Thursday Night Football since September 2017), it started also to license its technology stake to external customers and now powers OTT - platforms for fubo.TV, Pac-12 Network, and other D2C initiatives in the sports landscape. DAZN, which obviously thinks that the global sports industry is ripe for disruption and wants to lead the change, has just announced the opening of a new development center in Amsterdam emphasizing technology as their core competency in the future. Thereby, the London-based disruptor joins a growing cluster of technology companies already based in Netherland's capital such as Netflix, Uber, Amazon, and Viacom.

For legacy sports media companies or original rights holders seeking direct-to-consumer relationships, the question has quickly become whether to build up in-house expertise organically or to acquire the much-needed technological intelligence externally. Original rights holders (think: sports leagues, federations, and organizations) often opted for taking advantage of third-party backend service providers for obvious reasons as explained by BAMTech - customer George Barrios (Chief Strategy & Financial Officer @ WWE): „We looked at what it would take to build in-house, and compared that to what BAM could deliver. In the end, it made a lot more sense to let them bring their technology expertise to bear, and focus on what we do best, which is creating great content and connecting with wrestling fans,“ via The Verge (2017). The results have been D2C-offerings from many North American sports leagues such as the NFL International Game Pass (powered by Deltatre), NBA League Pass (powered by Turner Sport's iStreamPlanet), and NHL.TV (powered by BAMTech Media) to complement the coverage on linear television in both domestic and, maybe more important, international markets. For several reasons, but probably the lower inventory of games per season and by consequence more comprehensive coverage through third-party rights holders being the most important one, similar OTT offerings for self-exploitation of media rights have not been launched by Europe's top football competitions yet. Individual clubs, however, have made increasing use of the numerous white-label solutions to start venturing into the D2C business: Juventus TV (powered by Deltatre) and BVB TV (powered by Sportradar) are two recently launched OTT platforms in this regard. Live broadcasts of season games, however, should not be expected to appear on such team-owned platforms any time soon. Instead, the content focuses on training film, interviews, and behind-the-scenes footage. (see Twitterpost)

On the other end of the media value chain, sports media companies, also being aware of the increased importance of the new distribution technology and potential to differentiate its offering in the future, have either strategically bought external expertise (e.g. Turner Sports, The Walt Disney Company) or put enormous resources into internal developments (e.g. NBC's "Playmaker", BBC's "iPlayer"). With increased interest by big media companies, the fragmented industry inevitably started to consolidate: Thereby, streaming and hosting companies often face the decision between (1) cashing out given the increased attention by resourceful legacy players willing to spend big-time to catch-up to the new competition (i.e. strategic investment) and minimize their dependence on third-party service providers or (2) remaining independent and offering its services to a wide range companies in a growing industry. Selling to a financial investor outside of the sports media value chain offered a combination of both options, although with different intentions by the company's original shareholders at times (see: Deltatre vs. Sportradar AG). In addition, market leaders in this immature streaming service industry started to scoop up smaller companies to complement their own services and capabilities: New York - based Encompass Digital Media buying Babcock's Media Services in August 2018 is an example for independent sports media service provider trying to secure their long-term viability while staying independent, at least for now.

Selected Transactions - Multiples for OTT Back-end Providers in Live Sports (2016 - 2018)

Even if a company wanted to stay independent, some executives (i.e. managing shareholders) wanted to take advantages of financial investors that continued to see even more upside-potential in the valuation of sports media service companies going forward. Deltatre's co-founder and CEO Giampiero Rinaudo told Sportcal's Callum Murray in a recent interview: "At a certain point in this business, you sell. But the reason we selected Bruin [Sports Capital] is that they didn’t want the classical three-year or five-year cycle. They [Bruin] do not have a specific timeline to sell [despite being considered a financial investor]. Of course, they’re there to make money, but they don’t have a short-term view. That’s important for us," via Sportcal (2018). Such a situation in which a financial investor wants to cash-out on its investments due to its mostly pre-determined investment time horizon (+/- 3-5 years in private equity) has been recently observed with Sportradar AG as private-equity firm EQT sold its 35% stake in the Swiss-based company to a consortium consisting of CPPIB (Canada Pension Plan Investment Board) and Silicon Valley - based investor Technology Crossover Ventures (TCV) at an enterprise value of €2.1bn (+/- $2.4bn) in July 2018. Since Sportradar AG caught the interest of other purely financially motivated investors and CEO Carsten Koerl even increased its stake in the company above 50% during the transaction, it is safe to say that they see much more upside for the presumed market leader specifically and the overall industry in general. The paid EV/sales - multiple (>7.0x) says a lot about the imagined future of Sportradar AG. Thereby, CEO Carsten Koerl revealed during the "SPOBIS Gaming & Media 2018" that he specifically looked for a financial investor to be able to offer the company's services to the broadest set of potential customers as an independent sports media service provider as possible.

Transaction-based EV/Sales – Multiples for OTT Back-end Providers

The question with being independent will be whether there will be enough business up for grabs when technology firms have naturally their own proprietary technologies as core competency and legacy media companies continue to decrease their reliance on third-party sports media service providers by acquiring majorities in OTT service providers? The most high-profile and expensive strategic acquisition of external streaming and hosting capabilities by a legacy sports media company has been the deal for BAMTech Media by The Walt Disney Company, ultimately assuming majority ownership (75%) at an enterprise value of the MLB-owned subsidiary of +/- $3.75bn (>12.0x sales) in August 2017. The most recent transaction alone ($1.575bn) provided an enormous financial windfall for each of the 30 MLB franchises of reportedly at least $50m upon the deal's closing. For comparison: That cash inflow approximated the annual payment from MLB's central fund that clubs receive from the league each year representing a share of national revenue such as broadcast rights, licensing and sponsorships. On the other end of the transaction, the integration of the newly acquired expertise into the Burbank-based media conglomerate has been rocky: After not delivering on building a premium content app dedicated to live-stream "League of Legends," probably the world’s most popular video game, the first major media rights deal in esports (+/- $350m over 7 years) was ultimately dissolved as the costly-acquired exclusivity to tournaments such as "European / North American League of Legends Championship Series 2017" and "League of Legends World Championship 2017" could not have been exploited due to those development problems. Instead, these competitions had to be live-streamed on competitors' platforms (e.g. YouTube, Twitch) for free. It should be noted, however, that the deal with the game's publisher Riot Games was already agreed-upon under MLB's majority ownership in December 2016 and the main investment rationale for Disney was clearly to acquire the technological backbone for their own D2C services with the recently-launched ESPN+ and so-called "Disneyflix," which is set to be launched in early 2019. With original rights holders and traditional sports broadcasters, two players in the sports broadcasting market with an increased interest in either making use of third-party streaming and hosting capabilities or straight out acquiring such expertise have already been discussed.

Intermediaries as another Player in Sports Media Market with Interest in OTT Services

However, there is another party which recently contributed to the ongoing consolidation of the OTT space: sports agencies. These intermediaries, who have traditionally specialized in brokering media rights, face not only increased margin pressure on their core business as rights acquisition costs have skyrocketed but also the increased risk of being cut out of the industry's value chain entirely. In order to maintain greater control over the own product's development and presentation, even European-based original rights holders have found an increased interest in a direct relationship with broadcasters to which they sell their rights - putting the long-term viability of the agency model at risk. In North American, by contrast, such direct relations have been the preferred method of collaboration for years, especially in the premium segment of the sports rights market.

Sports Broadcasting Market - Intermediaries & Disintermediaton

In order to avoid any disintermediation, Endeavor-owned IMG has been a pioneer in expanding beyond its core business of buying and selling media rights through equity investments in sports leagues and organizations: European Golf Design (joint venture in 1992), EuroLeague Basketball (joint venture in 2015), and UFC (majority acquisition in 2016) are examples for properties that are at least partially owned by IMG. Then, in March 2018, the global sports agency announced the acquisition of the New York - based digital video technology company NeuLion Inc. for $250m (>2.6x sales). Given the current market trends, streaming capabilities had become an attractive complementary business for IMG for several reasons: On the one hand, it will allow the company to distribute and monetize content from its own sports properties via own D2C offerings. On the other hand, it provides a hedge against a lackluster demand for acquired media rights in its traditional business of brokering media rights deals between original rights holders and media companies. Since the acquisition of NeuLion, IMG launched subscription-based OTT platforms to provide live coverage of every game from the Italian Serie A, to which it purchased global media rights (excl. Italy) for €340m per season through 2021: The so-called "Serie A Pass" is available in 21 territories in South America ($59.99 for Season Pass) as well as in selected European markets including the Netherlands and Scandinavian countries (€49.99 for Season Pass). In terms of pricing, the "Serie A Pass" is closer to the OTT offerings of original rights holders (think: NBA, NFL, MLB) as compared to third-party rights holders (think: ESPN+, DAZN, B/R Live). (see Twitterpost)

As the OTT space starts to mature and, by implication, continues to consolidate, the industry will be characterized by acquired and self-developed in-house solutions of media companies on the one side and independent service providers on the other side. In the second part, which will be up next week, the blog will tackle the risk of these sports media service providers to remain on the side of being independent, the current limitations of over-the-top delivery as well as my conclusion: Why do I expect legacy sports media to remain the primary consumption platform for at least the next 3-5 years?


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