After having covered the origin of "Over-the-Top" delivery in sports, the emergence of a completely new, but fragmented industry, as well as its ongoing consolidation as legacy sports media and agencies try to equip themselves with the needed streaming and hosting capabilities to survive the digital disruption, this second part of "OTT-Technology in Sports" explores the risk of sports media service providers (e.g. OTT, data) to remain 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 sports content for at least the next 3-5 years? ... That opinion stands in stark contrast to a recent much-approved study by PwC as well as several of the most powerful people in the sports broadcasting market of the future. Before you start reading, please check "Part I: Buy-or-Make Decision for Legacy Media" first to hit the ground running.
Independent OTT Backend - Providers: Reliance on the Emergence of Niche Sports?
Whereas investors in iStreamPlanet (13.33x Return on Capital Raised) or Ustream (1.25x) decided to exit their investments at both highly exceptional as well as less impressive returns, other investors obviously believe in further upside potential for valuations in the industry for sports media and data service providers: Carsten Koerl, CEO & majority shareholder of Sportradar AG, in particular, seemingly believes in the future of his business, increasing his stake in the Swiss-based company as its previous co-investor private equity firm EQT reached the end of its fund's investment horizon and sold its 35% stake after approximately six years - after being already rolled over into new fund - to a consortium of CPPIB and TCV in a transaction valuing Sportradar AG at €2.1bn (+/- $2.4bn) in July 2018. Avoiding a tie-up with a sports media company (e.g. ESPN) or agency (e.g. IMG), a conscious decision by CEO Koerl, enables the company to provide its services to the broadest set of potential customers. Same is true for competitor Deltatre, whose co-founders sold 75% of the Italian-based company to sports-focused but independent financial investor Bruin Sports Capital. Streaming and hosting providers selling to parties that are integral parts of the value chain of the sports media markets, instead, largely become proprietary solutions controlled by the acquirer with a strongly limited set of external customers. At first glance, remaining independent as a B2B - service provider seems to be a quite attractive option as the interest of original rights holders (e.g. individual teams), media companies (e.g. beIN SPORTS), and intermediaries (e.g. sports agencies) in direct-to-consumer solutions is only expected to increase. Especially for original rights holders that are considered to be rather niche or second-tier or lack a comprehensive media coverage through traditional broadcasters have benefitted from the digitization and emergence of OTT technology as it has greatly decreased the barriers and costs to produce and distribute live video coverage of their competitions: Sports federations with niche status in most markets including the European Handball Federation (Sportradar - powered ehfTV), Women’s Tennis Association (Perform-powered WTA TV), International Basketball Federation (Perform - powered FIBA TV), English Football League (NeuLion - powered iFollow), and International Swimming Federation (Deltatre - powered FINAtv) just to name a few examples.
Another customer group for independent third-party service providers has consisted of larger sports leagues trying to expand beyond their domestic markets in order to reach a global audience, but more importantly to sustain their impressive revenue growth of the recent past. Among a rights holder's traditional revenue streams of gate receipts, sponsorships, and other commercial revenues, skyrocketing media rights fees in their respective home markets, in particular, have driven that astonishing growth and several sports organizations now look to international markets to overcome the increasing reliance, potential saturation, or even downward correction in domestic media rights markets (see: #23 Convergence of domestic TV Revenue in European Soccer [German]): Internationalization efforts of leading sports leagues and organizations to reach fans in underserved markets while also establishing a more direct relationship with a fragmented global audience are now often powered by stand-alone OTT offerings.
The National Football League (OverTier / Deltatre - powered NFL International League Pass) and World Wrestling Entertainment (BAMTech - powered WWE Network) are probably the biggest rights holders that rely on external service providers to support their direct-to-consumer OTT efforts in international markets. However, I would expect that, with the increasing importance of international markets, such initiatives will either be taken in-house by the original rights holder or assumed by the domestic media partner with appropriate streaming and hosting capabilities (see: NBA International Game Pass powered by Turner Sport's iStreamPlanet). Alternatively, local media companies in foreign markets start to provide more comprehensive coverage given their is an increase in popularity for the respective competition. Thereby, the external rights buyer would certainly demand exclusivity in exchange for increased rights fees, making an additional league-owned OTT offering both redundant and not tolerated by the local rights holder.
Such scenario would leave only aforementioned smaller sports federations, who are struggling for any attention and awareness to begin with, as well as ambitious but small-scale D2C offerings by individual teams (see: Borussia Dortmund with Sportradar - powered BVB.TV, Juventus Turin with Deltatre - powered Juventus TV) as clients. These rights holders often lack financial resources to pay any fees for the provided OTT white-label infrastructure at all and respective collaborations with technology providers are usually based on revenue (read: risk) sharing agreements of any advertising, subscription, or sponsorship sales for these new ventures.
In addition to traditional media companies, other parties along the value chain of the sports media industry like the aforementioned individual teams but also agencies (e.g. IMG) start to venture beyond their core businesses by acquiring, trading, or distributing rights. Most sports media service providers, however, remain highly specialized businesses and deliberately avoid any competition with their potential clients. Nonetheless, there are exemptions such as the Barcelona-based sports production and technology company MediaPro-Group, becoming primary rights holder of the French Ligue 1 starting in 2020, or the (now dissolved) record-breaking exclusive streaming deal between service provider BAMTech Media and the publisher of League of Legends (i.e. Riot Games), being initially worth +/- $350m over seven years (2017-23). Seemingly aware of their precarious position in the industry's value chain, these companies tried to diversify their revenue streams beyond their traditional activities. Instead, other independent but endangered players like Sportradar or Deltatre have deliberately been avoiding competing with its own clients so far.
To summarize, the ongoing digital disruption has greatly lowered the barriers for original rights holders to distribute their product in an audiovisual format and removed traditional broadcasters from being the gatekeeper to show events in a domestic or international market. However, the increased inventory of streamed live sports events falls largely under the category of "long-tail" content and consists of sports that would probably never have reached the needed television ratings that are required to become attractive for executives in the business of linear television. Any original rights holder that is able to attract a significant audience, either quantitatively (i.e. numbers of viewership) or quantitatively (i.e. young, digital-savvy audience), will be scooped up by traditional or new media companies in the future. The implication for independent technology service providers: These sports leagues, federations, or organizations leave the field of potential customers as distribution will be increasingly provided by proprietary in-house solutions of rights-buying entities, potentially leaving only the lower-end, less financially-attractive long-tail content for Sportradar, Deltatre & Co. in the long-term.
Technology and Legacy Media Companies with Proprietary Solutions
However, based on recent statements by executives from "Big Tech" firms, companies like Facebook themselves are not sure whether they will enter the upper-tier of the sports media rights market at large-scale anytime soon and which role such initiatives would play in the grand scheme of their operations as "Big Tech" continues to experiment: It would probably make an enormous difference for the future price level of sports rights whether Amazon, Facebook & Co. consider first-tier sports media rights as a mere cost leader for user acquisition and engagement driver or as profitable business activities on a stand-alone basis like legacy media companies are forced to do. The latter option would certainly provide are much more even playing field between old and new media. (see Twitterpost)
Their interest in long-tail sports content (think: World Surfing League on Facebook, AVP Beachvolleyball on Amazon), however, should continue and, as a result, significantly reduce the field of potential clients for independent technology providers as streaming and hosting capabilities can be fully provided through in-house solutions by the rights-holding entity.
Therefore, even if technology companies would enter not only the lower-tier but premium segment of sports broadcasting market, it should be assumed that they would make it a priority to rely on proprietary solutions for a fully-fledged content streaming and hosting technology stack: Regardless of the less-demanding nature of on-demand content from a technological perspective, Netflix's success being largely attributed to its superiors algorithms and delivery as well as the exclusive access to first-party data (e.g. exact data points instead of extrapolations as in linear TV, users' start/exit points within broadcasts, identification of subscription-driving content, average minutes watched per broadcast) should provide a sufficiently great incentive for minimizing the proportion of third-party white-label solutions. Examples such as Sportradar-powered Telekom Sport (i.e. rights-buying entity) and Amazon-backed fubo.TV (i.e. virtual MVPD) should remain exemptions in the future as the development of proprietary solutions (e.g. BBC's iPlayer) or acquisitions of external technological expertise (e.g. Turner Sports' iStreamPlanet) should continue. (see Twitterpost)
A limited and probably shrinking market for independent sports media service providers is the result.
Identifying Growth Field without directly Competing with their Clients
Directly competing with its client in an environment of skyrocketing rights fees would be the most obvious option to ensure relevance, but Sportradar AG and, to a lesser extent, Deltatre have clearly positioned themselves as independent B2B service providers. Instead, they have explored alternative ways to hopefully remain a relevant player going forward despite not getting into the rights-buying business:
The former has made it a priority to bring minority investors on board who, even though they do not control media rights themselves (i.e. original rights holders, intermediaries, rights-buying media companies), have significant influence at certain points of the sports media value chain and technology industry: Sports franchise owners such as Mark Cuban (Dallas Mavericks) and Michael Jordan (Charlotte Hornets), who have invested alongside Ted Leonsis' venture capital firm Revolution Growth during a $44m funding round in October 2015, as well as renowned technology-focused, growth equity investor TCV (e.g. Netflix, LinkedIn, SeatGeek, Facebook, Airbnb) should not only generate positive press for Sportsradar, but secure the company's relevance in the sports media market's premium segment to some extent: Sportradar's deal flow should certainly benefit from those (rather informal) acquisition channels. The Canada Pension Plan Investment Board (CPPIB), being complementary investor alongside TCV in July 2018 should provide the necessary financial prowess for any future projects. A similar set-up can be said about Deltatre and its majority owner Bruins Sports Capital given its portfolio companies has an impressive client roster including the likes of ESPN, US Sports Leagues (NFL, MLS, NHL), Manchester City, Mercedes-Benz, Microsoft, and the NCAA. Aligning itself with strategic, albeit independent investors supports the notion that these B2B service providers are highly aware of a potential disintermediation. Another important lever to ensure long-term viability of independent sports media service providers is consolidating market share, expertise, and capabilities in this still fragmented industry: In fact, Sportradar's origin actually was in the segment of sports- and betting-related data instead of media (i.e. streaming and hosting video content). Only the acquisition of The Sportsman Media Group in 2016 jump-started the company's audiovisual content business. The Austrian-based acquisition target was originally founded as a sports rights agency but evolved over time beyond being a pure intermediary into a content streaming platform with its OTT - brand "LAOLA1.TV." The platform was most famous for holding exclusive rights to the Spanish La Liga in Germany, Austria, and Switzerland since 2009 - until being ultimately acquired by Sportradar and DAZN assuming the rights to the Spanish league during its roll-out in August 2016. Those developments provide evidence for an example of the industry leaders among the sports media service providers also serving as a driver for the market's ongoing consolidation. Smaller strategic acquisitions by Sportradar aimed at geographical expansion in Asia, South America, and the United States followed quickly over the last few years. Although several companies house both "Data" and "Media" segments nowadays due to multiple acquisitions, their B2B businesses (i.e. "Data") including graphics, website design, video production among other things provide solid revenues and profits but limited upside potential, having companies such as Perform Group and Sportradar AG more focused on the "Media" segment either through rights-buying B2C platforms (e.g. DAZN) or service-providing B2B operations (e.g. Sportradar-powered ehf.TV). For references, Sportradar's Patrick Mostboeck (Head of Business Development) revealed recently in a podcast that the burgeoning "Media" segment will outgrow the mature "Data" business soon, via Sports Maniac (2018). It can be assumed that there has been a similar set-up of "Cash-Cow" and "Growth Tiger" at London-based DAZN Group: The recent rumors about a potential sale of the group's wholesale B2B operations ("Perform Content"), however, could imply an even stronger need for short-term financing as the stable but limited cash flow of its legacy business could provide, obviously going all-in on the company's "Growth Tiger" (DAZN Group) with +/- £2.6bn spent on rights by the end of 2017 – of which +/- £542 million had reportedly already been provided by Blavatnik himself. (see Twitterpost)
As the "OTT/Media" business has seemingly unanimously been identified as the future growth field by sports media service providers, a similar consensus among the independent companies can be observed regarding the geographical focus going forward: North America. The fact that acquisitions and equity investments are strongly concentrated in and driven by the world's largest sports media market support this notion. The biggest difference among the sports media service providers has been that DAZN decided to directly compete with potential clients for premium sports media rights while offering its backend solutions to both original rights holders (e.g. WTA) and other rights-buying entities at the same time.
Start-Up Problems as Common Pattern for OTT Platforms
As outlined in "OTT - Technology in Sports: Part I," many sports fans, however, 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. Especially if digital-only players would be able to acquire first-tier sports rights on an exclusive basis, technological progress in the OTT space is absolutely necessary to accommodate the surge in demand compared to when the digital distribution is used as a complementary channel to the non-linear distribution as currently seen at legacy media companies, either via own platforms (e.g. WatchESPN) or virtual MVPDs (e.g. fubo.TV). Additionally, it has to be concluded that current estimates for the maximum number of concurrent live viewers via OTT platforms, pegged at +/- 20 million by industry executives such as NFL's Brian Rolapp (CEO @ NFL Network) or Fox Sports' Michael Mulhivill (EVP Research, League Operations & Strategy @ Fox Sports), is more of a theoretical mark for state-of-the-art technology under ideal conditions as significant problems already arise at much lower viewership numbers. For reference, NFL's national broadcast windows average +/- 14.8m viewers across linear and digital channels through the first six weeks of the current season with three out of 19 games exceeding the 20-million-mark, via Sports Media Watch (2018). (see Twitterpost)
The only exclusive rights package (+/- $25m) for one of the four major leagues in the United States has been held by Facebook, having streamed 25 afternoon-games during this year's regular season of the MLB. "America's Pastime," however, is a highly localized sports, especially during the regular season, and even national broadcasts on the rights holders' linear channels ESPN (+/- 1.2m), FOX (+/- 2.05m), and FS1 (+/- 448,000) in 2017 are usually nowhere close to any NFL game's viewership, via Sports Business Daily (2017). Against this background, the often-rumored exclusive rights package for a digital-only player like Amazon for the NFL's next rights period starting in 2021 (ESPN's Monday Night Football) or 2022 (CBS/FOX/NBC) seems highly unlikely. Sports media markets in Europe, however, rarely require the technological scale of the United States given its smaller size of potential viewership, as long as the media rights market continues to be shaped by the "market-by-market" - approach in the premium segment. Although global media rights are available in lower-tier sports, their target audience is unlikely to reach a critical size that would push the boundaries of current technological capabilities.
The reality, however, is that sports-dedicated OTT platforms usually already face major problems at much lower scale: A common pattern for initial reliability problems is the surge in customer demand shortly before the rights holder's first digital-only broadcast as there seemingly is no real test scenario to simulate this event: Highly-concentrated traffic, checkout/payment process, live broadcast. On the other hand, these start-up problems often seem to be one-off events as platforms such as DAZN have reliably been able to avoid its reoccurrence afterwards. Therefore, an potential solution in order to overcome the fragility of OTT technology would be providing the customers with incentives to sign-up earlier for their digital offering (e.g. "Early-Bird Specials"), essentially decoupling the registration process & payment gateway from the first live broadcasts and distributing the increased stress on the technological infrastructure over a longer period of time.
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Such an approach, however, would only tackle the problem of internal limitations. Digital distribution and the uber-important last-mile delivery , in particular, also depend on several external factors that are not under full control of the rights-holding entities when trying to provide a reliable streaming experience (e.g. bandwidth at customer's home, regulations regarding net neutrality) - essentially creating unique one-to-one relations with millions of subscribers. In order to serve as a viable option for original rights holders in markets with a scale such as the United States or in case of global media rights, the OTT technology has to continue to advance. Whereas rights-buying companies should have an inherent incentive to develop superior technology stacks, third-party service providers seemingly do not have many alternatives either as to focus its effort on the digital platform development and the challenge of reliably delivering live streaming content to millions of concurrent viewers at scale in real time: Other segments such as broadcast operations (e.g. virtual studios, graphics, data) and production technologies (e.g. AR & VR) seem to have hit some sort of plateau while still being very profitable markets. The reason that there are several service providers and rights-buying media company's in-house departments focusing on sports is that it would be a true differentiator for any competitor to provide a latency-free, high-quality and scalable live-stream solutions to millions of sports fans as streaming on-demand content has increasingly evolved into a commodity service. Up to this inflection point, probably the best use for original rights holders will be leveraging "Big Tech's" increased interest in premium live sports content to drive up prices for its traditional - at this point irreplaceable - media partners by publicly emphasizing the "interest," held "talks," and "attractiveness" of these digital-only players. (see Twitterpost)
Executives from other leagues including Bundesliga's Christian Seifert (CEO @ DFL) and La Liga's Javier Tebas (President @ La Liga) have recently played the same card to stir up competition for future media rights tenders.
Conclusion: Legacy Sports Media remain primary Consumption Platform
Given the enormous size of the U.S. sports media rights market (+/- $20.4bn in 2016; 42% of global market), both the media coverage as well as the aforementioned investments have focused on the battle of "OLD vs. NEW Media" in the United States. At the same time, Amazon, Facebook & Co. are facing particularly high entry barriers into this market as legacy media companies have locked up premium properties such as the NFL (8 years until 2021/22), NBA (9 years until 2025), MLB (8 years until 2021) for several years long before the platforms with digital-only distribution started to show interest in live-sports content about two years ago. (see Twitterpost)
In a nutshell, I do not see any exclusive rights packages for digital-only players starting in 2021 given the aforementioned technological limitations, narrow adoption by less digital-savvy age groups (> 45 years), and the established role of linear television as the leagues' broadcast producer, aggregator, and media multiplier. However, old media's exclusivity, for which they certainly are paying a premium at this point in time, should be questioned in the medium- to long-term. NFL's current approach with its "Thursday Night Football" - package could serve as a blueprint going forward in order to both reach a complete audience through various channels and facilitate the inclusion of new companies into the set of rights holders: FOX (+/- $600m per season; distribution via free-to-air channel), Amazon (+/- $35m per season; digital-only distribution), and NFL Network (distribution via pay-TV channel). Thereby, the linear package would, in general, certainly remain the most expensive rights in the short- to medium-term future given the lower penetration of digital distribution among today's mainstream audience. Nonetheless, in spite of the aforementioned technology-related issues, the reasons for original rights holders in North America to pursue such an more differentiated approach regarding its media rights are obvious: Reaching a more complete audience, generating positive PR/branding as innovation-leader, achieving more profitable monetization of their overall content inventory, and getting access to (first-party) data are just a few incentives for establishing relationships with digital-only players.
Despite the fact that legacy media companies are possibly going to lose digital rights in upcoming rights cycles, linear television will retain a relevant role in the future sports broadcasting market. This development also implies a re-organization of the media industry for audiovisual video around a "market for live" (i.e. sports and news) and "market for on-demand" - content. The latter will probably largely be delivered "Over-the-Top" by a bunch of SVOD - services (think: Netflix). FOX's recent push into live sports programming (e.g. WWE SmackDown, Premier Boxing Champions, NFL Thursday Night Football) [Read More] and focus on news coverage or Reed Hasting's (CEO @ Netflix) statements during last week's earnings call targeted at the TV industry support that hypothesis: "Give up, just focus on news and sports."
Over in Europe, however, digital-only players got the opportunity to tap into market for premium sports rights much earlier: First, the much smaller scale of territory-based European media markets does not pose similar challenges for the digital-only delivery on an exclusive basis compared to North America, making DAZN, Eleven Sports, and Amazon more viable contenders even for upper-tier rights that reach relatively large audiences. Second, the European media markets are governed by an approach that has been coined „Intervening Public Interest - Oriented Model” to promote competition. As a result, the maximum length of broadcasting deals approved by regulators for most premium properties is about four years and most soccer leagues usually tender their domestic media rights in three-year cycles, providing recent market entrants with a much earlier shot at sought-after media rights. As seen in the English Premier League in the UK (Amazon) and Champions League in Germany (DAZN), digital-only players have been able to compete effectively with the incumbent players for domestic rights of the biggest properties. By implication, I think there is going to be a lower degree of segmentation of rights across different distribution technologies and, in stark contrast to the North American market, awarding rights on a platform-neutral basis will remain the default scenario in case of premium properties in Europe going forward.
Having been able acquire premium rights in Europe has certainly be a milestone for the future role of digital-only players in the sports broadcasting markets, but does not suddenly eliminate major challenges towards a sustainable business model in addition to the aforementioned technological limitations: Disadvantages compared to established legacy players such as lack of production and editorial capabilities, trust by consumers, awareness, and penetration in older demographics should make it an even greater challenge to profitably refinance skyrocketing acquisition costs. (see Twitterpost)
Finally, I want to take a look at the long-tail content, most likely the main customer group for independent B2B service providers going forward: Although it might seem counter-intuitive on first glance, I do not see revolutionary developments coming anytime soon to the broadcast of premium properties but lower-tier sports:
Niche sports do not only provide a field to experiment with innovative technologies at much smaller scale, but will also depend more on integration of social media, gaming, fantasy games on top of the core product, and a generally enhanced experience through live interactions among each other and parties directly involved with the broadcasted competition to drive viewership as compared to widely-followed sports leagues. But even with niche sports, I do not see applications of AR or VR becoming an integral part of the live broadcast anytime soon as such technologies are rather used in pre- or post-programming as a way to explain tactics, but difficult to incorporate into the live broadcast experience. FanFoot, a soon-to-be-launched soccer-specific OTT streaming platform that just acquired global media rights to Brazil’s premier soccer competition ("Campeonato Brasileiro Série A") could maybe provide a first glimpse into the future broadcast of non-premium sports: global, technologically-enhanced, digital-only distribution. Premium sports properties, on the other hand, are going to be willing to adopt new technologies for a multiple of reasons (e.g. access to data, adoption to the fragmented audience), but the development will be rather evolutionary than revolutionary: territory-based, event-focused experience, non-exclusive across multiple distribution systems. However, I would disagree with PwC's assessment that tech firm's, purely sports-focused, and original rights holder's OTT offerings will supercede broadcaster's OTT and linear offerings anytime soon - at least for full-length live broadcasts of the market's premium segment. A final thought: Fragmentation as an underlying narrative in the current sports media market does not only apply to the industry's structure but also the content's distribution, which is driven by less exclusivity, D2C efforts by original rights holders, more rights-buying entities, and a more aggressive segmentation and, by implication, monetization by original rights holders. The emergence of projects such as Snack Media that aim at serving as an aggregator of this widespread video content, branding themselves as "one-stop-shop," was only a matter of time. The big question will be whether there will be bundled packages consisting of multiple content platforms (think: DAZN/ESPN+/Prime/Netflix) that is equally-expensive as the much-despised ballooned cable package of the past. At this point in time, we have not even considered the proliferation of non-/near-live content across several platforms (e.g. highlights, windowing, GIFs) further fragmenting the market for sports content of the future. But, ultimately, any developments seem to be rather evolutionary than revolutionary.
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