#40 Streaming as Problem for Leagues and Fans: Rights Plateau and Ever-Increasing Fragmentation
The emergence of "Over-the-Top" has resulted in the empowerment of the consumer. At the same time, it has revitalized a declining music industry eroded by digital piracy into an industry that is growing revenues again. It has created billion-dollar companies such as Netflix in the video space, resulting in a straight-out streaming war including Amazon's Prime Video, Disney+, Apple TV+, NBC's Peacock, HBO Max or European competitors such as BritBox (in the U.K.), Joyn (in Germany), and My Canal (in France).
The inherent nature of live sports programming, however, has offered limited incentives for an accelerated adoption of OTT distribution (on the supply side) and consumption (on the demand side) in the sports broadcasting market: Pure-play sports streaming services such as DAZN, FloSports, and Stadium are left with second-tier and long-tail sports that struggle to cross over into the mainstream. Network-owned OTT services such ESPN+, NBC Sports Gold Pass, B/R Live, or Fox Soccer Match Pass, on the other hand, merely serve as overflow channels for less-attractive content given the limited shelf space in the linear broadcasting system. After all, most of the marquee live sports programming remains on linear (pay) television — both for economic (e.g. holding on to declining but profitable business models) and technical (e.g. lack of reliability/quality) reasons.
However, OTT streaming will not only impact how rights holders distribute and monetize live sports, but will also present fundamental challenges for rights owners (e.g. sports leagues and organizations) and consumers going forward:
⏺ CAN OTT LIVE UP TO THE HYPE?
The fundamental differences between general entertainment and live sports programming.
⏺ CHALLENGES FOR DIGITAL-FIRST, PURE-SPORTS OTT SERVICES:
Digital distribution might be the future but it's not the present just yet -- problems with discovery, consumer adaption, and churn.
⏺ CORD-CUTTING AS A THREAT FOR ORIGINAL RIGHTS HOLDERS, NOT ONLY TRADITIONAL PAY-TV:
Decreased monetizability of live sports programming will be passed on to rights owners, just on a slightly delayed basis.
⏺ RE-EVALUATION OF SPORTS BROADCASTING RIGHTS IN AN OTT-DOMINATED WORLD:
Live sports programming will be increasingly valued on an a-la-carte basis, instead of as a strategic subscription driver for ballooned bundles.
⏺ OWNED & OPERATED OTT SERVICES AS ALTERNATIVE TO THIRD-PARTY RIGHTS BUYERS:
A much more drastic decline from current rights fee levels needed to make it a viable option for sports leagues and organizations.
⏺ CONSUMER EMPOWERMENT MAKES SPORTS FANS A WINNER,
but they are still lost and face increasing wallet share tensions in the fragmented media entertainment space.
Moving on from "Walled Gardens", focusing on first-tier rights, and embracing a multi-platform world as reactions from legacy media companies to a new reality.
CAN OTT LIVE UP TO THE HYPE? The fundamental differences between general entertainment and live sports programming.
In just a few years, the world of media entertainment has been transformed by online platforms. Driven by the likes of Netflix and Spotify, over-the-top (OTT) services have made media content accessible on-demand, transportable, personal, and available at someone’s fingertips at any moment. For content providers, entering this new multi-platform world is key to securing a new generation of fans. The sports industry is no exception: Whereas the digitization has revitalized the declining music industry eroded by digital piracy into an industry that is growing revenues again (growing Y-o-Y plus 18% in H1/2019 with music streaming accounting for 80% of total industry revenue) and provided an unprecedented value proposition of choice, access, and affordability for consumers, the impact on video content has been much more nuanced and the disruption is ongoing without a steady-stade outcome anywhere in sight. As I outlined in a previous post (#39 Auswirkungen von OTT auf Distribution und Preisniveau im Sport), different genres of video streaming content have seen a varying level of adaption by consumers when it comes to OTT. In general, differentiating between entertainment-focused on-demand consumption (Streaming Video-On-Demand, SVOD) and sports-centric live consumption (Streaming Video Linear, SLIN) seems to reflect the current state of OTT in digital video streaming appropriately.
Netflix and Prime Video, who combined account for almost 80% of the SVOD subscriptions in the EU, have been offering a similarly attractive value proposition for streaming video-on-demand (SVOD) content for the last few years as the likes of Spotify and Apple Music have done for music streaming content. However, that lasted only as long as the content providers did not care about the streaming rights to their blockbuster movies and series. With legacy media players starting to understand the value of direct-to-consumer relationships and verticalization of distribution and monetization strategies, the number Netflix competitors of SVOD services in both Europe (e.g. „BritBox“ in United Kingdom, „Joyn“ in Germany, „My Canal“ in France) and North America („HBO Max" by WarnerMedia, „Disney+" by The Walt Disney Company, „Peacock" by Comcast's NBC Universal, „CBS All Access" by Viacom-CBS) will only increase going forward. In order to position their stand-alone SVOD service in the marketplace, effectively everyone (except for market-leader Netflix) including YouTube (MLB, MLS), Prime Video (NFL, English Premier League, ATP, US Open, AVP), and Facebook (MLB, UEFA Champions League, Copa Libertadores, WSL) has started to ventured into live sports programming to find new unique selling points -- which seems to be both the rare asset that these technology giants cannot replicate in-house and is still consumed live. It is probably the last remaining „appointment television“ that is capable of drawing millions of viewers at one particular point in time in front of the TV, laptop, or mobile device.
However, it is not more than tipping their toes in live sports programming by said technology giants at this point and their current willingness to experiment as part of their overall „pivot to video“ - strategy could certainly end with the conclusion that their resources are spent better elsewhere and completely leave the sports broadcasting arena in a few years down the road. Ultimately, their current financial investment in sports broadcasting rights is non-material — both in the grand scheme of the 50-billion-dollar sports media rights market and the technology giants’ respective financial bottom line. (Link: Twitterpost ⤵️)
Even worse for original rights owners in the short term: The interest by „Big Tech“ has not become the desired (and much-needed) catalysts to further drive rights fees upwards and instead even served as a deflationary force as sports leagues and organizations have been willing to sacrifice short-term revenues to partner with new-media companies for broader access and visibility among the sought-after younger demographics or to merely start establishing a business relationship with the rights buyers of the future as early as possible — hoping that the big payday will come further down the road. As a matter of fact, globally-operating platforms do not even deal with cash as their primary currency when they talk to sports leagues and organizations. Instead, purely advertising-based digital platforms like Twitter or Facebook trade their reach and distribution among sought-after audiences in exchange for the right to broadcast, or rather simulcast, live sports programming. Some rights owners have been more willing to experiment with this new distribution and monetization model (e.g. NBA, LaLiga) than others (e.g. Premier League, NFL). However, even streaming services that benefit from a dual revenue stream of advertising and subscription revenue, most notably Amazon, are able to pull-off highly discounted deals with rights owners given the rights owners’ desire to get into business with and learnings from new-media companies. (Link: Twitterpost ⤵️)
In any case, the conventional wisdom that digital platforms will eventually step forward and replace the linear broadcasters as the buyers of elite sports content has not been proven just yet. Thus, „Big Tech“ will not drive any media rights revenues for sports properties in the near-term. But even if that should eventually be the case that live sports will primarily be consumed via Amazon, Facebook & Co., early indications are that it will rather have a deflationary impact on rights fees. This opens up the question whether we have reached „Peak Media Rights“ — or at least a seller’s market after a decade-plus-long run of ever-increasing rights fees? For a long time now, the latest deal has always been the most lucrative one and rights owners could not wait to bring their in-demand intellectual property back on the market to lock-in the next revenue bump. Now, there seems to be a rush by some rights owners (e.g. PGA Tour in the U.S., UEFA Champions League in Germany and France) to start their media tenders prematurely, several years ahead of the expiration of current deals. Based on past logic, that would not be the revenue-maximizing move to make. (Link: Twitterpost ⤵️)
Although the reasons for the cooled-down interest from previous or new bidders are complex and often related to market-specific conditions across the globe, three major factors can be identified that supported inflated price levels in the past but are no longer sustainable: (I) the erosion of traditional pay-TV model, (II) new catalysts did not live up to the promise of pushing rights fees to the next level (i.e. tepid interest by digital media giants), or (III) owned and operated services do not represent a viable alternative to the current way of distributing and monetizing sports broadcasting rights through third-party rights holders.
When it comes to the tepid interest of the digital media giants, or at least the limited willingness to spend big-time on sports broadcasting rights, the fact is that „Big-Tech“ continues to tip their toes into live sports, but as long as Amazon, Facebook & Co. rather experiment in this space instead of going all-in, their involvement will not drive rights fees in favour of rights owners. Live sports programming is the rare asset that technology giants cannot replicate in-house and, in order to advance their ambitions in the video space, their vast financial resources are probably better spent on original programming that can be exploited on a global basis, has a much longer shelf life, and for which vertical integration is much more valuable when it comes to distribution. In contrast, the market for live sports programming is highly fragmented on a territory-by-territory basis and any content does not provide added value to the streaming services’ back-end catalogue — particularly important for subscriber retention. Acquiring the occasional live sports event to boost subscriber acquisition, especially if such opportunity is available at a deep discount (e.g. Amazon: NFL Thursday Night Football, 20x Match Days of English Premier League), will continue to be part of their video strategy but will not have a material impact on media rights revenues of first-tier sports rights owners. The production, and any investment that come with that, of so-called „original“ series, documentaries, or movies means owning the rights. Acquiring live sports programming for one rights cycle, instead, means renting rights. The difference between the distribution instead of ownership play is fundamental and particularly important for globally-operating digital services.
Therefore, it is also possible that „Big-Tech“ concludes in a few years that live sports is nothing which would both materially and positively contribute to their core businesses and decides to leave the sports broadcasting arena entirely. A final note on this point: Looking at the impact of the digitization across other media formats (e.g. music, books, SVOD content), digitization has rather served as a deflationary than inflationary force on price levels. The same might be in play for live sports programming —which makes the initial assumption that Amazon, Facebook & Co. will increase rights levels upwards dubious in the first place.
The following analysis will focus on the challenges of digital-first, pure-sports OTT services that are supposed to replace the traditional pay-TV model and how rights owners can adapt to a changing media landscape, including making their product as attractive and monetizable as possible for third party rights holders as well as the future prospects of own direct-to-consumer streaming services.
CHALLENGES FOR DIGITAL-FIRST, PURE-SPORTS OTT SERVICES: Digital distribution might be the future but it's not the present just yet: problems with discovery, consumer adaption, and churn.
The emergence of OTT, in other words, streaming TV untethered to a cable or satellite subscription, has resulted in a lot of challenges for broadcasters. Although the market entry barriers for new challengers to the market incumbents in the sports broadcasting market have been drastically lowered in the digital space, these pure-sports streaming services that are currently popping up left and right face a broad set of challenges on their way to any sustainable profitability. These challenges are not unique to pure-play sports streamers, but such players are much more susceptible to them compared to the traditional pay-TV model and even the SVOD-dominated digital video entertainment space — including discoverability, digital adoption, and churn.
Discovery: Original content production in the entertainment space is an expensive and potentially never-ending approach but the potential pay-off is a hit show that puts a streaming platform on the map for one moment to the next (e.g. Netflix: House of Cards). Live sports programming is not the same: Sports that attract mainstream audiences cannot be created, but can only be acquired expensively and for a limited period of time — and remains out of reach for new upstarts more often than not anyways (e.g. insufficient financial resources, limited track record / credibility as sports broadcaster). That primarily leaves broadcasting rights to second-tier to long-tail sports for digital-first/only market players at this point. It is content which did not make it into the linear distribution system in the past but can find a home in the digital space thanks to unlimited shelf space and drastically lowered production and distribution costs.
However, beyond the limited number of die-hard fans of such niche sports, who would tune in regardless of where their favorite sports or team is shown, it is almost impossible to meaningfully expand the audience for a sports (and thus subscriber base to the streaming services) when the live content exclusively lives on a video-only streaming service without a built-in or pre-existing user base which could be „randomly“ exposed to such content. In essence, this scenario stands in stark contrast to traditional linear free-to-air television and could evolve into a vicious cycle: Live sports programming available on OTT services cannot ignite a mainstream interest that grows subscriptions while distributing live content behind the paywall greatly restricts access and exposure which limits the potential to expand fans bases.
Digital Adaption: Compounding the issue of limited mainstream content available on OTT platforms that would boost adoption of digital-only services, which remains an enormous challenge among older demographics (think: Generation X & Baby Boomers, i.e. older than 40 years) even with premium content exclusively available on said services, is the fact that sports leagues actually thrive on distribution:
Despite the traditional linear pay-TV model eroding, its economics of subscription and advertising revenues combined with a still far larger distribution compared to sports streaming services put even the most well-funded OTT players at a major disadvantage. At this point, being a digital-only rights holder means that they punt on a large portion of their total addressable market (i.e. older demographics) and are effectively almost forced to focus their efforts on targeting hardcore single sports fans of smaller properties. To refinance first-tier sports rights, however, the mainstream sports fan and casual viewer across all demographics must be successfully addressed and monetized. Digital adoption rates will naturally but slowly improve over time simply based on the demographic change, but OTT services would need first-tier broadcasting rights to forcefully accelerate mainstream adoption. Until then, the total addressable market (TAM) for OTT remains much smaller compared to the TAM of market incumbents who have both their legacy linear distribution (including its built-in customer base) and also start to venture into the digital space to serve new generations their most relevant consumption medium — while having to consider the potential cannibalization effect on the highly-profitable traditional customer base. Persistent reservations towards digital distribution in the context of live sports programming, even among the most digital-savvy audience and especially in case of being the exclusive distribution platform, due to the lack of technical reliability (e.g. streaming issues, buffering) and performance (e.g. streaming quality, latency) certainly does not help to penetrate or ideally expand the defined target market for digital-only players. External factors that streaming services cannot influence such as the lagging broadband infrastructure in more rural areas compound the problem and remain a differentiator for satellite TV, and its ability to evenly cover and reach population across urban and rural areas, in particular. As a result, over-the-top distribution remains a minuscule factor in overall live sports viewership. (Link: Twitterpost ⤵️)
Churn: New consumer-centric companies always start with focusing on customer acquisition, but shift to mitigating churn and increasing retention as they saturate their target market — which in the case of pure-sports streaming services consists of digital-affine sports fans and/or vivid hardcore fans. Especially younger demographics (think: Generation Y & Z, i.e. younger than 40 years) are considered to be increasingly elusive, demanding, fickle, and cheap at the same time, which makes challenge of customer retention even tougher. Combined with the hyper-aggressive acquisition tactics to secure their portion of the consumer’s limited resources (i.e. mind and wallet share), customer lifetime values are not even close to the monetization of customers through the linear pay-TV model. Instead of lock-ins into year-long contracts with pay-TV providers, digital (video) subscription services are characterized by low commitment (e.g. free trials, monthly cancellation) and aggressive pricing models that usually range from $5 (e.g. Eleven Sports in U.K., ESPN+ in the U.S.), over $10 (e.g. B/R Live in the U.S., DAZN in Italy/Spain), up to $20 (e.g. Magenta Sport in Germany, DAZN in the U.S.) per month.
Such monetization models lead inherently to high churn rates. Sports-centric OTT services, in particular, have to cope with that phenomenon due to the fact that live sports programming is an effective vehicle for new user acquisition, something that certainly has made selected sports live programming appealing to technology giants such as Amazon, but less effective in keeping subscribers engaged and entertained over time, for which Amazon has a tremendous amount of on-demand content in its back-catalogue — in addition to its core e-commerce business.
During a period of time that is already coined „Cancel Culture,“ cancelling the subscription being only one-klick away, and password sharing being ubiquitous, lifecycle marketing and management become paramount for pure-sports OTTs compared to the traditional cable/satellite pay-TV business with years-long contractual lock-in. But even compared to other online platforms with a more balance of revenue mix (e.g. Amazon), who do not necessarily need to squeeze out the last penny from customers through subscription fees, pure-play sports OTT video-only services will be inherently challenged going forward.
With „Big-Tech“ and „Pure-Sports OTT Services“ already covered, the following will focus on how the changing media landscape has started to impact rights owners (i.e. sports leagues and organizations) as media rights fees seem to have peaked.
More specifically, the focus will be on first-tier rights owners, currently commanding billions in total media rights fees on an annual basis. Long-tail sports, for its part, have unquestionably benefited from the opportunities facilitated by the digital era. Nonetheless, distribution and monetization strategies of various niche rights owners differ greatly and reflect their respective short-term priorities:
immediate monetization facilitated by verticalized direct-to-consumer products targeted at the limited number of but willing-to-pay vivid hardcore fans (e.g. NBC Gold Passes) or
providing access to and exposure for their competitions facilitated by direct-to-consumer products targeted at the broadest audience possible in order to grow the interest and monetize a larger audience in the future (e.g. The FA Player, covering the Women’s Super League, England’s top female football league).
One of the biggest trends resulting from the emergence of OTT distribution has been the industry-wide trend of „cord-cutting“ (or the phenomenon of „cord-nevers“), the practice of cancelling (or forgoing from the beginning) a cost-expensive pay television subscription in favor of an alternative low-cost internet-based TV channel subscription service. Up to this point, this development has been considered consumer-friendly (think: no subscription of undesired channels, high flexibility) and detrimental to the traditional pay-TV industry (think: loss in subscription revenues for rights holders such as ESPN, Sky PLC, and Telèfonica). Original rights owners such as leagues, sports organizations, or individual clubs, instead, seem to have now the opportunity to leverage an unprecedented array of new distribution and monetization channels. Upon closer investigation, however, the impact of OTT, often praised as democratization of sports media distribution and access, is far less favourable for original rights owners: Disrupting the traditional pay-TV model of „walled gardens“ will negatively impact them and their ability to monetize their audiovisual media rights: Traditional bidders will simply be less willing to make the enormous financial commitments to which rights owners got accustomed to in the past. As the profitability of the traditional pay-TV model erodes, without equally-profitable monetization models catered to the new digital reality being fully developed, it becomes suddenly more reasonable why rights owners want to put their broadcasting rights back on the market for the next rights cycle as soon as possible. The question that many sports leagues and organizations are currently pondering is how the unprecedented growth in media rights revenues can be sustained for the next round of bidding — except for the strategy of getting back on the market as soon as possible?
CORD-CUTTING AS A THREAT FOR ORIGINAL RIGHTS HOLDERS, NOT ONLY TRADITIONAL PAY-TV: Decreased monetizability of live sports programming will be passed on to rights owners, just on a slightly delayed basis.
The secular trend of declining pay-TV subscriptions has been much more advanced in the United States compared to Europe. For example, it has resulted in ESPN’s subscriber count for its linear flagship channel plummeting by +/- 14% from its peak in 2011 (> 100m U.S. households) to c. 86m subscribers at the end of 2018. Using carriage fees released by media, communications and entertainment research firm SNL Kagan (2017) as a reference, these 14.0M subscribers to the „Worldwide Leader in Sports“ would equate to +/- $1.32BN in lost subscription revenue in 2017.
Lost annual subscription revenue for ESPN (2011 - 2017):
Affiliate Fee ($7,86/Month) x 12 Months x 14.0M = $1.32BN
Such revenue loss does not even account for lower advertising revenue (c. 60:40 split of subscription:advertising revenue) as a result of lower TV ratings, an almost inevitable consequence of the decline in subscribers, and lower subscription numbers of ESPN’s secondary and overflow channels such as ESPN 2 ($0.98), ESPN News ($0,29), ESPN Deportes ($0.26), or the SEC Network ($0.74) which also command meaningful affiliate fees. Although these channels of the ESPN-family have slightly (ESPN2) to far lower (SEC Network) subscriber numbers and their respective affiliate fees, in particular, pale in comparison to the linear flagship channel ESPN, by far the most expensive channel in the US pay-TV universe, accounting for their negative impact would add hundreds of millions to the $1.32BN in annual lost subscription revenue by ESPN only due to cord-cutting. Unfortunately, the start to 2019 has not been more bullish for ESPN’s traditional pay-TV business as the decline in subscribers even re-accelerated again through the first three quarters. (Link: Twitterpost ⤵️)
The challenge for the European pay-TV market, which is actually a growing pay-TV market in terms of number of subscribers, is that penetration rates are growing from a much smaller base and average monthly revenues per subscriber are still far from current figures in the United States and nowhere close to the historic peaks around 2010: pay-TV penetration (+/- 88% of TV households) and average monthly pay-TV bill (+/- $106 per subscriber). Further, a comparatively strong live sports coverage in the free-TV landscape further holds back the adoption of pay-TV in Europe. Its highly-lucrative pay-TV model has been one of the main drivers for rights fees for live sports programming having exploded in the United States over the past decade. However, with its accelerating erosion driven by cord-cutting, digital piracy, and changing consumption habits, the question will be how rights fees will be impacted going forward?
On the positive side, however, average monthly carriage fees (or affiliate fees), the revenue that content providers such as ESPN receive from TV platforms (i.e. virtual and traditional multichannel video platform distributors) have steadily increased since 2010, slightly compensating for the decline in numbers of subscribers.
Nonetheless, even accounting for increased affiliate fees and other product innovations such as ESPN+, the company’s stand-alone pure-sports OTT service for $4,99 per month, the profitability of traditional broadcasters has plummeted in recent years and has become a business with razor-thin margins as rights fees skyrocketed over the past decade and subscriber bases started to diminish or became heavily discounted (think: lower avg. revenues per subscriber due to desperately excessive customer acquisition and retention programs).
* ESPN+ is said to currently have about 2.4M subscribers: Assuming that there are no discounted memberships, with which ESPN and other OTT streaming services — in stark contrast to other digital subscription services such as The Athletic or traditional pay-TV operators — have been relatively restrained beyond the usual 7-Day Free Trial to overcome the initial scepticism towards digital-only alternatives, and all customers stick around for an entire 12-month period, annual subscription revenue for ESPN+ would amount to a mere $120M at the moment. Given the ability to effectively subscribe, cancel, and (re-)subscribe to OTT streaming services on a monthly basis within seconds as well as ubiquitous password sharing, the second assumption, in particular, raises the question if the ARPU for ESPN+ subscribers comes anywhere close to $60 per year (= 12 months * $4.99). In essence, it is not only about accruing customers (e.g. via marquee boxing events in case of ESPN+) but engaging them constantly and consequently retaining them in order to maximize ARPUs and, ultimately customer lifetime values. The recently announced discounted bundle of Disney+ (regular monthly price: $6.99), Hulu ($5.99), and ESPN+ ($4.99) will put additional pressure on ARPUs for ESPN’s streaming service and should be kept in mind whenever ESPN+ subscription numbers will be reported in the future. [ ↩️]
Unlike its counterpart in the European pay-TV market, the pay-TV business in the United States has historically been a pretty profitable undertaking: Therefore, a decline in rights fees for live sports programming is not a foregone conclusion simply because (existing) profit margins are shrinking. Instead, the question will be how far traditional rights holders are willing to cut into these margins. However, profit margins will not only be pressured by lower subscriber numbers but also the decrease in average revenue per user since even traditional pay-TV content providers have started to embrace skinny bundles and virtual MVPD services such as Sling TV, YouTube TV or PlayStation Vue to remain relevant among cord-cutters. These digital alternatives are not only far from being anywhere close to compensating for the decline in traditional pay-TV subscribers but it would be interesting to see whether content providers can sustain their ballooned affiliate fees in the new media landscape — making each digital subscriber potentially much less lucrative than a customer with a traditional pay-TV subscription.
Bottom-line, the current pay-TV model simply generates much less overall revenue, which is then available for (live) content acquisitions. One final catalysts for the secular decline in traditional pay-TV subscribers, that is particularly prevalent in the United States where — despite the recent consolidation movement — content creation (of pay-TV channels such as ESPN, Fox Sports, TNT) and distribution (via TV platforms such as AT&T, Verizon, Dish) has traditionally been separated, is that TV platforms on which content creators have been relying greatly for maximizing their respective distribution seemingly lack incentives for holding on to want-away customers. The reasons are based on simple economics since operating a cable or satellite television business is one of the least profitable business units for telecommunication service companies. Instead of putting additional pressure on margins by steeply discounting their cable or satellite TV offers in order to retain customers (and continuing to pay the pre-defined affiliate fees), letting such want-away pay-TV customers go while retaining them as broadband-only customers has become as go-to strategy for telecommunication service companies — and has to be considered the main driver for the recent prolonged disputes with content creators over carriage fees. (Link: Twitterpost ⤵️)
As a result, keeping subscribers as broadband-only customers and acting as „super-aggregator“ of third-party OTT services in an increasingly fragmented supply side of the media landscape (powered by their very own broadband services) is an attractive proposition for telecommunication firms in times of the eroding traditional pay-TV bundle. Companies such as AT&T, Comcast (both U.S.), BT (United Kingdom), and Deutsche Telekom (Germany) have the opportunity to regroup the multitude of OTT services into a single interface. Such an approach does not only benefit these companies but can solve the consumer’s problem of lack of orientation and guidance. The increased pressure on the consumer’s wallets is less likely to be solved though: Stand-alone OTT services are great deals on their own but the inherent fragmentation puts a lot of pressure on consumer’s budgets. (Link: Twitterpost ⤵️)
The combination of consumers no longer willing to pay monthly pay-TV bills of over $100, television distributors lacking incentives to hold on to such consumers to the bitter end, and digital alternatives far from compensating for the loss of traditional pay-TV subscribers, both in terms of total numbers of subscribers as well as (probably) also in terms of affiliate fees per subscriber, will only accelerate the trend of cord-cutting. But when will this downward trend, currently sitting at +/- 85M (including digital alternatives such as YouTubeTV, Sling TV, and Hulu Live) for the flagship-channel at ESPN for example, hit rock-bottom: 70M, 60M, or 50M? A reasonable assumption would be the number of households with at least one die-hard fan for whom there will not be a real or more cost-efficient alternative to a pay-TV bundle within the foreseeable future. Looking at TV viewerships across the major sports in the U.S., even 50M subscribers of traditional pay-TV seems suddenly pretty high.
Something which will probably come together with this decrease will be a shift of the subscriber base over to the digital ecosystem and so-called „skinny bundles“ and some experts even suggest that telecommunication firms will completely punt on acting as distributors of traditional pay-TV channels via satellite or cable technology (i.e. MVPDs) at some point, solely focusing on their broadband services — being the pipeline for virtual MVPDs. (Link: Twitterpost ⤵️)
On the positive side, it is also fact that the genre of live sports programming, in addition to news programming, is probably the main reason why — in a culture dominated by on-demand consumption — linear broadcasts is still relevant, is the only thing driving subscriptions, and is essentially holding the traditional pay-TV bundle together — at least to a certain degree. In fact, linear broadcast and cable television remains the only medium delivering live mass audiences for the advertising industry. While the decline in overall linear TV viewership accelerates and many advertisers decided to build their advertising around engagement and digital platforms which deliver not just eyeballs but contextualised eyeballs, live sports programming, which seems to be the most-resistant television genre, remains almost the only option for maximum-reach image and branding campaigns. Thus, the advertising industry continues to spend big on live sports programming on linear television. As a result, it becomes more expensive to address the same number of viewers: For example, CPMs for both broadcast/free-to-air ($36.19; +125% since 2010) and cable- and satellite-TV/pay-TV ($19.45; +123% since 2010) have skyrocketed since the start of the decade, according to eMarketer (2019). Effectively, linear broadcasters are charging advertisers more for fewer customers as linear TV viewership becomes an increasingly scarce resource overall. Luckily for rights owners, viewership around live sports programming remains most resilient.
For reference, spending on linear TV advertising in the United States has declined from $63BN (2010) to $59BN (2019), or +/- 6%, since 2010, according to research firm Magna Global (2019). Over the same period, viewership has decreased by +/- 20% among the U.S. population, according to former Head of Strategy at Amazon Matthew Ball (2019).
The higher degree of vertical integration in Europe, where telecommunication firms such as BT/Sky PLC (in the United Kingdom) or Telefonica/Orange (in Spain) often act as content creators (i.e. rights holders of live sports programming) as well, should actually protect the European traditional pay-TV market against a secular decline in the foreseeable future as there is no inherent conflict of interest between content creators and distributors.
RE-EVALUATION OF SPORTS BROADCASTING RIGHTS IN AN OTT-DOMINATED WORLD: Live sports programming will be increasingly valued on a-la-carte basis, instead of as a strategic subscription driver for ballooned bundles.
Regardless of how the business of traditional pay-TV will evolve over the next decade (a time frame during which I do not consider the prediction made by the aforementioned TMT analyst Rich Greenfield and YouTube TV’s very likely), any decreased monetizability of live sports programming as a result will inevitably impact the top-line of original rights holders — at the latest once their media rights are back on the market and bids are due for the next rights cycle. What traditional broadcasters such as ESPN, beIN SPORTS, and Canal+ will pay for the rights is mostly based on what they can earn from their sports channels that carries such content. If their distribution and/or carriage fee decline, rights fees must follow (in the mid-term).
The challenge with the proliferation of OTT services and increasingly replacing the previously ubiquitous (ballooned) pay-TV model: Whereas the evaluation of sports rights by broadcasters was based on a multitude of factors to which a monetary value was attributed to (bundled telecommunication services, strategic premium, branding effect), future evaluation will increasingly be made simply based on the number of subscribers that such content is able to draw to those a-la-carte channels. No other considerations.
As a result, I expect rights fees start to plateau or even go down. At least, the guaranteed portion of rights fees will go down and be replaced by variable components that are tied to the rights holder’s success, measured based on subscription numbers or TV ratings. (Link: Twitterpost ⤵️)
Looking at further levers that original rights holders can pull to mitigate any negative impact on rights fees by making their content more mometizable for bidders, the list of options becomes shorter and more exhausted:
Carve-outs during on-going media rights cycles (e.g. MLB’s whip-around live highlight show awarded to DAZN for +/- $100M per season through thec2021 season) or the more aggressive slicing and dicing of rights packages during the tender process for the next cycle (e.g. smaller, less exclusive and monetizable rights packages) will reach a point at which existing rights holders will push back (in case of additional carve-outs) or potential bidders leave the bidding process (in case of slicing and dicing of rights packages).
A lot of leagues and organizations have increasingly opted for maximizing exclusivity for pay-TV operators to the detriment of any free-to-air distribution in order to maximize revenues. In a world in which subscription-based broadcasters tend to be able to pay the big bucks, thanks to the aforementioned dual-revenue model, many original rights holders have failed with the challenge of striking the right balance between short-term revenue maximizations and exposure — whose benefits will only be visible further down the road.
Interested in the in & outs of the entire value of the sports broadcasting market?
An in-depth look into the economics, underlying mechanics, and relevant players can be found in my book:
"Auswirkungen der Digitalisierung auf den Sportrechtemarkt in Deutschland"
"Auswirkungen der Digitalisierung auf den Sportrechtemarkt in Deutschland"
The German Bundesliga, in process of selling its media rights in the United States for the next rights period starting with the 2020/21 season, currently provides an example of choosing shot-term revenues over the prospects of long-term growth of its brand: Reportedly moving from FOX **, which has provided full-distribution through linear free-to-air (via FOX Broadcast), and pay-TV (FS1/FS2) as well as digital (Fox Soccer Match Pass) distribution for the German top-flight competition since the 2015/16 season, to ESPN’s pure sports streaming service ESPN+ is a good example for this problem of lack of discovery and exposure for a sports property trying to grow its brand in a given, under-penetrated market.
** I am told that there will be an announcement on a new multi-year media rights partnership in the United States as early as next Monday (September 30, 2019). [ ↩️]
ESPN+ will effectively acquire a fixed number of die-hard Bundesliga fans in the U.S. who are highly likely to sign up for the $4.99-per-month OTT service. Given that ESPN+ has really tried to establish itself as the „Home of Soccer in the United States“ ever since its launch in April 2018, it is safe to assume that some of said acquired audience might already be an ESPN+ subscriber given their seeming affinity for the sports of soccer. As a result, net subscriber growth is hard to estimate. On the other hand, rights owners such as the Bundesliga should still want to be on most platforms in order to reach the most number of people. Digital platforms can offer a lot of things that a linear television screen cannot do (e.g. interactivity, targeted advertising in brand-safe environment), but reach is still incredibly valuable — especially for sports that are still at the beginning of any growth in a particular market. From ESPN’s perspective, acquiring second-tier rights with a vivid and passionate fan base is almost the best they can currently do to boost subscribers for its digital streaming services — especially if ESPN does not grant any windowing of selected top matches on their linear airways since having access to a match day’s 1-3x top games of any given sports league would greatly reduce the incentive for consumers to sign up for ESPN+. The challenge for ESPN+, however, is that first-tier rights owners will never allow a digital-only distribution any time soon. Any streaming service would need to dramatically overpay compared to other bids by a wide margin for rights owners to even consider this option. However, that is what seemingly happened with ESPN acquiring UFC’s broadcasting rights plus distribution rights for the organization’s PPVs for the $4.99-per-month streaming service as part of a five-year, $1.5BN pact running through April 2023. In an era where audiences are fragmenting at an accelerated rate, live content requires a free path to every potential viewer in order to maximize its enormous value potential — and the linear broadcast system will be a required part of any distribution and monetization strategy for a long time to fully activate the value of live sports. This means also that ESPN will obviously (but willingly) take a financial loss on its investment in the UFC since digital-only streaming. When it comes to the Bundesliga, it will probably be handsomely paid for being on digital-only airways for the next few years. (Link: Twitterpost ⤵️)
Based on first reports, the German Bundesliga will indeed not have any windowing of its content across ESPN’s linear pay-TV channels — something that the Italian Serie A was able to negotiate while moving from beIN SPORTS to ESPN before the 2019/20 season and, therefore, enjoys the occasional broadcast on ESPN News or even ESPN 2. ESPN will probably pay a premium for leaving any Bundesliga games exclusively behind the paywall, since exclusivity for live sports programming is what will drive adoption of and subscriptions to digital-only streaming services for the foreseeable future. (I shared my thoughts on the challenges for sports streaming services compared to other SVOD services such as Netflix and Prime Video recently with JohnWallStreet: ESPN+ May Have Best Programming, But Too Early to Pronounce as Sports Streaming Leader.)
With media rights revenue probably maximized, a potential issue going forward for the German Bundesliga could be whether interests between the rights holder in the world’s biggest sports media market (ESPN: maximizing subscriptions for ESPN+) and the rights owner (Bundesliga: growing overall fan interest and relevance) are aligned for the duration of their broadcasting partnership? It is hard to imagine that any incremental casual sports or even soccer fan will sign up for ESPN+ just because the streaming service added the German top-flight competition to its line-up considering that, although people are willing to stack OTT services, they are only willing to spend around $38 in total, the equivalent of 3-4x OTT subscriptions (= „service-stacking“) out of more than a dozen options, on streaming services per month, according to research company Magid (2019).
The German Bundesliga will simply not have the casual viewing like on linear platforms. Instead, viewers would have to proactively seek out the digital service to consume the German top-flight competition, something only already existing die-hard fans will do.
I looked at the inherent conflict between maximizing reach and revenue for sports properties a few months ago when I took a deep-dive into the obvious lack of success of the German Bundesliga in the United States despite a seemingly promising setting for the last five season with Fox Sports:
This situation will change greatly with moving to ESPN+, but maybe ESPN as a more committed broadcaster partner compared to Fox Sports will be able to somewhat compensate for the far lower reach and exposure provided on ESPN+. (Looking at the graphic above, digital-only streaming services would need to be added as a fifth tier when it comes to distribution and quantifying the potential viewership, far below „Premium Pay-TV“.) At this point, ESPN+ remains a niche 2.3M to 2.4M subscriber digital-only platform.
OWNED & OPERATED OTT SERVICES AS ALTERNATIVE TO THIRD-PARTY RIGHTS BUYERS: A much more drastic decline from current rights fee levels needed to make it a viable option for sports leagues and organizations.
As traditional media has topped out and its business model is under siege from piracy and the digital platforms (e.g. ever-greater share of advertising revenues) declining rights fees from here becomes a more than plausible scenario. If that is true, there will come a point when direct-to-consumer streaming services actually become a viable option for rights owners to do their own thing, cutting out the middlemen and going directly to the consumers. Currently, there is still a lot of economic risk, but it will decrease significantly once old and new media broadcasters are not willing to guarantee the rights fees from the past: If rights owners are selling „business-to-business,“ they do their rights deals with broadcasters, and they know what revenue will come in at which points in time, which provides much-needed security for sports league and organizations (e.g. for budgeting/paying player salaries, and day-to-day operations ). If rights owners are doing „business-to-consumer,“ they have no idea how media rights revenues are going to evolve. It is all based on projections and there is a significant element of risk. Nonetheless, it is safe to say that even for first-tier original rights holders, exploiting their audiovisual content exclusively through an owned and operated OTT service would go together with a big drop in revenues for many years. There is simply no viable alternative to selling to third-party rights buyers, especially at current levels of rights fees. In fact, broadcasters do not only provide minimum guarantees and, therefore, security but also assume several other vital roles that sports leagues are simply not ready to assume just yet, including expertise in production, marketing, technology, administration including customer management and so on.
The best case by cutting out third-party broadcasters at this point in time would be a drop in short-term revenues for a potentially lucrative long-term future. One possible solution: Getting an investor (e.g. traditional broadcaster) on board that compensates for the decline in short-term rights value and assume aforementioned functions that are simply not the core competencies of most sports leagues at this moment in time. The Barcelona-based sports agency and broadcaster MediaPro Group is one of the traditional middlemen who seems to explore such opportunities: After signing a 10-year deal for all media rights with Canadian Soccer Business (CSB) including the launch of the OTT streaming service „OneSoccer,“ it is currently proposing a league-operated channel for the domestic market to the Italian Serie A including a minimum guarantee of €1.3BN per season plus sharing any additional revenue beyond that — while taking care of things like game production. Thus, the decision for rights owners about entering the OTT market is not a binary option. They can dip their toes in the water, but ridiculous statements such as by former Crystal Palace owner Simon Jordan back in February 2019 regarding the English Premier League potentially going direct-to-consumer with an owned and operated OTT services should simply be ignored: “If you had 100m subscribers on Premier League TV, like with Netflix, at £8 per month, you’d bring in £10bn per year, not £8.7bn [globally] every three years [as the 2015-19 broadcast rights deals did].”. Such statements completely ignore the specific nature of live sports and that it even took Netflix about ten years, a product that appealed to a much broader target audience, and had the potential for localization in every single market. (Link: Twitterpost ⤵️)
In the short-term, which includes both the current as well as at least the next rights cycle, leagues and sports organizations will continue to rely on third-party media companies and such statements mainly serve as a threat for broadcasters to drive up rights fees. During that time period, the rights owners’ main responsibility is going to be to provide a product (e.g. competitive balance, match scheduling) and a framework for rights exploitation (e.g. not restricting innovation in distribution/monetization strategies by rights holders) that ensure profitable operations by its broadcasting partners in an ever-changing media landscape. Even five years down the road and plateauing or even decreasing rights fees getting closer to what leagues think they could generate on their own by going direct-to-consumer, leagues that currently make billions in annual broadcasting revenue would need to get creative to overcome the inevitable short-term dip in revenues when going direct-to-comsumer: One option would be to get an outside investor on board who cuts a deal with the league and clubs to stem any short-term bleeding to finance day-to-day operations in general and player salaries in particular.
That does not mean that there is no place for an owned and operated OTT services by leagues at this point in time. At the minimum, having the technical capabilities to establish some kind of direct-to-consumer OTT option in their armoury makes their threats of cutting out the middlemen somewhat more credible. Further, markets in which rights holders have struggled to secure value and / or comprehensive media coverage from traditional broadcasters or new OTT players (so-called „dark markets“), could become test runs for what might come in the future. Recently launched services by LaLiga (LaLiga4Sports.TV) or DFL (Bundesliga Pass) are good examples for that. Compared to these first-tier rights owners, lower-tier original rights holders who simply do not generate meaningful media rights revenues, especially outside of their domestic markets, have already right now much more opportunities to experiment with going direct-to-consumer since every newly-created reach and/or monetization is of purely incremental (instead of cannibalizing) nature to the status quo: The Polish Ekstraklasa is the latest example.*** (Link: Twitterpost ⤵️)
First-tier sports properties that have such an amount of inventory of games per season that simply not every game can be covered by their respective rights holders (e.g. NBA: 1,230x regular-season games; MLB: 2,430x regular-season games either due to limited shelf space in the linear distribution system or diminishing returns on producing and broadcasting every single game via an OTT solution, have much opportunities to go direct-to-consumer. Especially in International markets, US-based leagues such as the NBA; „International NBA League Pass“) and the NFL („NFL Game Pass International“ launched in 2008) have been true pioneers when it comes to providing incremental coverage and access to their product through owned and operated digital services with unprecedented options for fans in terms content, packaging, and pricing — truly super-serving the most passionate fans. [ ↩️]
However, until we are going to see live content of first-tier rights properties on an exclusive basis and in their most important markets on these owned and operated distribution and monetization vehicles, there is still a long way to go. Instead, the purpose in the immediate future for such own streaming services will center around building a technologically viable product and providing (incremental) distribution, exposure, and potentially monetization for second-tier and niche competitions (e.g. youth, women, lower-tier competitions). Still, international niche markets in which media rights remain unsold and there is no revenue to be cannibalized are also predestined for such league-operated OTT services. In markets in which the vast majority of a competition’s game inventory is covered live and in full by third-party rights holders, which is mainly true for first-tier rights holders, they would essentially disrupt their main (albeit declining) source of revenue. (Link: Twitterpost ⤵️)
CONSUMER EMPOWERMENT MAKES SPORTS FANS A WINNER, but they are still lost and face increasing wallet share tensions in fragmented media entertainment space.
In a nutshell, the consumer has been empowered in the new media age: Streaming services such as Netflix have set new standards for streaming quality and, as a result, sky-high expectations by sports fans as well. The challenge, however, is that streaming live sports events is fundamentally different and infinitely more challenging from a technical perspective as the live nature does not allow to pre-load / buffer the stream without increasing latency — which is at least as crucial aspect as the quality and reliability of the broadcast. Thus, linear television has still very significant advantages (e.g. latency, reliability, quality, verified viewerships measurement) when it comes to live (sports) content, especially when the content is viewed by a million or more people concurrently.
Today’s consumers are not going to tolerate any kind of buffering, the stream must never pause to load, and a seamless experience has to be ensured. In essence, that alone justifies the linear broadcast’s existence for foreseeable future as streaming technology will simply not be ready to carry the load of large-scale live sports events. This also implies that the seemingly endless possibilities within the environment of digital streaming such as interactivity, additional information, and overlaid stats will remain features for a niche segment of the overall audience. Reliability, instead, will remain top-of-mind for digital-only rights holders, especially when holding such broadcasting rights exclusively. The inherent problem: Only exclusivity of (large-scale) live sports events will force consumers to adopt digital streaming services (at large scale).
CONCLUSION: Moving on from "Walled Gardens", focusing on first-tier rights, and embracing a multi-platform world as reactions from legacy media companies.
Legacy media companies have tried to hold onto “walled gardens” and their traditional business models that center around bundled services for a long time. However, even they have started to offer alternatives with a better product-market-fit given today's media environment: Sky UK (NOW TV), Sky Deutschland (Sky Ticket), Movistar (Movistar+ Lite) started all to adopt. Nonetheless, holdouts who try to hold on to the traditional, highly-integrated pay-TV model that ties any access to their most valuable content to a traditional cable or satellite TV subscription remain as well, including ESPN or BT Sport.
On the positive side for these companies, there has not been any digital-only player yet that truly has the bandwidth to handle anywhere near the audience that linear television regularly distributes on broadcast or cable/satellite TV. Up to this point, the most ambitious exclusive streaming has pertained to monetizing comparatively niche fanbases (e.g. ESPN+) and digital distribution will continue to serve as a complement in an mostly additive nature that captures incremental (but less monetizable) audiences.
Another reaction of legacy media companies to the market entry by new digital players into the sports broadcasting arena has been a prioritization of first-tier broadcasting rights as OTTs bid up prices for second-tier on long-tail rights: a premium strategy by traditional broadcasters that resulted in a cut in overall spending, particularly on non-marquee sports rights. Although these premium broadcasting rights are most-suited to hold the traditional pay-TV bundle together, a shift of distribution strategies (by moving beyond the exclusivity of content on linear pay-TV) that fits the usage patterns of younger audiences in order to maximise audience growth — or at least audience retention — is still without alternatives.
The fundamental issue has been the fact that the traditional subscription-based pay-TV model has peaked several years ago and started to decline ever since: being eroded by piracy and digital alternatives, especially popular in the under-35 demographic: Not only the sports rights market has become increasingly fragmented, but so has the audience too. In addition, live sports with its extremely broad target market, ranging across all ages, demographics, social classes, and political views already attracted a diverse audience from the beginning. However, that is both a blessing and a curse at the same time as its target group is split across numerous different platforms and has diverse preferences when it comes to content formats. Inevitably, rights holders will be tasked to diversify their distribution and content strategy in order to properly cater to the entire target audience — which is vital to have any chance on successfully recouping the current levels of upfront financial investments in first-tier sports rights. Rights holders need to meet the audience where it is and be always available at the consumer’s fingertips: „Anywhere, Anytime, Any (Best Available) Device.“ After years of premium live sports content being ringfenced and moved behind the paywall in order to drive subscription revenues, the so-called „syphoning effect,“ I would also consider an increased free-to-air coverage as a fundamental pillar of any combination of platforms going forward: either through a limited windowing in the FTA system as a marketing tool to ensure mainstream visibility, interest, and relevancy or even as primary distribution system in markets where the scale of the potential audience scale tops rights fees. A single-platform approach, though, will not work, neither today nor in the future. (Link: Twitterpost ⤵️)
Ultimately, the problem for rights owners is that decreased revenues of rights holders will be passed on to them — only on a somewhat delayed basis.
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