#42 OTT Trends in 2020: Implications of Moving from B2B to D2C Business in Live Sports Broadcasting
The number of available (sports) streaming services does not only continue to proliferate, but these over-the-top services remain also in full customer acquisition mode — vying to a large extent for the same set of consumers and their limited resources such as time and disposable income. One consequence of purely focusing on maximizing subscriber growth in the short-term, which has become the vanity metrics of choice when it comes to valuing streaming video or music services, is that subscription prices have reached an unsustainably low level. What's more, other revenue streams that could potentially slow down new sign-ups are either totally dropped or used very sparely to provide the best user experience possible. In order to make locked-up wallet share available for these new digital subscription services, though, consumers are cutting the cord and dropping out of the traditional cable/satellite pay-TV ecosystem. The challenge for rights holders, who continue to pay skyrocketing rights fees for the rights owners' IP: The level of monetization for acquired media rights in the OTT space comes not even close to the traditional pay-TV bundle yet as current ARPUs have been greatly depressed -- given the lack of exploited revenue streams.
In light of these observations, I tackled a few key trends in OTT streaming that could become relevant in 2020 and beyond as well as the implications for content providers to move from a B2B2C business (with pay-TV operators as middlemen) to vying for consumers in a D2C marketplace, including:
1️⃣ Re-Addition of Revenue Streams in the OTT Space
2️⃣ Fragmentation and Aggregation is of Cyclical Nature
3️⃣ "Streaming Wars" - A poorly-named Catch-All Phrase
4️⃣ Balancing Existing with Future Revenue Streams
5️⃣ Content Migration: Combination of OTT Streaming and Free-to-Air Television as the Future?
Underlying a lot of these trends is the expected migration of live sports programming from linear pay-TV to digital streaming services. In contrast to the siphoning of such content from linear free-to-air television behind the paywall of satellite and cable television starting in the 1980s (in North America) and 1990s (in Europe), I do not expect a full migration to a new ecosystem (i.e. subscription-based streaming services) this time around. Instead, what's old could be new again: free-to-air linear television (and streaming services) — which have been railroaded by satellite/cable subscription channels for more than a decade.
1️⃣ Re-Addition of Revenue Streams in the OTT Space
Right now, there seems to be only one metric based on which OTT streaming services are valued on: Regardless whether publicly-listed (see: Netflix) or privately-held (see: DAZN) pure-streamers, or the direct-to-consumer streaming services of legacy media companies (see: Disney's Disney+, ESPN's ESPN+, NBC's Peacock, WarnerMedia's HBO Max), the number and growth rate of subscribers is the only thing that matters at this moment — with total disregard for cash flow or profitability.
For example: In light of ESPN and DAZN announcing/leaking 3.5M and 8.0M active subscribers, projected quarterly operating losses of $850M for Disney's newly established Direct-to-Consumer Division, which houses Hulu, Disney+, and ESPN+ among other things, or DAZN losing more than €5M per month in Spain, probably the market in which the Blavatnik-led company has made the lowest financial commitment to rights acquisitions until today (± €100M per year), do not seem to matter at this stage of the "Streaming Wars." In other words, streamers are in full customer acquisition mode — which inevitably means a lot of (1) downward-pressure on monthly subscription fees towards an unsustainable level, (2) wildly-accepted password and credential sharing as well as (3) highest flexibility for customers with the cancel-button at the fingertips of subscribers, who were just costly acquired in a fiercely-competitive digital marketplace.
Customer acquisition strategies which initially focused on free-trials, which is still a comparatively cost-effective tool (on which I remain bullish given skyrocketing costs to acquire new customers for subscription models through digital advertising alone) by lowering the entry barrier for consumers to at least give a streaming service a try (i.e. exposure), have been gradually expanded by initiatives that further decreased ARPUs in favor of mitigating churn and subscriber growth. Depending on the composition of their respective content portfolio, monthly-cancellable pure-sports streamers can be particularly susceptible to churn and the phenomenon of customers "opting in-n-out" on a monthly basis given the sports events on the slate for the next 30 days. DAZN's US operations, which is heavy on combat sports and targeted at an audience that has traditionally been accustomed to a highly-priced pay-per-view model, has probably been the poster-child for that challenge: It quickly pivoted away from its globally-uniform pricing model as the cyclical nature of the US rights portfolio (e.g. boxing, MMA) simply required a different approach compared to the portfolio's seasonal nature across its other active markets such as Germany, Canada, Japan, Italy, and Spain (e.g. soccer, basketball, football). Granted, the seasonal viewing nature of traditional sports seasons is still a challenge when it comes to maximizing ARPUs, but much more manageable and less impactful than the highly cyclical nature of a very few flagship fighting events per year.
In addition to the standard discount on an annual subscription compared to a monthly plan of 15% - 25%, which nonetheless is the preferred customer decision from a streamer's point of view (think: predictability of recurring subscription revenues), offering even more discounted annual or multi-year plan has become a go-to strategy for OTT streaming services. For example, DAZN in Germany just offered a Christmas Card, including in offline retail shops, for €99.99 instead of €119.99 (annual plan) or €155.88 (monthly plan: 12x €12.99). Further, before the official launch in the United States, Disney made its streaming service Disney+ available for $47 per year as part of a three-year plan. The benefit of these heavily depressed ARPUs? DAZN and Disney have literally bought time in order to convince its customers from the value delivered for their money. In other words, they do not have to worry about churn for 12 or 36 months, respectively. This competition, however, is eroding the (short-term) bottom line: prices and ARPUs are falling as rivals fight to gain subscribers, which will remain the all-important metric to value streaming services for the foreseeable future.
A less obvious, but probably equally significant factor as pricing when it comes to customer retention is the current prioritization of user experience over user monetization by almost every streaming service. Most notably, the majority of pure-sports streamers are either completely ad-free or have a very light, little-intrusive ad load.
Going forward, advertising around appointment TV will provide unique revenue potential: Only live sports programming will be able to continue to reliably deliver mass audiences in a predictable manner and at scale in an on-demand, time-shifting economy. With rights fees further experiencing upward pressure, any ad-free approach will ultimately turn out to be as unsustainable — just like the current level of monthly subscription prices in live sports streaming. In the short-term, the OTT streaming industry will remain in full customer acquisition mode and sustain low price levels to undercut competing services thanks to VC-funded subsidization or cross-subsidization from other business units — willing to spend record sums in hope of exponential (subscriber) growth and building the next streaming behemoth (or decently-sized acquisition target) once the still-fluid OTT marketplace consolidates. Everybody knows that, unfortunately, pure user-centricity will not perfectly align with an improved customer monetization in the long-term though.
In the very short-term, however, the hyper-competitive marketplace for streaming services is more likely to put even more downward than upward pressure on subscription-based ARPUs. The emergence of streaming bundles (e.g. Disney+, Hulu, and ESPN+ for $12.99 per month), distribution partnerships with telecommunication service companies (e.g. DAZN's carriage deal with TIM in Italy), and seasonal promotions (e.g. DAZN's Christmas Card in Germany) will further dilute effective ARPUs. The negative impact of price hikes should be more direct on customer acquisition and retention than a data-driven ad integration. Thus, it stands to reason that advertising may potentially be the revenue stream with more upside potential in the short-term. In short: Instead of price hikes, the re-addition of both long-known and entirely new revenue streams to OTT services will be a fundamental trend in 2020 and beyond.
Thus, the traditional dual-revenue-stream model of advertising and subscriptions revenue in the linear pay-TV industry, which has catapulted rights fees to an unprecedented level and resulted in the creation of multi-billion dollar sports media companies such as ESPN, will not only be duplicated but expanded in the digital space. New revenue models need to expand, exploit the unique capabilities of the digital ecosystem, and untap new, incremental revenue streams in order to come anywhere close to the past level of monetization that was achieved by the highly sophisticated revenue models of:
third-party broadcasters (e.g. pay-TV bundles through which non-sports channels effectively cross-subsidize the value of sports rights) or
technological convergence of the telecommunication value chain leading to the so-called "Triple-Play" (i.e. pay-TV, telephone, and broadband internet services) or even "Quadruple-Play" (+ wireless mobile services).
Fortunately for rights holders (and rights owners since rights fees at least in the long-term will depend on the ability of rights holders to monetize such rights), the list of potentially new revenue sources is long:
Data-driven opportunities across subscriptions (e.g. transactional video-on-demand options such as PPV or dynamic pricing during the match) in combination with the integration of further add-ons (e.g. in-game betting, customized commentary feeds, access to statistics, cross-selling of merchandising or tickets) could evolve into a triple-revenue-stream model that provides a level of monetization that comes at least close to current rights fees paid from third-party broadcasters: subscriptions + advertising + add-on integrations. Truth be told: Although the OTT model offers unprecedented flexibility, from pure-pay (e.g. pay-per-view, flat-fee/metered subscriptions) to free offerings (e.g. in-game add-on integrations), it is still barely explored up to this point.
In any event, such incremental add-on integrations will never fully substitute subscription fees (i.e. upfront costs for access) on a widespread basis. Whereas free-to-play video games such as Fortnite Battle Royal (think: in-game micro-transactions) have transformed global spending on digital games into a $109BN industry (by accounting for c. 80% of total market), sky-high financial upfront commitments in form of rights fees seem to be an insurmountable obstacle to that end — via SuperData (2020). However, more scalable and sophisticated advertising combined with one or two incremental non-subscription revenue streams could still make live sports programming more accessible in the future: More on that in 4️⃣.
Another impediment: In spite of a future with an OTT-enabled feature-rich watch experience and revenue upside for rights holders compared to traditional television, the short-term focus needs to be on getting the fundamentals of the live streaming experience right:
As of today, streaming quality/reliability and latency remain the most pressing issues: Not only to simply avoid spoilers through other push notifications on the same or any second-screen device but even for those aforementioned revenue-generating add-on integrations such as in-game betting actually to work. Unfortunately, there is a direct trade-off between streaming quality/reliability and latency, as the latter essentially serves simply as a security buffer in order to avoid crashing of any of the limitless number of potential breaking points along the streaming workflow, such as user entitlement, ad-delivery, or outplay. That is one reason why over-the-top streaming of on-demand content is so much easier from a technical point of view and much-wider accepted from a consumer point of view than live (sports) streaming. As video content migrates from traditional delivery methods (e.g. cable/satellite distribution) to OTT-enabled delivery, underlying technology stacks become more heterogeneous compared to the linear age in which rights-holding broadcasters owned most of the value chain. The result: Not only content becomes more fragmented, but technology as well.
2️⃣ Fragmentation and Aggregation is of Cyclical Nature
A lot of things are behaving cyclically: both in business (e.g. stock markets, industry cycles, unemployment) and elsewhere (e.g. weight loss in a diet). One more development of cyclical nature: fragmentation and aggregation. The traditional pay-TV bundle has drawn much criticism in recent years. Constantly increasing carriage fees paid to content providers have been passed through by TV distributors to the subscribing customer base for years. One of the drivers for skyrocketing average prices of pay-TV bundles has been that content creators negotiated many of their expensive live sports-carrying channels into the base, lower-tier packages. As a result, non-sports fans have effectively subsidized sports fans for years and even in today's era of so-called "skinny-bundles," sports-free offerings remain rare for that reason. Media conglomerates such as The Walt Disney Company, WarnerMedia, and Fox Corp. use their leverage to include their sports programming in these not-so-skinny-anymore alternatives to linear (satellite or cable) as a precondition for their non-sports entertainment programming. Unsurprisingly, initially low-priced offerings from Sling, fuboTV, or YouTube TV are well on their way to reach the lower price range of linear pay-TV (while arguably running on a less reliable technology). In other words, the traditional pay-TV bundle was and continues to be a good value for money for die-hard sports fans as it shifted bargaining power from content providers to consumers by aggregating the demand side — at the stage of the pay-TV operators, acting as a two-sided marketplace. The aforementioned media powerhouses, for their part, have been able to match that leverage in negotiations though, resulting in the near-full distribution of their subscription channels among pay-TV operators and more than 100M subscribing households at the peak of the traditional pay-TV model around 2010. Since 2013, however, the number of U.S. households with a traditional pay-TV subscription dropped around 14% — and counting. It's still a vastly profitable business for The Walt Disney Company, WarnerMedia, Fox Corp. & Co. which is why those content providers are overly protective of that billion-dollar business when it comes to any disruption. Based on that rationale, I would agree with a take that I already came across multiple times, including Michael Nathanson of media research group MoffettNathanson: Cord-cutting will stop, or decelerate greatly, once the subscriber base of linear pay-TV (including their OTT-delivered alternatives) will be free of non-sports fans.
Less-powerful content providers, however, will start to understand that the erosion of the traditional pay-TV model, the increased splintering of audiences, and disaggregation of demand will provide other opportunities: In a media broadcasting landscape that is dominated by direct-to-consumer businesses, content providers will inevitably gain leverage towards consumers, at least to a certain extent (see 3️⃣). After initial enthusiasm, especially among non-sports or single-sports fans, consumers will probably recognize at some point that they are facing a similar combined monthly bill of several D2C streaming services as they did for traditional pay-TV a few years ago. A big difference: Consumers will have deliberately chosen the content they are paying for, which will give them a much better feeling. The content/channel composition of traditional pay-TV was mostly pre-determined, increasingly irrelevant, and just equally expensive — not to mention the access to seemingly endless live and on-demand libraries in the new on-demand economy. One opportunity for content providers is obviously to offer their channels on an a-la-carte basis. Looking at ARPUs, the upside seems to be there: bundled MVPD price (e.g. NBA TV = $0.23/month) > unbundled direct-to-consumer price (e.g. NBA TV = $6.99/month).
The drawback: Such move of offering their content on a stand-alone basis and completely untethered from the pay-TV bundle greatly undermines their negotiation power towards TV distributors. (I also expect some content providers to not even be contractually allowed to offer such separate, a-la-carte offering or would have to significantly re-negotiate carriage fees and/or inclusion in lower-tier packages). As a result, content providers such as the NBA are betting on the calculation that dramatically higher ARPUs will overcompensate for any decrease in distribution among traditional pay-TV subscribers given the built-in customer base of TV distributors. Although, league-owned and -operated content providers, by being IP providers at the same time, might not only be motivated by financial matters as broadcasting rights fees form third-party broadcasters overwhelmingly drive overall media revenue. Therefore, it will be much more interesting to see whether other pure content providers (i.e. media rights buyers) with a limited distribution such as beIN SPORTS in the United States (± 20M TV households) will follow the path of NBA TV (± 45M TV households). In contrast to pay-TV channels with industry-leading household penetration such as basic sports channels like ESPN and FS1, less-distributed (premium sports) channels such as NBA TV and beIN SPORTS do not only suffer from "cord-cutting" (= dropping out of the traditional cable/satellite/digital pay-TV ecosystem), but so-called "cord-shaving" as well: (1) Keeping the traditional cable TV subscription but cancelling all the costly channels, premium-tier packages, and add-ons (beyond the basic package) or (2) switching to the aforementioned, slightly less expensive digitally-delivered skinny-bundles hurts beIN SPORTS and NBA TV but not ESPN and FS1.
In fact, beIN SPORTS just did the first step on its way to untether from the traditional pay-TV model a few weeks after my initial prediction: By launching the free-to-air channel "beIN SPORTS Extra", which could be compared to an "overflow channel" consisting of fully incremental programming, in November 2019 in the United States, the Qatari-based media conglomerate effectively (1) circumvents traditional MVPDs such as Comcast and DirecTV that are not willing to carry the channel under proposed terms to bring some of their live content to the end consumers, (2) benefits from incremental ad revenue, and (3) provides some much-needed exposure and visibility for some of its less-marquee sports properties (e.g. Spanish LaLiga SmartBank, French Ligue 1, Turkish Süper Lig). At the same time, there is no content overlap with its premium live content on its pay-TV channels (e.g. Spanish LaLiga Santander) and any OTT-access to such content remains tethered to a traditional pay-TV subscription. In comparison to NBA TV, beIN SPORTS still remains more invested in the traditional pay-TV system and its existing partnerships with TV operators that continue to carry its channels (e.g. fuboTV, Sling, Fanatiz) by not cannibalizing any of their offerings. The incomparably higher ARPU, disregarding subscriber duration and churn rate for argument's sake for a moment, combined with other benefits of a direct-to-consumer business, however, will continue to be intriguing — especially if any existing business to be cannibalized continues to decline as cord-cutting accelerates.
Additionally, the much higher D2C price starts to look much less attractive once newly-introduced intermediaries are taken into account: Even in a "direct-to-consumer" world, content providers will continue to pay for distribution — to enable monetization. Although "Over-the-Top" is often equated with "Direct-to-Consumer", simply starting to distribute streaming media as a stand-alone product instead of part of a bundle in the traditional wholesaling model, is just an essential prerequisite for getting to the latter: Establishing a true direct-to-consumer business is not only difficult because moving from a B2B(2C) to D2C business requires a complete mind-shift when it comes to distribution/monetization (i.e. moving from managing commercial partnerships with a few distributors to handling millions of one-to-one relationships with end consumers in a personalized and scalable fashion) and product (i.e. establishing a product-focused culture as consumer choices will not only be content- but also feature-driven with regard to stand-alone streaming services), but OTT enables but not guarantees a D2C business. In fact, only market leaders with a globally recognized brand, long-term thinking and, most importantly, incredibly deep pockets such as Netflix can pull it off in a holistic sense: controlling the entire value chain, bypassing any intermediaries, and ultimately fully owning the customer relationship — instead of being a mere arm's dealer of content (which is probably still a good business looking at current levels of spending on content, but does not come close to fulfilling the initial ambitions of many in the OTT space): In other words, even OTT streaming services will at least to a certain degree rely on wholesaling in order to not only having the capability to reach audiences but actually capturing their attention (= mind share), converting them to subscribers (= wallet share), and ultimately maximizing ROI.
Coming back to the cyclical nature of fragmentation and aggregation, the introduction of intermediaries will not only be boosted by content provider's need for distribution though, but by end consumers' preference for convenience, curation, and ease. Numerous players in the digital ecosystem are ready to assume the role of the marketplace, platform, or aggregator (and even gatekeeper) that enable a "one-stop-shop" for the consumer's media entertainment needs. As a result, the set of (potential) bidders in the sports broadcasting market has become more diverse and the fight for media rights could become an uneven playing field as such rights might not be the end but just the means to an end.
3️⃣ "Streaming Wars" - A poorly-named Catch-All Phrase
"Streaming Wars" is an easy catch-all phrase to describe the current competition between the different OTT streaming services for consumer's mind and wallet share — which is the reason why I do not oppose such phrase although it lacks a lot of nuance and context:
With increased competition and changing media consumption habits on the horizon, long-standing market incumbents started to equip themselves with respective technical capabilities through either opening their chequebooks for M&A acquisitions and/or acqui-hires (e.g. ESPN/BAMTech Media, Turner Sports / iStreamPlanet) or investing heavily in in-house developments (e.g. NBC / Playmaker Media) in order to effectively compete in the post-bundle world of new media.
However, in addition to those legacy media conglomerates who either continue to pursuit a "TV Everywhere" strategy which remains tethered to traditional pay-TV subscription (e.g. ESPN) or start to make their full slate of programming available via owned and operated streaming services on a stand-alone basis (e.g. recently even Sky DE and BT Sports, more on that in 4️⃣), the field of potential bidders for sports streaming rights has greatly expanded as of late: pure-sports OTT streaming services as the most notable additions.
The main challenge for these pure-sports streaming services, and any pure-content video-on-demand streaming service in general, in such a crowded OTT marketplace is that not all market participants follow a common set of objectives. Instead, it can range from (almost) purely relying on subscription revenues (e.g. Netflix, DAZN) in exchange for video or music streaming on the one end to leveraging streaming as a mere loss-leader that is meant to support and amplify the broader business (e.g. Apple, Amazon, Google) on the other end — with the traditional market incumbents somewhere in-between. A rather uneven playing field, in which companies with a singular mission compete with entire ecosystems, is the result:
(1) Pure Content - Plays
The terms "Over-the-Top" and "Direct-to-Consumer" are often used synonymously, but it will be increasingly difficult for pure content - businesses to establish exactly that direct customer relationship as customer ownership will rather be transferred to newly introduced intermediaries in the value chain who already own a critical mass of customers. Ironically, "OTT" originally meant to cut out any intermediaries in the value chain, but the case can be made that "Over-the-Top" only refers to the underlying technology of how content is delivered instead. (Blog #41) In the worst-case for pure-streamers, only the nature of the middle-men will have changed for content providers: from multi-channel video programming distributors to new (e.g. Amazon / Apple / Google) or long-known players (e.g. internet service providers). I do not imagine that players such as DAZN have the ambition to be a mere arm's dealer of content, which can still be a highly attractive business in today's "streaming wars". The challenge will be to balance increased distribution via partnerships with parties mentioned above with shrinking margins, the lack of direct customer relationships, and brand dilution. Being a pure content - play is the traditional playbook of rights holders in the sports broadcasting market specifically and the entertainment media landscape in general. However, live sports is the rare assets that cannot easily be created in-house and wholly-owned by giant technology companies in times in which seemingly everyone seeks unique content to differentiate their services — which inevitably led to an increased interest by those parties in sports media rights as of late as well.
(2) Platform - Plays
With the formidable growth of media rights fees on the one side and the erosion of the traditional pay-TV bundle on the other side, vertically-integrated telecommunication service companies, in particular, have pivoted away from leveraging exclusive live sports programming as unique and widely-effective differentiator in order to sell bundles of convergent telecommunication services (i.e. so-called "Triple- or Quadruple-Plays") to positioning themselves as a super-aggregator of third-party services in an ever-more splintered digital marketplace.
The biggest benefits for decade-long market participants compared to new pure-content streamers are much lower customer acquisition costs due to pre-existing customer relationships (e.g. broadband customer) and the ability to serve as an aggregate in a splintered marketplace thanks to their vertical integration:
“Content is King, but Distribution might be King Kong."
The appeal of aggregators for consumers should only increase as subscriptions fatigue starts to set in and the impact of recommendation or discovery engines gets super-charged in an aggregated system by providing a cross-service search, navigation, and user experience.
As a result, sports rights acquisitions by players such as Dt. Telekom and BT have become more focused and no longer primarily contributing to the traditional set of objectives: The acquisition of exclusive broadcasting rights in Germany to the UEFA European Championship 2024 by Deutsche Telekom is a good example for how telcos might leverage exclusive live sports programming in the future:
First, the cyclical nature of one-off, multi-week events such as the EURO 2024 is not conducive to drive recurring subscription revenues for OTT services like Dt. Telekom's Magenta Sport, especially for those who offer free trials to minimize the entry barrier for new customers — which is the reason why pure-sports streamers such as DAZN will always have limited appetite for anything other than season-long formats and/or multi-year media rights deals (e.g. combat sports).
Second, the financial commitment required for securing the three-week football event greatly exceeds anything Dt. Telekom has invested in its existing portfolio of sports properties (± €50M per year), including the domestic top-flight competitions in second-tier sports such as Handball, Basketball, and Ice Hockey as well as the third football division.
Thus, it stands to reason, which budgets actually contribute to such unprecedented investment? Reports that a marketing push around the roll-out of the 5G technology as the investment rationale do sound plausible given the above-mentioned strategic pivot of telecommunication service providers to be much more diligently when it comes to broadcasting rights in an environment of ever-increasing rights fees. If the investment, however, is part of the company's marketing instead of sports content budget and does not require an immediate positive ROI, an uneven playing field is established and makes pure-content streamers less competitive. Still, telecommunication service companies have somewhat limited financial resources and exhibit a rather conservative mindset. However, there will be other new market participants who will probably have an even higher willingness to repurpose live sports programming into a complete loss-leader for other business objectives: Offering incremental incentives to consumers for joining and/or staying with an ecosystem of services and products that facilitates a multitude of ways to monetize customers.
(3) Ecosystem - Plays
Phrases such as "Phase of Experimentation" or "Day One" were commonly used by "Big Tech" to describe their approach to live sports programming. Assuming for the sake of argument that their interest in such will only increase, the deep pockets (on the rights acquisition side) might not be their biggest competitive advantage. Instead, their superior / diversified monetization capabilities of any given customer flip the "Streaming Wars" into an "Ecosystem War" — or an uneven playing field. The ease with which big technology companies such as Google, Amazon, and Apple have already taken over other markets (and squash smaller, purer players) should have pure-content streamers with a singular mission (as well as regulators across the world) worried.
4️⃣ Balancing Existing with Future Revenue Streams
One inherent consequence of the increasingly competitive (sports) streaming landscape is the continued erosion of the traditional pay-TV bundle — which represented a highly attractive business, revenue, and distribution model for many stakeholders in the sports-media-industrial complex for more than a decade: As live sports coverage was siphoned off free-to-air television, media rights revenue generated by (1) rights owners (i.e. IP providers) skyrocketed thanks to the superior monetization capabilities of the dual-revenue stream (= advertising + subscription revenue) established by (2) rights holders (i.e. content creators). At a time when direct-to-consumer businesses were essentially non-existing, any channel acquisition costs in form of so-called "carriage fees" for (3) pay-TV operators (i.e. multi-channel video programming distributors) were simply passed on to end consumers — including a noticeable mark-up to ensure profitability (i.e. cost-plus model) that has resulted in monthly pay-TV bills regularly exceeding $100 per month and model that enabled the formidable growth of sports broadcasting rights valuations.
With increased consumer frustration given the high price point, limited flexibility, and ballooned multi-channel video bundles, consumers demanded change and current trends such as unbundling and cancel buttons at someone's fingertips addressed those misgivings. The migration of live sports programming away from the traditional pay-TV system puts the sports media industry at another tipping point. In contrast to the time when (both public and commercial) free-to-air services had been railroaded by subscription channels, the content migration, however, will be much less frictionless and clear-cut: First, many of the current incumbents remain powerful players in an OTT-dominated marketplace. Smaller market entry barriers did not only facilitate the emergence of new challengers but will at least provide incumbents with the opportunity to adapt to a changing market environment and continue to craft integrated (distribution) packages that appeal to rights owners: Granted, financial considerations (including the financial security behind any bids) will dominate any decisions by rights owners when it comes to awarding their media rights, but at least official selection guidelines will continue to have non-monetary evaluation criteria such as programming plans, coverage and level of exposure, anticipated audience, estimated market share, broadcast/production expertise as well as brand and marketing considerations.
But again, it is one thing for legacy media companies to be equipped with the required technical capabilities (think: "buy-or-built" decision for tech-stack) to continue to flourish in a fragmented, digital marketplace, but another thing to transform the mindset from a B2B to D2C business (think: product focus, balancing short-term revenues and long-term thinking). The ongoing disruption by the hands of OTT-delivered distribution (but not necessarily digital-only contenders), however, will continue as evidenced by the fact that even the most vertically integrated (i.e. at least controlling content creation and distribution, plus potentially bundling with other telecommunication services such as broadband or mobile) sports rights holders untethered their sports programming from other offerings or long-term commitments. Just a few weeks ago, long-standing hold-outs such as Sky Deutschland and BT Sport launched monthly-cancelable, low-priced streaming-only products for their full-slate of live sports content.
I posted a few top-of-mind thoughts on the new "Sky Ticket Sport" in a recent thread on Twitter, including the following takeaways:
No knee-jerk reaction to the loss of broadcasting rights to UEFA Champions League (starting with 2021/22 season) but a thought-out initiative to reach the incremental customer (i.e. casual sports fan) as seasonal demand is at low-point when football season moves toward winter break.
The positive revenue impact of incrementally acquired customers needs to the outweigh cannibalization effect of down-selling existing subscriber base, betting on single-game broadcasts as a strong-enough differentiator for core customers (i.e. die-hard sports fans).
That leaves very few hold-outs when it comes to stand-alone streaming services among those players who have dominated the sports broadcasting landscape in the world's biggest media markets for a long time, including Movistar in Spain (= Telefónica's (sports) pay-TV division) and ESPN in the United States (= Walt Disney's (sports) pay-TV division). The former only offers a slimmed-down version of its linear programming, prominently lacking the rights holder's most-marquee properties such as the domestic La Liga and UEFA Champions League. The latter launched ESPN+ as a completely untethered OTT streaming service (both from a subscriber base and content point of view): Unsurprisingly, live programming to its most attractive assets (e.g. NBA, NFL, MLB, NCAA College Football) remains exclusively on linear pay-TV in order to protect existing, albeit decreasing, subscription revenues — paid from MVPDs in so-called "carriage fees" per subscribers.
Naturally, those invested the most in the traditional wholesaling pay-TV business will be most protective of their legacy pay-TV channels. Taking the United States as an example again: Not coincidentally, those content providers who operate the most viewed networks based on total views via the old-fashioned way (on linear cable/satellite TV), are those who do not offer their premium live (sports) programming on a stand-alone basis and are heavily focussing on live sports and news programming, according to Variety (2019): NBC, ABC, Fox, Fox (4x free-to-air broadcast TV), Fox News Channel, ESPN, and MSNBC (3x pay-TV channels). Where did NBA TV and beIN SPORTS, those who are seemingly willing to move on from the wholesaling model of traditional pay-TV, rank? 106th and 140th out of 142 free-to-air and paid linear channels.
From a consumer's point of view, such OTT services like ESPN+ that serve as a hedge for an OTT-driven future of live sport sports broadcasting, effectively act as secondary paywalls, which force consumers to double-dip in order to get access to one rights holder's content.
5️⃣ Content Migration: Combination of OTT Streaming and Free-to-Air Television as the Future?
As traditional pay-TV subscriptions erode, content will not only not fully migrate to (paid) streaming services resulting from hedging strategies by market incumbents (e.g. Sky Ticket, Movistar+ Lite, B/R Live, ESPN+, NBC Sports Gold, CBS All Access), new pure-sports contenders (e.g. DAZN, FloSports), and integrated streamers (e.g. Prime Video, Apple TV+) in the OTT streaming space but the erosion of the traditional pay-TV bundle will be also driven by the re-emergence of ad-supported, free-to-air distribution — which I consider to become a significant factor in preventing a perfect migration of live sports programming from traditional pay-TV to subscription-based OTT providers (in addition to demographic, infrastructure considerations and so on). There are several arguments for the revived importance of FTA going forward, including that simply not everybody will be able to afford a stack of OTT services with the potential for audience segregation and a socio-demographical digital divide looming.
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"
Ad-supported, free-to-air distribution can happen independently from the underlying technology (i.e. platform-agnostic/-neutral): The linear - although more accurately - the analogue distribution system (i.e. cable and satellite television) has already recognized that live sports is going to be one of the very few genres that continues to reliably draw mass audiences in form of appointment-based television. Top-tier live sports programming is the last effective retention tool for them and programming with true cross-over appeal among different socio-demographic group. Thus, they will spend accordingly in order to capture an increasing share of an at least stable TV advertising market (e.g. approx. $70BN per year in the United States). Additionally, even in a performance-driven marketing world, there is still a place for pure "top-of-funnel" marketing that aims at creating, reinforcing, and increasing brand awareness and loyalty: The need of advertisers (e.g. mass consumer brands, whose audiences are effectively every human being on the planet) for diverse mass audiences in an increasingly fragmented media landscape and the growing share of addressable and programmatic TV households (i.e. narrow-targeting capabilities) will result in higher-than-usual advertising rates (i.e. CPMs) that partially compensate for less total eyeballs available in the linear distribution system. Additionally, those prices to reach viewers should further increase based on less available ad inventory given the lighter ad-loads in the OTT space as well as the popularity and widespread accustomization/expectation of ad-free streaming services in general. Making up lost viewership by selling ads at higher prices should be a viable strategy for at least a limited amount of time and, therefore, could drive remigration of some live sports programming to free-to-air channels in an OTT-dominated media landscape.
From a rights owner's perspective, it also makes sense to put some of their biggest games or events on free-to-air distribution to reach the largest possible (and diverse) audiences and avoid pricing-out the middle-class sports fans. In addition to financial burdens put on consumers by the proliferation of paid streaming services, consumer adaption of OTT streaming services is still at an early stage and it remains a big risk to go with streaming exclusively whenever reach, the total number of eyeballs on their products, and reliability are given any priority. In other words, what's old is new again: free-to-air linear television (and streaming services) — which have been railroaded by satellite/cable subscription channels for more than a decade.
Additional untapped potential when it comes to advertising revenue should provide the OTT-delivered free-to-air distribution (i.e. addressable TV advertising) in which advanced advertising-technology should further boost both (1) top-of-line revenues based on the promise of advanced audience targeting, contextualization, and segmentation (think: combination of attribution, through ad-tech, and allocation, through OTT-delivered live television) and (2) profit margins given the increasingly programmatic nature of ad booking and delivery, which should make advertising an even higher-margin business going forward.
Given the above-mentioned, temporary race to the bottom when it comes to monthly subscription fees as streamers remain in full customer acquisition mode, combined with the upside of a narrowly targeted ad delivery in a brand-safe environment, purely ad-supported offerings might become competitive on an average revenue per user (APRU) basis: To illustrate, NBC expects purely ad-funded monthly of ± $5 per month/user for its upcoming streaming service, called "Peacock." Another example is Hulu, a US-based subscription video-on-demand and live TV streaming service that offers a discounted hybrid-tier with integrated ads for its on-demand library for currently $7.99 per month. Pricing the ad-free option at $11.99 per month, implying a ± $4 per month/user premium, confirms the level of revenue contribution through ad integrations — although the hybrid-tier (i.e. discounted subscription fee + advertising) is said to be the even more profitable alternative for the Disney-owned company.
It should be noted that such monthly advertising revenue expectations can vary greatly from low to high single-digits based on the underlying assumptions made for time of daily consumption, ad-load, CPMs and so on, and the upside for niche streaming services, in particular, could be limited (due to limited scale).
As mentioned before, for subscription-based (pure-sports) streaming services, advertising will and needs to be become a significant revenue driver as well once a certain amount of scale is achieved (i.e. when moving from customer acquisition/retention to customer monetization mode) in order to enable a path to profitability in face of sky-high rights acquisition costs. The one benefit of scripted on-demand content compared to live sports programming when it comes to ad-supported monetization is that scale is more easy to achieve if rolled-out internationally — which is not yet common in a sports broadcasting market in which broadcasting/streaming rights are usually awarded on a market-by-market basis (instead of global rights).
In the meantime, free ad-supported TV streaming, so-called "FASTs," (as well as traditional linear free-TV) could remain competitive in a post-pay-TV-bundle world and could offer rights owners maximum reach for their live sports programming while achieving a comparable level of monetization as paid services. The built-in guidance of linear TV could become another factor as consumers overwhelmed with content choices could embrace the curated linear feed and like to avoid any sort of actual decision-making.
In the long-run, significant market consolidation, price rationalization/hikes, more stringent settings when it comes to concurrent profiles/accounts/devices per subscriber in order to prevent wide password sharing, and longer contract terms in form of yearly contracts will come back as ARPUs need to increase and customer monetization becomes the priority — which would make purely ad-supported streaming less competitive again.
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