#46 Content is King, Distribution is King-Kong?
Content was king when audiences and their budgets were monopolized by traditional pay-TV. Media fragmentation changed the game, including for the sports/media industrial complex: Owning demand ( = consumer 👱♂️ ) has become more powerful than owning supply ( = content 🎞 ) — with very few exceptions.
Cord-cutting ✂️ has been mentioned over and over again (besides piracy ☠️) as THE fundamental threat to the sports/media industrial complex.
However, it has rarely been addressed what cord-cutting means and why it matters for (professional) sports. Therefore, here we go ⤵️:
What is Cord-Cutting? The reallocation of the 💰 consumer’s disposable income — previously locked-in in the traditional pay-TV ecosystem and with live sports programming demanding the lion's share of it — to other digital alternatives that started to proliferate. Netflix, Spotify and Co. have redefined consumer expectations for value-for-money propositions. The previous go-to place for entertainment — the ballooned pay-TV bundle — seems no longer competitive in the eye of a growing segment of the market to demand a similar share of their discretionary income as subjectively better alternatives become abundant.
Why it matters? Traditional pay-TV monopolized content, audiences, and their budgets — providing 🔀 distribution and 🤑 revenues at scale for rights-holding content creators. In turn, they were more than willing to pass on a large chunk of those revenues to rights owners in form of guaranteed rights fees for renting their IP for a few years. Lowered profitability for those who are licensing the rights should trickle down to the IP owners—even if slightly delayed. It should make sports poorer 📉 if the current monetization gap of sports IP between the eroding linear pay-TV and emerging OTT business cannot be closed as it suffers from less scale in total and lower monetization of the individual.
Fortunately for legacy media companies, the traditional cable/satellite pay-TV subscription is still the best product-market-fit for the majority of not only die-hard but even casual sports fans — the demographic group that is most important to support the sports/media industrial complex. To this end, cord-cutting is still more of a local development (across North and South America) than a universally applicable trend. In other words, there’s still some time left for legacy media companies to master the 🔌 cable-to-streaming 📱 transition. However, as previous entry barriers erode (think: legacy-sized TV infrastructure), new threats to undermine their dominant market position emerge from new market entrants in particular. Regardless of being an established incumbent or the new challenger, content (= supply) alone does not longer seem to be sufficient to capture audiences and their disposable income (= demand). This was the case as long as traditional pay-TV provided a one single, centralized distribution system. Today, distribution is fragmented and, instead of a guarantee for revenues, being available on TV platforms (e.g. Amazon Fire TV, Apple TV, Roku, Android TV), mobile platforms (e.g. iOS, Android), or local telcos / TV operators (e.g. Orange, Free, SFR, Bouygues, Canal+ in France) merely reduces friction for the customer sign-up:
🤑 Carriage fees have become affiliate fees.
🔀 Distribution has become a necessary but not sufficient condition to run a successful OTT streaming business— with very few exceptions.
Outsized profits become possible through either (1) a horizontal monopoly ↔️ in one of the three layers or (2) the integration of two of the parts ↕️ such that a competitive advantage in delivering a vertical solution materializes. The former is the reason why I would have huge antitrust concerns whenever a Big-5 European football league, for example, would go exclusively over-the-top in their respective domestic market. The latter has become less likely due to the increased fragmentation of audiences, but is the whole reason why players in the distribution layer that already own direct customer relationships to at least a certain market segment are interested in renting sport broadcasting rights—including Big Tech.
B2B-turning-B2C company MediaPro is far from either and is a timely case study of how even premium content has lost its drawing power. Now, distribution makes or breaks investments in sports media rights, or any other licensing of content for that matter. In exchange for a whopping +/- €825M per season, the sports production company and rights agency has become the domestic rights holder of the 🇫🇷 French Ligue 1 ⚽️ and currently fights the battle over distribution. This blog has a play-by-play commentary along the company taking over the entire value chain for one of the priciest properties in European football—without any competitive advantages:
💸 RIGHTS ACQUISITION: Further evidence for new market entrants continuing to pay a premium for unique IP to gain immediate relevancy — even if it's only for a limited amount of time and based on super-ambitious business cases.
📽CONTENT CREATION: Rights do not necessarily imply an obligation to make use of such and the investment in rights acquisitions is only one part of the total cost equation. Removing the constraints of limited programming minutes of linear TV by the transition to digital streaming, the trickle-down economics of sports have been revealed: Rights holders only care about the big clubs and consider even average teams rather as a liability than an asset.
💻CONTENT EXPLOITATION: New market entrants do not have to master the cable-to-streaming transition like legacy media companies. However, that does not mean that they should not be available in both distribution systems. A platform-agnostic approach must be the go-to-market strategy for most rights holders for now. Regardless of the eventual way of distribution, though, the company's OTT streaming service, priced at €29.90 per month or €25.90 per month as part of an annual plan, will face the challenging unit economics of OTT that every (pure-sports) streamer does.
🔀CONTENT DISTRIBUTION: Even for premium content such as the domestic top-flight football leagues, it is hard to cut through the noise as digital content proliferates. Any distribution deal with platforms that have built-in audiences brings Téléfoot, the consumer-facing brand of MediaPro licensed from TF1, one significant step further down the conversion funnel. As France remains a strong IPTV market with an underdeveloped/-penetrated OTT landscape, telcos and TV operators effectively serve as gatekeepers. As MediaPro positioned itself as a direct competitor for sports rights acquisition, Canal+, with +/- 8M subscribers probably the most powerful gatekeeper in France, remains reluctant to close a distribution agreement. As a result, Téléfoot has reportedly accumulated only +/- 600K subscribers to date: far from the communicated subscriber goal of +/- 3.5M. The owned and operated streaming service (available to everyone) only accounts for a third of the current subscriber base.
🏁 To conclude, if any given rights holder has not a built-in user base, the distribution (in addition to the content IP naturally) must be rented from those platforms who already own the customer relationship. Off-platforms subscribers 👱♂️, those signed up directly through the website of the owned and operated streaming service, have the highest value (think: customer data, highest margin) but represent the clear minority of cases: being more of a direct-to-fan than direct-to-consumer service.
* Since the blog reached outsized proportions, that is a short summary. The real nuggets are in the full blog post below though. ⤵️
"The future of media will never be as profitable as the past has been." — a bold hypothesis but cord-cutting, and thus the erosion of sport's main source of revenues, has been cited as the biggest challenge for the sports/media industrial complex. However, the question of why cord-cutting is a fundamental threat has rarely been addressed.
What is Cord-Cutting? The reallocation of disposable income which was locked-in in the traditional pay-TV ecosystem—with live sports programming demanding the lion's share of it. However, consumers became frustrated as content fragmented and other digital alternatives started to proliferate, often offering better value-for-money compared to the previous go-to form of entertainment—the "ballooned pay-TV bundle."
Why it matters? Audiences fragmented ("Audiences follow Content, at least to some extern—more on that later.") and, more importantly, took their budgets with them. Traditional pay-TV provided distribution and revenues at scale for content creators. Rights-holding content creators were then willing to pass on those revenues to rights owners in form of guaranteed rights fees for renting their IP for a few years. Lowered profitability for those who are licensing the rights should trickle down to the IP owners as well—even if slightly delayed.
Distribution and guaranteed monetization was built-in, but has become increasingly difficult in a fragmented landscape with an abundance of competitors for the consumer's mind and wallet share.
While third-party licensees face fundamental challenges, disintermediating them completely and going "direct-to-consumer" is not an option for rights owners either as they would be even less-equipped to sustain the current level of income.
MediaPro's acquisition of top-notch IP (i.e. French Ligue 1 in France) is a timely case study of how content has lost its power and distribution has become more valuable than ever and absolutely required to gain scale in video streaming—before even worrying about customer monetization down the road.
DISTRIBUTION IN THE ERA OF TRADITIONAL PAY-TV
Digital Alternatives not able to pick up the slack: From a sports rights owner's point of view, that does not mean that such lost revenues siphoned out of the traditional pay-TV ecosystem can not be recuperated. However, the digital alternatives (a.k.a. virtual MVPDs) have not proven to be able to pick up the churned customers or capture much of the freed-up disposable income as competition for the consumer's wallet share is fierce and other digital products have redefined the value-for-money perception expected by consumers in the meantime—in other words, Spotify, Prime Video, Netflix, or Disney Plus have become the beneficiaries of the budget reallocation amidst the growing adoption of streaming services. One pay-TV subscription has often been replaced by a stack of OTT streaming services. Unfortunately for the live TV distribution system and more often than not, such a self-selected bundle of subscription streaming services does not include television's digital alternative anymore. In the United States, recent year-over-year subscription growth rates of virtual MVPDs have been impressive on a relative basis through Q1/2020 (+38%). However, some players (think: A&T TV Now -47.7%, Sling -4.7%), in particular, and the market for virtual MVDs (-349K net additions during COVID-induced sports hiatus) already seem to have peaked. Admittedly, the recent sports hiatus only accelerated cord-cutting in the United States through the last quarter as the mass exodus of TV video bundles continued and, with the lack of live sports, there were little incentives for cord-cutters to become at least cord-shavers/movers—losing 1.5M customers in just three months and conversion to virtual MVPDs remaining lackluster.
One contributing factor has been that the initially superior price-to-value proposition of YouTube TV ($65 per month), fubo TV ($60 per month), or Hulu Live TV ($55 per month) has not proven to be sustainable as the so-called "skinny bundles" grew inevitably in (1) scope and (2) price:
(1) Scope of virtual MVPDs: There will always be the one channel that is missing to make it a fit for the incremental customer and in the pursuit of continued subscriber growth—seemingly the only metric that matters for investors in the short term with complete disregard for operating cash flows—platform operators are almost forced to further add to their channel offering to successfully address the market. The bad news for platform operators: There is no cherry-picking and this one sought-after content channel (think: anchor channel such as ESPN) of a content creator (think: The Walt Disney Company) will often come together with the entire family of content channels (and their price tag) owned by the content creator (think: long-tail / premium channels such as ESPNU, Freeform, ESPN News, Disney XD). And even though the stand-alone price tags of these tugged-on channels ($0.20-0.35) cannot compare to those of the company's flagship channel such as proper ESPN ($7.86) and The Disney Channel ($1.61), multiplied across a distribution system housing more than 100M subscribing households at one point, the monthly bill payable to the content creator increases significantly—without really driving either customer acquisition or retention. In other words, the bundling along the broadcasting/streaming value chain already starts way before the end consumers enter the picture—bundling begins as early as when content creators acquire the IP (and obligations) from rights owners such as sports leagues in order to create such content. Given their lack of scale and, thus, limited significance for the business of content creators, virtual MVPDs cannot hope for any precedent-setting discounts compared to traditional pay-TV operators either.
(2) Pricing of virtual MVPDs: Looking at a TV distributor's primary input costs (i.e. carriage fees paid to content creators), simple math dictates that the initial price levels were not sustainable from the beginning and became even less so over time: While costs increased constantly by a combination of increasing carriage fees per channel whenever carriage agreements expired and adding additional channels, or more likely an entire family of them, pricing power did not increase—neither towards the content creators in ever-more "carriage disputes" nor the end consumers.
Carriage fees a.k.a. content acquisition costs, which is something different than affiliate fees (more on that later), are only one part of the cost equation when operating a live linear TV streaming service like fubo TV though:
Marketing costs, especially as a new player with an unknown brand (think: no brand equity) and business model (think: linear TV via OTT streaming instead of "TV Everywhere" which was still tethered to an authenticated traditional pay-TV subscription) are significant as brand awareness, promotions (think: free trials, discounts), and customer education (think: cancellable on monthly basis) are key for any early market penetration and customer pick-up.
Overhead costs do not reach the level of satellite-/cable-based video distributors and their legacy-sized infrastructure and cost structure but operations and delivery costs (think: CDN, cloud storage, VPN/DRM protection) are still significant.
As those players started to compensate for rising costs and try achieving product-market-fit for a mainstream audience, cord-shaving (i.e. replacing the ballooned traditional pay-TV bundle with a smaller, less expensive but more relevant bundle of channels of similar subjective utility) is evolving into mere cord-moving: replacing the ballooned traditional pay-TV bundle with a less reliable (think: streaming issues), less performative (think: latency) alternative of similar scope and price.
Concerning acquisition and marketing costs, there will never be a sustainable competitive cost advantage for virtual MVPDs since they do not equal their traditional counterparts in critical mass (think: max. 3M customers) and economics (think: lower customer lifetime value) in the eye of content creators just yet. Stand-alone players without significant cross-ownership by the traditional pay-TV, in particular, should not hold out hope for any sweet-heart deals or even equal treatment (think: most favored nation clauses)—Hulu and more recently fuboTV have proven that initial investors such as FOX, AMC, or Discovery are willing to exit their strategic toehold ownership for a quick return on their investment. (Interestingly, The Walt Disney Company has both become the majority owner of the former and retained a minority stake in the latter amidst the sale to FaceBank.)
Unsurprisingly, I'm rather bearish on pure-plays like fuboTV (286K subscribers; $44M in revenues; 100M in net losses during Q2/2020)—the live TV streaming services that recently announced their plans to IPO but:
is significantly smaller than its peers Hulu Live TV (3.4M), Sling TV (2.3M), and YouTube TV (2.0M),
already lost most of the strategic toehold-ownerships of established content creators and distributors,
will lack the size that attracts institutional investors at large and warrants a valuation premium, and
needs enormous scale to overcome the business model's lack of vertical integration (think: renting content and customers) and fixed costs problem of every subscriber having minute contribution margins, and are far from positive once customer acquisition costs are taken into account (think: negative gross-margin subscription base)—similarly independent Spotify did it, but the Swedish-based music streaming platform can, amongst other things, also afford to be selective with external distribution (think: no sign-up via iOS and Android) thanks to its brand power, superior product UX/UI, and increasing differentiation through original content, making the single-unit economics more bearable and benefit from a global addressable market to achieve the required scale. I am not sure fuboTV can do it.
Compounded by the usually challenging OTT economics (think: higher CAC, lower CLV) and lack of incremental monetization as well as built-in stickiness of the customer relationship (think: broadband or other telecommunication services), over-the-top distribution, i.e. untethered from the traditional cable and satellite TV system, remains niche. At the same time, rights-holding broadcasters cannot forget who their most profitable customers currently are and, thus, will impact rights valuation most significantly in the short-term—something rights-owners care most about: the more affluent, older-skewing traditional pay-TV subscriber.
Even though bundling and unbundling of services is an inevitably cyclical development, I do not believe that the tipping point has been reached just yet—at least from a profitability point of view—and the economics of bundling several channels still makes more sense than each channel selling itself on an a-la-carte basis to individual distributors or "directly" to the end consumers. Traditional pay-TV subscriptions are still the best fit for many and, most importantly, for the casual sports fans who exist in abundance and sports broadcasting ultimately lives and dies with.
It’s just not one-size-fits-all anymore and product-market-fit is no longer complete. However, if any rights holder would have to decide on one monetization model, the (traditional) "bundle" would be still the way to go. Luckily, rights holders are not limited in coming up with new ways of exploitation and monetization: increased price and product differentiation to cater to fragmented consumer behavior / preferences and narrowcasting instead of above-mentioned broadcasting offer a lot of unexploited opportunities. This potential is only further evidenced by the fact that sports media consumption has shifted significantly from live content to highlights (50:50) while the monetization continues to happen in the former (80:20). In other words, rights holders are creating a lot of value while not being able to capture that value yet.
Further, both rights-holding traditional broadcasters or emerging pure-play OTTs follow the same playbook for content and monetization—the only business model innovation being increased value (think: more aggressive pricing) and flexibility (think: monthly subscriptions) for the end consumers. Put differently, rights holders are selling the same but moved from the high-margin economics of traditional pay-TV to margin-pressured OTT economics.
The good news, though: There is some time left for rights holders—enabled by technology and rights owners' realization of the need for a more collaborative approach—to advance business models to master the cable-to-streaming transition. "Cord-cutting" is still rather a local phenomenon than a universal trend across the world. The Americas, in particular, have been susceptible to such siphoning of the consumers' disposable income out of the pay-TV distribution system for multiple reasons, including the regulatory framework: The historical separation of content creation and distribution is super-charging the secular decline in pay-TV across the United States, Brazil, or Mexico. In contrast, vertical integration across Western Europe and Asia makes traditional pay-TV more sticky: The former is at least stable, while the latter is still growing—except for the SE Asia region that had experienced unprecedented growth and competition last decade and is now undergoing a significant market correction that is particularly relevant to rights fees to the European football leagues. (📝 Blog #37 - English Premier League: Is there anything to gain for Scadumore’s Successor as the League’s CEO?)
Even the COVID-induced sports hiatus and economic pressure in addition to traditional TV operators increasingly having to compete with sports and non-sports streaming services did not prevent the global pay-TV market from further adding net subscribers in significant amounts during Q2/2020, according to 🔢 Ampere Analysis (2020).
On the other hand, worsening fundamentals (= intrinsic value) do not necessarily mean that a market correction across the board is coming. The level of monetization is also only one input variable for determining the media rights fees eventually being paid to the IP owners (= market value): New market entrants continue to believe in the intrinsic value of top-tier live sports programming, willing to continue to pay a premium. Furthermore, long-term media rights deals, which are especially prevalent in North America, may result in specific rights not being fully valued yet, i.e. have not priced-in market developments since the last time that the rights owners went to the market with their most valuable IP. For example, the U.S. sports rights markets will have seen almost all major sports leagues heading to the market for domestic renewals until the end of next year. Despite the most recent market developments (think: COIVD + secular decline in pay-TV), they have essentially sat out the entire media rights frenzy that has happened since 2016 despite today 15% fewer U.S. households having pay-TV than four years ago. In other words, there is much more to catch up with than the most recent developments having the potential to reduce the respective price tags. Plus: Even triple-digit percentage increases—not completely ruled out for the NHL and NFL (both last valued in 2011)—are quickly put into perspective with the shorter rights cycles in Europe once looking at the implied annual growth rates.
OTT is the future, traditional pay-TV is the past. Right now, the transition has to be managed and before closing the monetization gap between the past and future model, getting market penetration and consumer take-up for over-the-top distributed pure-sports streaming services in the first place needs to be the priority—setting oneself up for shifting from customer acquisition to customer monetization mode once (1) pay-TV is no longer the best value-for-money for the overwhelming share of (casual) sports fans and/or (2) the price-to-value ratio can no longer be justified by even for mid-to-high income earners: i.e. once traditional pay-TV hits rock bottom.
Closing the monetization gap by overcoming the short-term deflationary impact of OTT streaming services (think: hyper-aggressive pricing/promotion, friction-less / monthly cancellation, no or at least reduced ad load as customer acquisition and watch experience are prioritized) becomes vital once "OTT" has become the primary business model of rights-holding broadcasters.
If that transition can’t be mastered, sports will simply get poorer as "Big Tech" will never save sports at large as future rights valuations will be determined by the business models and built-in monetization capabilities of the common media rights buyers and not the once-in-a-lifetime companies like Amazon—which will never be able to buy (or at least not be interested in doing so) the rights from every rights owner in every market. Let alone the fact that it currently even receives discounts when doing one of its few, very selective rights acquisitions.
Therefore, the fundamental business model of rights holders will inevitably need the re-addition of revenue streams—evolving from the current dual-revenue stream (subscription + advertising) into a triple-revenue stream model including add-on integrations like other direct-to-consumer verticals adjacent to (live sports) video streaming such as betting, merchandising, or ticketing. The problem of cord-cutting is twofold though: Besides the short- to mid-term impact of cord-cutting on rights valuation, it also limits the accessibility to live sports programming and the ability to nurture the interest of the next generations in sports which could negatively impact long-term participation.
Closing the monetization gap between traditional pay-TV and OTT is a topic for another day, though. Before, and as traditional distribution falls apart, rights-holding streaming services must fight for market penetration, scale, and customer ownership with rights owners and distribution platforms—including the inevitable question: Has distribution become more important than the actual content in the digital age?
DISTRIBUTION IN THE DIGITAL AGE
Technically, streaming and production technology has been democratized, cheapened, and commoditized—even though doing it at scale and on a transactional basis, in particular, not quite yet. (📝 Blog #34: Streaming of Live Sports: The Triple-Play of “Live” + “Exclusive” + “Pay-per-View”)
Consequently, Any technical infrastructure is rarely able to serve as a competitive advantage or moat anymore—in contrast to the market entry barriers which the asset-heavy and expensive traditional television operations represented in the past. Today, anyone's willingness to pay for renting the rights owner's IP seems to be the only market entry barrier left for potential bidders: Although most top-tier rights owners are supposed to have a diverse set of selection criteria for awarding media rights—especially for their domestic rights—paying a bit of a premium usually does the trick for new, unproven market entrants.
Unquestionably, this development has benefitted lower-tier properties as (automated) production and distribution in an unconstrained-in-size system (think: unlimited shelf space on the internet) have been enabled, creating at least the prerequisite for monetization of their media rights in the future. Top-tier sports properties that already were sought-after assets in times of limited demand (think: limited programming minutes on linear TV), on the other hand, need to manage the cable-to-streaming transition—which is less a technical (think: TV-Everywhere) than a commercial challenge.
Commercially, consumers are no longer willing to blindly follow live sports content for multiple reasons, including the increased content fragmentation which requires further customer education (think: discovery, adoption of new distribution means) and less perceived value-for-money when compared to other non-sports digital subscription services as well as heightened competition for their attention, time, and, ultimately, disposable budgets.
Content has been king in the traditional distribution system that monopolized audiences, their time and budgets while guaranteeing scale for content creators—differentiated content was the main bargaining chip against content distributors that determined carriage fees and, thus, the share of the total national (pay-TV) market any given rights-holding content creator could demand.
Hypothetically, does a similar scale in OTT streaming, which is needed to achieve a similar level of monetization of content given the lack of innovation in business models up to today, require ubiquitous third-party distribution (and all the downsides that come along with that), or is the drawing of premium content enough and today's empowered consumers will proactively seek out stand-alone streaming services—breaking established habits?
CASE STUDY: MEDIAPRO'S SEARCH FOR CONTENT AND DISTRIBUTION IN FRANCE
Coincidentally, we have a perfect case study going on in France where newbie MediaPro rented the bulk of the two top-flights football leagues' rights for four seasons (2020/21 - 2023/24) and a total layout of +/- €825M (€790M for Ligue 1 + €35M for Ligue 2) per season. As part of the bi-weekly podcast "The Bundle by Unofficial Partner," Richard Gillis and I have been providing our play-by-play commentary for MediaPro's transformation from a rights-trading intermediary—a mere arbitrage business with limited sustainability as their knowledge advantage compared to rights owners erodes and rights owners increasingly seek direct relationships with their broadcasting partners—and B2B production company to a fully-fledged consumer-facing media company including rights acquisition, content creation, content exploitation, and, ultimately, content distribution.
As the Barcelona-based company now seeks market penetration and consumer take-up for their newly-launched OTT streaming services—does premium content still does the trick on its own?
Outsized profits become possible through either (1) a horizontal monopoly in one of the three layers or (2) the integration of two of the parts such that a competitive advantage in delivering a vertical solution materializes. The former is the reason why I would have huge antitrust concerns whenever a Big-5 European football league, for example, would go over-the-top exclusively in their respective domestic market.
The latter has become less likely due to the increased fragmentation of audiences, but is the whole reason why players in the distribution layer that already own direct customer relationships to at least a certain market segment are interested in renting sport broadcasting rights—including Big Tech.
STEP 1 - RIGHTS ACQUISITION
After a similar attempt has failed or at least been put on hold until further notice as the league ponders a capital injection from private equity investors, in Italy, the Barcelona-based company finally entered the consumer-facing role of being the official main domestic broadcaster of a Big-5 European football league by acquiring the majority of French Ligue 1's and all of Ligue 2's media rights for a whopping combined +/- €825M per season through the 2023-24 season.
This deal put the French top-flight on much more equal footing with its European peers domestically—while it continues to suffer from the bargains that long-term rights lock-ups have turned out to be for broadcasters over the past few years: The LFP essentially missed out on the entire global media rights frenzy and rise of Paris St. Germain since 2016 by extending an existing deal with Qatari-based beIN Sports through the 2023/24 season in 2014—years in advance of the original €32.5M deal's expiration (2017/18), in private negotiations and without an open tender. The new deal for €80M per season, plus a reported revenue share component, pales in comparison to the English Premier League and Spanish La Liga in particular. Trying to front-run a potentially overheating sports rights market back in 2014 turned out to be an unwise decision as the most recent deal has essentially been the most lucrative one ever since. Thus, the French top-flight was heavily incentivized to go with the most lucrative bid despite some early warning signs (e.g. lack of bank guarantee provided by MediaPro or consumer-facing brand)—the new market entrant was fully willing to pay such premium to realize its ambitions in the B2C marketplace.
STEP 2 - CONTENT CREATION
There are two common misconceptions when it comes to rights acquisitions: First, rights do not necessarily imply an obligation to make use of such. For lower-tier properties, in particular, the cost-benefit-analysis often dictates to only produce and distribute the biggest games of any given competition—resulting in a lot of locked-up but unexploited IP. As a result, especially in international markets, rights owners such as the Spanish La Liga have started to not only bundle their second-tier with the top-notch competition when selling the rights but also attached obligations to exploit the acquired IP through the forced distribution of a certain number of second-division games as Part of any agreement (for the top flight’s rights). Second, the investment in rights acquisitions is only one part of the total cost equation: Domestic rights holders, in particular, cannot rely on simulcasting a league-produced international feed but are expected, both by the league and local fans, to put enormous resources into the program's production and presentation. Being the "content layer" in the sports broadcasting market, i.e. operating in both the B2B sports rights marketplace and B2C sports programming marketplace, comes with a lot of operational overhead and margin pressure: a typical media company.
Even though rights owners such as the German Bundesliga have significantly forward-integrated into the "content layer", both for self-exploitation (mostly focusing on archive material and social media content) and steering/incentivizing rights holders to present the league's product in the best and most-distributed way possible, production, operational, and marketing costs are still significant—not only for any league's domestic broadcaster but the internal media partners as well.
This became crystal-clear as MediaPro had reportedly been a deciding voice against adding two additional teams for the 2020/21 Ligue 1 season in order to sort out the implications of the COVID-induced cancellation of last season. It seemingly considered the production and distribution of 82x additional rather as a liability than an asset—making the trickle-down economics of pay-TV blatantly obvious: They only care about the biggest teams who draw mass audiences, i.e. are able to cross-over into the mainstream. Again: (The economics of) sports broadcasting ultimately live and die with the casual sports fans. On the positive side, third-party rights holders only being interested in the most-marquee games (think: willing to pay 80% of the money for 50% of the game inventory) and rights owners having own direct-to-consumer ambitions represent complementary interests at first glance—even though I do not expect rights holders to allow leagues to increase the scope and/or exclusivity of retained rights without significantly lowering their licensing fees due to purely-strategic, not economic reasons.
STEP 3 - CONTENT EXPLOITATION
The built-up legacy of market incumbents in the sports broadcasting market is often positioned as a competitive disadvantage for mastering the cable-to-streaming transition. Especially the inherent conflict about how fast to cannibalize the still highly-profitable legacy businesses (think: two separate slates of programming, one for broadcast/cable and one for streaming) as the move into streaming is inevitable in the lone-run when taking the changing consumption habits, the technical limitations of linear satellite/cable TV, and the legacy-sized operations including the attached fixed costs are taken into account. However, established brand awareness and trust, decade-long production and marketing expertise, built-in subscription bases, legacy cashflows, and distribution agreements can be a super-valuable asset when jumpstarting a stand-alone OTT streaming service.
MediaPro has had the benefit of decade-long production expertise and solved the lack of brand awareness in the B2C marketplace by licensing the historic Téléfoot moniker—TF1's long-running soccer magazine program would compensate for one of MediaPro's biggest blindspots and provide editorial know-how as well.
MediaPro's distribution and monetization model is this of a straight-forward (1) stand-alone, (2) ad-supported, (3) subscription-based OTT streaming service: aggressively priced, monthly cancellable, and digital-first distribution via owned and operated platforms (i.e. website) or mobile (iOS, Android) / television (Roku, Fire TV, Apple TV, Google TV) operating systems. The introduction of a discounted mobile-only monthly pass for €14.90 (vs. €29.90/€25.90 for monthly/annual pass) has been some much-welcomed innovation: I'm a big proponent of more price and product differentiation to achieve a more complete product-market-fit as mainstream culture has been fractured by new technologies.
Consumer preferences have become more heterogeneous, and a one-size-fits-all approach is not revenue-/welfare-maximizing anymore. Such innovations can capture an incremental share of consumer’s disposable income—striking the right balance in terms of scope (here: mobile-only) and price (here: 50% discount) is a delicate exercise nonetheless.
Ultimately, the Téléfoot streaming service follows the common OTT economics and dual-revenue stream model though—and even the very ambitious plan of reaching 3.5M subscribers across all plans seems unlikely to generate a positive return on the rights investment in the foreseeable future.
NOTES ON ASSUMPTIONS:
Mobile-Only Pass: As stated above, I do see incrementality in product and price differentiation including discrimination (think: multi-platform, multi-product strategy) to reach a more complete product-market-fit: Fish where the fishes are—with the right bait. Since MediaPro did not provide an update of the subscription goal (+/- 3.5M), let's assume any dilution of ARPU would be perfectly compensation by an increased number of mobile-only subscriptions, although I think there can even be additive revenues if played intelligently.
Seasonality: Usually, a ****Portfolio approach to any rights acquisition and content creation strategy is supposed to counteract the inherent seasonality of sports. Having exclusively European football makes Téléfoot extremely susceptible to churn—the OTT market's biggest challenge (think: CAC vs. CLV)—and a 75% annual churn rate (think: football season stretches across nine out of twelve seasons) almost represents the best case while an annual pass at a 13% discount almost seems without a real use case assuming active subscription management by consumers.
Advertising Revenue: Advertising budgets are shifting to digital, driven by the migration of audiences from linear television and the lure of more advanced ad technologies—promising a better ROAS. ESPN, who put the dual-revenue-stream model on the next level during its hey-days around 2014 by offering the advertising industry the combination of being sports pay-TV (= attractive audiences) and providing mass-reach (= 100M+ households) in a secure environment reached 40% of advertising revenue as part of its revenue mix—reflecting a very bullish assumption for the investment case of MediaPro.
Loss-Making Operations: Having profitable OTT streaming service operations from the get-go is an uphill-batlle, but the inherent problem of licensees is that they do not only rent audiences (as reflected in "Platform/Distribution/Bundle/Discount Tax") but the IP as well—hitting a profitable run rate towards the end of any three-to-five-year rights cycle (and shortly before the next rights cycle and attached with it the risk of a significantly higher price tag or loss of the rights) being almost the most bullish case and without sufficient time to recoup the ramp-up losses.
Churn and Addressable Market: Intra-annual retention of subscribers is driven by seasonality and Telefoot's current "portfolio of rights" on aggregate, does not ensure a stable subscription base over time. Thus, from a rights acquisition strategy perspective, it’s more a "collection of rights" than a well-diversified portfolio—limiting the total addressable market (think: football fans/casual sports fans only) and making the streaming service highly reliant on other built-in anti-churn mechanisms (think: producing/licensing original non-live programming, adding friction to the cancellation process). As monthly subscriptions imply a constant delivery and exchange of value—requiring renewed commitment on a periodical basis—even well-diversified pure-sports streamers are fully willing to give steep discounts on annual passes due to the tough reality of OTT economics: There’s little incentive to do so in this case given the comparatively meager discount in exchange for a one-year commitment. Both the total addressable market and fixed costs will decrease starting with the 2021/22 season once the Champions League (sub-licensed from RMC Sports during the 2020/21 season) will move over to Canal+—and it all becomes about customer retention for Téléfoot. The "Téléfoot" branding itself also seems to limit any optionality to pivot into a multi-sports streaming streamer without major marketing spending to move beyond the brand's pure association with football at this point. Initial, very aggressive customer acquisition mode with subsequently quickly switching into customer retention/monetization mode did make sense on paper taking the nature of comparatively short rights cycles into account—which would have made closing extensive distribution agreements immediately even more vital.
STEP 4 - CONTENT DISTRIBUTION
Before the onset of cord-cutting around 2015, cable/satellite pay-TV provided one-size-fits-all, mass-reach distribution to 100M+ households in the U.S. alone—fully serving two seemingly opposing ends: monetization and accessibility of content. I took a deep-dive into the role of distribution in terms of accessibility for a sport's potential growth in the world's biggest media market as it related to the German Bundesliga and its negligence under the previous rights holder FOX Sports last year. (📝 Hot-Take #3: The Future of the Bundesliga in the United States Beyond 2020)
While pure-sports streaming services inherently limit accessibility (think: digital divide, both economically and demographically) and continue to have niche status in the grand scheme of things, the role of distribution in terms of monetization has experienced a paradigm shift as well:
Pay-TV operators paid out fixed "carriage fees" to content creators for every single subscriber of their respective TV package of which any given channel was automatically part of—resulting in guaranteed recurring revenues at scale for rights holders which subsequently trickled down to the leagues in the form rights fees. In the United States, even special-interest sports channels such as SEC Network or beIN SPORTS delegated to the TV operators' premium packages gained scale which current pure-sports streaming services will probably never reach and an overcompensation in ARPU seems unlikely given the ongoing race to the bottom when it comes to pricing as essentially all streamers are in full customer acquisition mode—customer monetization must follow down the road: Making more money off fewer customers is the whole idea of OTT (= cutting out the middle-men) and DTC (= monetizing the customer relationship in multiple ways) but certain scale is required nonetheless.
When negotiating the tiers (= determining the number of subscribers) and carriage fee (= revenue per subscriber) with TV operators, content had been king as it provided great leverage vis-a-vis commoditized TV operators of which there were perfect substitutes for consumers if any given "must-have" channels had not been carried. Expensive live sports programming regularly secured its position in basic-tier packages, inevitably resulting in the often-cited "ballooned pay-TV bundle" from the consumer's point of view—a notion particular prevalent for non-sports fans.
Distribution has changed in the digital age though: "Carriage" fees have become "affiliate" fees. Being "distributed" significantly reduces friction for the customer sign-up but no longer guarantees any revenues for content creators—it is now so-called IPTV: a managed service, delivered by TV operators / telcos via a set-top box.
In fact, the dominance of major technology companies as the gateway to digital content and the abundance of content fighting for the consumer's mind and wallet share has put their respective bargaining power upside down: Access to customers becomes essential and there rarely is "must-have" content anymore. True ownership of the customer relationship for OTT streaming services (think: personal/billing information), the definition of a true direct-to-consumer business, is often not achievable and only the world's biggest brands can completely forego (think: Spotify/Netflix not allowing sign-up via iOS/Android) or limit the intermediation by (think: Netflix not becoming part of The Roku Channel, Apple TV, or Prime Video Channels) third-party distributors. During the pay-TV era, content creators did not have customer agency either but at least received guaranteed revenues at scale. Now, OTT streaming services have not only not been able to cut out the traditional middlemen (think: telcos pivoting to "super-aggregators") but added more intermediaries who are seeking their share of revenues, data, and advertising space. Ultimately, someone is always going to be the rent seeker in TV—placing themselves between customers and content. Previously, it has been satellite/cable providers. But now Roku, Google, Amazon, and Apple are playing that role in addition to the previous players.
Unfortunately for content creators, the ambitions of technology companies are not limited to be a platform with super-high margins (think: connecting differentiated brands with consumer demand) but expand to assume the role of an aggregator by collecting a critical mass of users (like platforms) and leveraging that access to those consumers to extract value from the supplying content creators—ultimately leading to commoditization instead of differentiation of brands: By means of owning the user experience/interface and customer relationship, the available content on Roku, Fire TV, or Apple TV becomes increasingly associated with those players instead of those who are actually licensing and supplying the content in the first place—without all the financial risk, margin-pressure, limited scalability, and operational overhead attached to operating in the Content Layer. Additionally, aggregators, in particular, promote churn, which is bad for the individual streaming service but beneficial for the aggregate—leaving the individual content creator even without the ability to retarget churned customers due to the lack of customer ownership. Consumers favor OTT aggregators (think: "subscription fatigue" due to non-financial costs): The ease of using a single user interface via a single app, managing a single bill, as well as cross-service navigation and search (i.e. discovery), is certainly enticing in today's fragmented streaming landscape.
The whole idea of why to get distributed reach in the first place is about growing the subscription base quickly—which does not necessarily mean gaining a customer: Distributors get the customer, their data, the billing information, and the ability to market to them.
Coming back to MediaPro though: Off-platform subscribers via the content creator's owned and operated website are the most valuable, highest-margin ones and represent a true direct-to-consumer relationship. In addition to traditional marketing spending, rights holders are even willing to further dilute ARPUs by undercutting platform-pricing to gain customer agency. In fact, discounting the owned & operated website service is often an easy trade-off for streamers (if allowed).
Without third-party distribution though, the lack of discoverability and inherent friction in the sign-up process would denigrate many OTT services to mere "direct-to-fan" offerings—having no chance to capture the casual sports fan who will make or break an investment case like MediaPro.
As bargaining power has shifted from those who own, or at least rent, the supply (= content creators, Téléfoot) to those who own the demand (= content distributors, Canal+) and Canal+ having the scale that fubo TV lacks as a distributor, carriage on the country's biggest TV operator seems to have determined the faith of MediaPro's investment from the beginning. Reminiscent of what happened to Eleven Sports in the U.K. with Sky Sports and BT Sport, going into direct competition in terms of rights acquisitions with someone on whom MediaPro would depend later on for creating a positive ROI for any given rights acquisition shows the power of vertical integration: combining the content and distribution layer.
CONCLUSION: CONTENT AND DISTRIBUTION IS A CHICKEN-OR-EGG PROBLEM
Accumulating built-in distribution (think: Amazon) or globally-recognized brand power (think: Spotify, Netflix) in the first place makes content creators both less reliant on extending reach via expensive third-party distribution and more attractive as a rights holder to rights owners (think: monetization and accessibility of content). The latter is ostensibly evidenced by the discounts which bidders with mass-distribution such as free-to-air broadcast TV (think: FOX/ABC/FOX/CBS in the United States) and "Big Tech" (think: Amazon in the United States or United Kingdom) have been getting compared to their paywalled, lower-reach rivals (think: ESPN in the United States or Sky Sports in the United Kingdom).
The problem for rights owners though: Free-to-air broadcast TV is constraint-in-size (think: limited programming minutes/shelf-space), depends on limited budgets by the advertising industry, and, therefore, has only interest in some games of the very few top-tier sports properties that can draw mainstream audiences.
When it comes to "Big Tech," Amazon is probably the technology company that is mentioned the most like the one who will step right in and save sports as at least some properties seem to approach the peak of media rights valuations. However, Amazon's approach to sports rights is less strategic than opportunity-driven and benefits from unique internal cross-marketing/monetization/subsidization. The e-commerce giant will provide occasionally the very rare bonanza, or at least bail-out, for sports but will not save sports at large: Amazon, of which there is only one, will never be interested in every sports right available and only improved business, or more specifically, monetization models, will do the trick and warrant similar rights fees as in the past.
Not every property or available rights package comes with a very limited number of games, almost no production and editorial programming duties, and a compressed timeframe that can be parlayed with at least one of the four most important online shopping days in Amazon Prime Day, Black Friday, Cyber Monday, and Christmas–-this has been the case across the board for Amazon’s investments in the NFL, Premier League, Autumn Nation Cup, and French Open. Amazon is still experimenting and remains in the “Distribution Layer” as much as possible (think: asset-light, relying on third-party solutions by FOX and Sunset+Vine for production, or WSC Sports for innovation) at this point.
If the monetization gap between the business models of traditional pay-TV and OTT streaming (think: triple-revenue-model of subscription fees, advanced addressable advertising, and add-on integrations) is not closed in the long run, rationale business behavior (think: customer acquisition costs ≤ customer lifetime value) should prevail and would dictate less revenue trickling down to the right-owning leagues and organizations in form of licensing fees as the inevitable result. At the same time, I do not expect the delta between revenues/scale of owned and operated streaming services by rights owners and licensing fee/coverage from third-parties to shrink significantly—especially when it comes to first-tier properties such as the leading European football leagues and major sports leagues in North America, neither domestically nor internationally. This delta is the key consideration when evaluating any direct-to-consumer ambitions of rights owners and defines the scope of such. In other words, the role of league-owned and -operated OTT services will remain that of a premium product for die-hards (for major sports leagues in North America) or a difficult-to-believe threat a.k.a. bargaining chip towards their broadcasting partners (for the leading European football leagues).
And never forget: Acquiring subscribers with a customer lifetime value greater than their acquisition costs only starts recouping investments in content acquisition and operational costs—still a long way to go for making a profit (as a rights holder) or coming close to the licensing fees that continue to be paid by third-parties (as a rights owner).
Content was King in the linear past, Distribution has become both commoditized (technically) and vitally important (commercially) in the digital age. Implicitly, renting/creating sought-after content is no longer the be-all-end-all for successfully and sustainably entering the (sports) broadcasting/streaming market—other competitive advantages across the IP (e.g. Disney, Rights Owners) and/or Distribution (e.g. Amazon, Apple) are now required. MediaPro's run as the main domestic rights holder of the French Ligue 1 seems to be heading towards its end before it really began. Even though COVID-19 did not help, MediaPro CEO Jaume Roures blaming the revenue shortcomings on the lack of advertising revenues does not make sense as digital (addressable) advertising on OTT streaming services is still in its infancy given the lack of scale and with rather unproven superiority in terms of ROAS. Instead, the gaping hole in Téléfoot’s distribution leaves the service’s subscription total sitting at +/- 400,000 among TV operators / telcos (i.e. Orange, Free, SFR, Bouygues) plus those who have signed up via Téléfoot’s over-the-top streaming services (TV OS / Mobile OS / Website). Unfortunately, France is a traditionally strong IPTV market (with telcos as gatekeeper) with an underdeveloped/-penetrated OTT landscape (with "Big Tech" as gatekeeper), in which Canal+ (+/- 8.4M subscribers) is coincidentally the biggest cable/satellite/IPTV player. And even though content creators relying on distribution through the telcos is not a great deal for them, alternative ways to access end consumers are very limited.
Once full distribution a.k.a. market penetration is achieved and customer take-up accelerated, streaming services will have to switch from customer acquisition to customer monetization/retention mode.
Even though there is a lot of untapped, technology-enabled potential for innovation in media rights packaging and distribution, it remains doubtful whether rights-holding OTTs will come close to the IP's level of monetization (= Subscribers x ARPU) as before and be able to pay rights fees to which rights owners have become used to over the past decade. Instead, in order to supplement media rights revenues, rights owners will probably have a broader set of media partners and content exclusivity will become less important as markets fragment (think: less platform-neutral rights). Different rights holders of the same rights owner will have different addressable markets and abilities to reach them—with limited overlap and competition between them.
The direct-to-consumer part of rights owners, though, will be rather strategically- than commercially-driven: When it comes to revenue streams, rights-owning leagues and organizations will continue to rely on B2B relationships (including second-level bank-rolling intermediaries such as rights agencies) for the foreseeable future. But even those B2B relationships can be optimized and diversified.
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