Hot - Take #7: Apple, Amazon, and Google going for Video Aggregation Primacy ... through Live Sports
YouTube becoming the exclusive retailer of 🏈 NFL Sunday Ticket follows the 🗺️ playbook from other technology giants but might come from a position of 🛡️ weakness rather than 👊🏼 strength
🚨 The News: Google/YouTube will pay the NFL between $2.0-2.5BN annually, reportedly including a variable component based on sign-ups, under a seven-year for the residential rights to retailing the NFL Sunday Ticket. The NFL retains commercial rights to broadcast games in bars, restaurants, and other commercial premises until further notice — which could push the package's annual value beyond $2.5BN in a best-case scenario and total domestic media rights income to $12.0BN for each of the next seven years. Recent blog posts on OFFTHEFIELDBUSINESS covered Big-Tech’s apparent interest in live sports programming and how such distinguished content (💡think: ⏱️ live, 🙅🏼 non-substitutable product with 🤷🏼♂️ low price elasticity of demand and 🔥 sure-fire in a hit-driven video entertainment business with a lot of losers):
First when the sports media rumor mill went overboard on Apple getting into the sports rights market, from small- (picking-up MLB’s mid-week leftovers: Apple and MLB hold ‘Substantial Talks’ over Broadcast Deal), to medium- (licensing NFL’s Sunday Ticket: Apple reportedly wants in on NFL Sunday Ticket), and even large-sized investment tickets (acquiring of Disney’s worldwide leader in sports: Apple Could Acquire ESPN in 2024):
#49 Subscription vs. Platform Revenues from Live Sports Programming: Making sense of apple’s interest in exclusive live sports programming and why “Big-Tech” might be the future sports rights buyers that rights-owning leagues have always held out hope for — and trying hard to speak it into existence: Apple and Amazon provide NHL with extra opportunities, says commissioner Bettman). The traditional pay-TV bundle had been in secular decay and limited capacity to sustainably absorb the constant growth of sports rights fee of the 2010s — while it turned out that OTT streaming would quickly make up for linear TV losses was a false assumption (💡 think: trading 📺 broadcast bucks for 📱 digital dimes). Instead, the superior monetization through a platform (Apple TV) compared to subscription economics (Apple TV+) to generate positive returns on content investments might be the ecosystem that could accommodate ever-higher rates and bring the incremental rights buyer to the negotiation table. [🔗 LINK | February 2022]
Then, when MLS finally locked in a return on its multi-year effort of pooling and aligning all regional, national, and international media rights ahead of the league’s 2023 season, the unprecedented and all-encompassing ten-year media rights agreement with Apple required an update on what Apple, Amazon & Co. are seeking when getting into business with sports rights owners (which certainly might not be something for everybody as it was later seen during the NFL Sunday Ticket negotiations):
#50 MLS x Apple - Decoding Apple’s and Amazon's Sports Video Strategy: Positioning as the exclusive retailer/distributor of ready-made content rather than a traditional rights buyer. The deliberately coined “MLS Season Pass” might be the picture-perfect, biggest-available use case for Apple to deliver proof of concept for being an underwriter of a sports league’s direct-to-consumer ambitions (💡 think: going over-the-top with league-branded 📱 streaming service while transferring most financial risk to the third-party licensee and reaping significant financial guarantees 💰🔒) and realizing the company’s idea of an “iTunes of Sports”. [🔗 LINK | August 2022]
In the immediate aftermath of the MLS announcement, Apple fortified its position as the odds-on favorite for an even higher price: the NFL’s out-of-market package of not nationally televised regular season games (a.k.a. NFL Sunday Ticket). At first glance, the exclusive retailing/distribution rights to a ready-made product produced by the local affiliates of national rights holders CBS and FOX — waiting to be brought to the end consumers — seemed another good fit for Apple and would again have come without the traditional broadcaster obligations such host production, talent management, and ad sales that are usually attached with being a main league’s broadcasting partner.
Fast-forward another half a year, YouTube — a dark-horse contender and not known for (over-)spending on sports media rights to date — swooped in and locked up that sought-after-by-Big-Tech NFL property with its unique characteristics: mainstream domestic sports, ready-made product.
Next Up: 🏀 NBA League Pass (= NBA’s equivalent package to NFL Sunday Ticket) and 🤼 UFC Fight Pass and Pay-per-View Events (= self-contained, self-produced league with a global, price-insensitive audience) are the next digital-first products that will be brought to market. The set of potential bidders should broaden given the lower price tags compared to the NFL, allowing pure-play streaming services such as ESPN+, Peacock, and Max to contend with broader platform or ecosystem plays like Google, Apple, and Amazon.
🥸 The Analysis: Before getting ahead of ourselves on what is next, let’s unpick YouTube’s acquisition of the exclusive retailing rights to NFL Sunday Ticket along the following lines:
Product-Market-Fit: How can the NFL Sunday Ticket could have served any potential buyer’s business in the current media marketplace and what holds them back?
Must-Have vs. Nice-to-Have for Big Tech: Amazon, Apple, and Google’s core businesses are challenged to different degrees, can NFL Sunday Ticket mitigate existential threats for any of them?
NFL Sunday Ticket on YouTube: How does the NFL Sunday Ticket fit into Google’s core advertising business and any other of the company’s developing, still nascent revenue streams?
Digital TV Bundle, Multi-Tiered Subscriptions, CTV Storefronts, Advertising Budgets: Everyone following a similar playbook, how Apple, Amazon, and Google are going for video and audience aggregation primacy by leveraging live sports programming — which has been a content laggard in the cable-to-streaming transition?
Outlook for YouTube: How does Google create parallel paths for YouTube to own the bundle of the future, regardless of whether the linear TV bundle survives (YouTube TV as leading virtual MVPD), the new bundle becomes a self-select package of third-party streaming services (Primetime Channels as CTV storefront), or a combination both?
How could the NFL Sunday Ticket have served any potential buyer’s business in the current media marketplace?
Since the NFL last brought its out-of-market regular season package to the open market in 2014, the product has not changed much: As a B2C proposition, it has arguably been slightly diluted as the NFL carved out more national broadcasting to lure incremental media rights buyers (e.g. expanded, more exclusive Thursday Night Football) and new audiences (e.g. NFL Christmas Games, NFL International Games) — while the NFL in particular and must-have live sports programming in general might have never been more valuable. As a B2B proposition, it remains a loss-leader at an exorbitant price tag that inherently limits the set of potential buyers to businesses that can generate superior economics indirectly and by attributing “strategic” benefits to the investment since there is no path to accounting profits through direct subscription and advertising revenues for possibly anyone. However, the media and entertainment landscape including its main players and prevailing video consumption habits have undergone constant change ever since, and the cable/satellite-to-streaming transition only accelerated amidst the recent COVID pandemic.
Contenders and Pretenders for NFL Sunday Ticket
Consequently, NFL Sunday Ticket’s product-market-fit and, thus, the set of potential bidders have evolved as well — remaining limited in size and scope though:
Even with live sports as one of their last strategic advantages over streaming still intact up until recently, traditional satellite and cable pay-TV operators (= multi-channel video programming distributors; such as 🔌 Comcast, 🔌 Charter, 📡 DirecTV, 📡 Dish TV) have been losing subscribers at an increasing rate ever since its high-point in 2010 (approx. 110M pay-TV subscribers). Such churn has predominantly been irreversible and accelerating for the leading pay-TV providers (approx. -1.7M in Q3/2022 🆚 approx. -1.3M in Q3/2021) — with the digital linear TV bundle (= virtual multi-channel video programming distributors; such as 📱YouTube TV, 📱Hulu + Live TV, 📱Sling TV, 📱fuboTV) only able to pick up about 50% of the slack (approx. +900K in Q3/2022 🆚 approx. +680K in Q3/2021). Such shrinking total market size of their main revenue source is the challenge cited by almost every executive in sports media: Two-thirds of US TV households in the United States pay for a cable, satellite, or streaming TV subscription, down from 79% in 2017 and 88% in 2012.
Along the way and as a beacon of hope for sports rights owners pursuing sustained media rights licensing revenues, over-the-top streaming services and other technology giants were automatically drawn into the sports rights market by competitive forces to deliver continued subscription growth on their own.
At this stage of the industry cycle and as streaming has not been able to quickly make up for linear TV losses, DirecTV and its industry peers are not the “star” anymore, rather serving as the “cash cow” (💡 think: 👍🏼 high market share x 👎🏼 no market growth, with DirecTV just announcing another 💲 price hike for existing customers in January 2023 to squeeze 🤑 additional revenue out of a 📉 declining customer base). Optimizing a business in secular decline for consistent cash flows, without a clearly defined bottom and no chance of re-accelerating growth over its remaining lifespan prohibits high-cost (customer) acquisition or (subscriber) retention marketing investments in the size of a service like NFL Sunday Ticket. Unfortunately, over-the-top streaming has not become the new “star” yet but remains a “question mark” as the industry’s cable/satellite-to-streaming transition plays out and, ironically, is temporarily deficit-financed by the “cash cow” (💡 think: Disney not divesting its 📺 linear networks generating approx. $8.5BN in operating profits to double-down on 📱 direct-to-consumer streaming making approx. $4.0BN in operating losses in FY 2022) from above.
More specifically, pure-play streaming services such as Disney-owned ESPN+ or Netflix, on the one hand, are now operating in a new environment as investors over the course of 2022 soured on the growth-at-any-cost, loss-making playbook. In contrast to broader platform or ecosystem plays that leverage streaming as an add-on business attached to a core product, both ESPN+ (as part of the Direct-to-Consumer segment within Disney Media and Entertainment Distribution) and Netflix (as a pure-play streaming service) do not have the benefit of both hiding such a loss-leading marketing expense from investor’s attention deep inside the company’s income statement and making good with indirect revenue streams or “strategic” benefits beyond the stand-alone streaming economics. Potential bidders with an established legacy media business already underwent significant cost-rationalization measures, especially on the fringes and related to non-business-critical sports properties, to optimize for cashflow generation. Their in-house streamers, supposed to be a hedge against the erosion of the linear TV subscription base, are growing (e.g. ESPN+: approx. 24.3M subscribers in Q3/2022; +42% 🆚 Q3/2021) but can simply not swallow such losses as company-wide bottom-line profits, free cash flow, and revenue expansion originated from their existing subscription base now trump pure subscriber growth.
If anyone, a fully-distributed Netflix in the United States and equipped with the required scale, might have been the pure-play best equipped to support NFL Sunday Ticket economics — despite its recent subscriber growth slowdown (approx. 73.4M North American subscribers in Q3/2022; -1% 🆚 Q3/2021). However, the company is subject to the same pressures from Wall Street investors as $DIS-owned ESPN+/Disney+, or its sub-scale competitors such as $WBD-owned Max and $CMCSA-owned Peacock. For now, there are more cost-efficient growth catalysts available for both The Walt Disney Company and Netflix: bundling with in-house or external services, the crackdown on password-sharing, discounted advertising-supported tiers, and more. Needless to say that ESPN, in particular, was interested in the NFL Sunday Ticket, doubling down on the success of the sell-through case of UFC Pay-per-View Events. Stand-alone OTT economics at its current level of scale, churn, and pricing power were simply not competitive at such elevated investment size (1x 🏈 NFL Sunday Ticket = 7x 🤼 UFC Pay-Per-View Events) though.
Inevitably, broader platforms or ecosystems, on the other hand, with deep pockets and significant marketplace prowess that leverage video/music streaming as an additional benefit to drive user/customer acquisition or retention attached to a core product became the most viable contenders and made the most sense as buyers for NFL Sunday Ticket — a pure marketing expense which would have been a (hidden) drop in the bucket for the income statement of either Apple, Amazon, or Google.
B2B Licensing versus B2C Retailing
To also tick the “rights owners going direct-to-consumer” box, the league may or may not have looked at exploiting and offering its out-of-market package itself on the league-owned and -operated content streaming service NFL+. Obviously, the NFL chose ultimately to go the licensing route and will keep doing so as long as third-party licensees remain willing to pay top-market valuations and the NFL is able to lock in significant cycle-over-cycle increases. Variabilizing such a material portion of its contractually guaranteed revenues to take a shot at realizing a doubtful, or at best questionable, upside would be financial suicide considering recent multi-year commitments in the form of player salaries with backed-in annual escalators (e.g. Patrick Mahomes: ten-year $450M deal through 2031; Deshaun Watson: five-year $230M deal through 2026) or, and in spite of significant subsidies from public funds, multi-billion stadium projects in even mid-sized markets (e.g. Buffalo Bills: 1.4BN, opening in 2026; Tennessee Titans: $2.1BN, opening in 2026). Further, and until further notice, the NFL already has some eggs and material opportunity costs (approx. $500M per season) in the B2C basket with its mobile in-market streaming rights on NFL+ — which very much still feels like a half-baked placeholder until a minority or majority investor in NFL’s media assets is on-boarded. Overwhelmingly, and like most top-tier rights owners, the NFL remains a B2B licensing business instead of a B2C retailing business — benefitting tremendously from its privileged position as a supposedly powerful loss-leader for broader platform or ecosystem businesses.
Being a pure distribution play (= sell-on of the broadcasting feeds of local FOX or CBS affiliates outside of their local designated market areas), it was also easy to slice its out-of-market package into residential and commercial rights. Due to this particular nature as a distribution-only product (like 🏀 NBA League Pass or 🤼 UFC Fight Pass and Pay-per-View Events) and even though live sports has been a laggard in the cable/satellite-to-streaming transition, a non-traditional technology company securing the residential retailing rights to the NFL Sunday Ticket might not be the final tipping point in the move from traditional cable/satellite TV to internet-based video just yet. Instead, it reflects which market players are on an upward or downward trajectory and which business models have nowadays the underlying economics to support such a high-cost loss leader that does not have a stand-alone path to profitability. The NFL is not all-in streaming (like the MLS), it is tip-toeing into streaming for diversification purposes and only with select products as media distribution models and delivery mechanisms evolve.
However, the league expanded its set of broadcasting partners with Google, a technology owner with a huge balance sheet and global reach, a large marketing platform with a built-in, identifiable audience on YouTube, and the ability to support sustaining the legacy linear TV bundle via YouTube TV where the league's most-marquee games remain available and the majority of revenues are still originated from. Interestingly, and despite fundamental changes in the media marketplace and consumer habits, NFL Sunday Ticket’s utility remains at least partially in a marketing tool for a linear TV channel bundle (= YouTube TV) — with expanded utilization intended as part of advancing YouTube’s position in the broader, fast-growing (video) audience aggregation business (= YouTube TV). Having fully retained its set of traditional and trusted broadcasting partners (Comcast Corporation, Paramount Global, Walt Disney Company, Fox Corporation), CBS, and established new business relationships with two trillion-dollar-technology-companies (Amazon + Alphabet) has arguably both de-risked and future-proven the league’s media rights revenue and distribution mix for the long term.
Must-Have vs. Nice-to-Have for Big Tech
Amazon, Apple, and Google’s core businesses are challenged to different degrees, can NFL Sunday Ticket mitigate existential threats for any of them?
With the pretenders out of the way, a few points stand out about why NFL Sunday Ticket ended up with Google, instead of Apple or Amazon who have been more aggressive in the sports rights market as of late, and limited the appetite as well as strategic fit and made it a “nice-to-have” rather than “must-have” for either of those two behemoths and in contrast to YouTube. Since NFL Sunday Ticket is inherently loss-making and was always supposed to “lead” to and support a core business, considering the current revenue mix of any of the mega-cap technology giants is informative:
🔎 Google: Advertising (79% of total revenues, which amounted to an annual turnover of $393.4BN as of Q3/2022)
📱 Apple: Hardware (80% of total revenues, which amounted to an annual turnover of $280.5BN as of Q3/2022)
🛒 Amazon: E-Commerce Store/Marketplace (65% of total revenues, which amounted to an annual turnover of $502.2BN as of Q3/2022)
Before revenue expansion, there is revenue retention: The (search) advertising market is softening and facing key challenges at the moment: marketing budgets pullbacks and pressured by the economic slowdown, return on digital advertising spent knee-capped by Apple’s privacy push, market share dominance challenged by new competition including artificial intelligence (💡think: ChatGPT-powered Bing 🔎 search engine), and an evolving media consumption mix skewing increasingly more towards (short-form) video are just a few selected headwinds that Google’s core business is currently facing.
Considering what makes or breaks Alphabet’s stock price in the foreseeable future and would have a material impact on the company’s income statement bears the following question: Has the acquisition of the NFL Sunday Ticket rather been a defensive (= revenue retention from existing revenue lines) than offensive move (= revenue expansion through new or still nascent revenue lines) after all?
NFL Sunday Ticket: Must-Have vs. Nice-to-Have for Big Tech
Short- and long-form digital video content as well as a shift from mobile and desktop devices to the connected big-screen TV panel increasingly makes up today’s media consumption mix. Further, linear TV advertising budgets are getting digitized. Google’s advertising market leadership has been firmly established on small-to-medium-screen devices and in display search advertising. Translating its current mobile/desktop advertising market share — for its own cross-device advertising network (= Google AdSense + AdMob) and its management platform of third-party advertising networks (= Google Ad Manager) across supply and demand sources — to the “big-scree” will be business-critical as both competition grows and connected TVs capture more eyeballs and marketing budgets in the future.
Related, YouTube recently experienced its first decline in quarterly revenues (approx. $7.1BN in Q3/2022; -1% 🆚 Q2/2022) — due to a combination of reduced supply (💡 think: underdeveloped and less monetizable YouTube Shorts, i.e. 🤳🏼 sub-60-second clips, compared to TikTok and Instagram) and demand (💡 think: marketing budgets subject to ✂️ short-term cost-cutting measures amidst 💹 macroeconomic uncertainty).
In theory, NFL Sunday Ticket could be leveraged to mitigate all of those existential threats: increasing market share for its CTV operating system to secure advertising budgets, adding users and eyeballs for its live and on-demand video streaming platforms (YouTube TV + YouTube) to retain its online video primacy, and competing on short-form video with making exclusive premium sports content accessible to YouTube content creators.
As far as revenue retention is concerned, Apple’s and Amazon’s core businesses seem less threatened by underlying market/consumption shifts or stiff competition. In fact, both companies are increasingly challenging Google’s digital advertising market leadership (29%) — with Amazon (13%) already capturing the third-most advertising spent behind Google and Meta (20%), and Apple aggressively developing ambitions and hiring resources to capture more market share.
Despite an understandably increased urgency on Google’s behalf, Apple remained the odds-on favorite to secure the NFL’s out-of-market regular season package until a couple of days before the eventual announcement — implying that Google indeed stayed financially prudent and did not intend to compete head-on with Apple in a bidding war. Once Apple bailed on the opportunity due to a combination of compromises that would have made the NFL Sunday Ticket a less appealing and straightforward proposition than its recent ten-year “Every Game, One Single Place, All Around the World” - deal with the MLS (💡 think: ⚫ local blackouts; 📉 watered-down exclusive game inventory to accommodate other new media partners and establish annual tentpole events on Christmas or Black Friday). Amazon, for its part, was apparently only interested in bargain-hunting if the sales process remained behind NFL’s expectations given the diminishing returns of any incremental NFL inventory for the e-commerce giant (💡 think: 💰 limited capacity of Prime Video subscription to create a return on incremental NFL investment and absorb any additional sports rights spending; 🎯 nascent sell-through strategy, cross-device platform approach, or additional subscription tiering that would expand ARPU potential). Google quickly closed a seven-year deal for the exclusive residential retailing rights of NFL Sunday Ticket once Apple and NFL were stubbornly unable to agree on terms and conditions.
Some additional quick thoughts on any other reasons behind the price tag why it turned out to be NFL ✖️ YouTube for the league's next-to-last domestic media rights package available for the foreseeable future:
Territorial implications were a factor to consider, NFL Sunday Ticket is a US-only proposition and YouTube TV is the one US-only business across the three globally-operating technology giants that stands to benefit from the addition of such exclusive programming. From a branding perspective, the “Sunday Ticket” - moniker has been all over the press announcement and now that the ownership stake in the broader NFL Media ecosystem (NFL Network, NFL+, NFL.com) will be transacted separately — re-educating the consumer on an already well-established proposition is not worth it despite the negative association that DirecTV might have brought to the legacy-rich brand name. As far as the eventual buyer/investor in NFL’s media assets is concerned, we might look again at Netflix: With the live sports element carved out and the executives at global streaming services never having been into the rights-renting and/or loss-leaders in the first place: ”We’ve not seen a profit path to renting big sports. We’re not anti-sports, we’re just pro-profit.” As mentioned before, the (exclusive) national live game schedule retained for NFL Network has been diluted significantly and would not make up the main investment hypothesis for NFL Media anymore, storytelling support by the most-premium intellectual property is what the league brings to market with this intended transaction. Netflix, for its part, has been on a (non-live) sports content buying spree, adding a significant number of sports documentaries to its programming line-up in short order: 🎾 ATP/WTA (Break Point, January 2023), ⛳️ PGA Tour (Full Swing, February 2023), 🚴 Tour de France (coming in 2023), 🏉 Six Nations League (coming 2024), and ⚽️ FIFA World Cup 2022 (coming 2023) to mention a few.
For revenue expansion purposes, it would have been more of a “nice-to-have” or “super-charger” for both Amazon (i.e. super-charging e-commerce-first subscription business subsidized by AWS) and Apple (i.e. super-charging mobile-first hardware- and software-business). Rising interest rates and other macro-economic uncertainties have been priced into the market and such an investing environment is simply not conducive to aggressively pursuing incremental growth: Valuation multiples have corrected downward in both size (contraction) and metric (profitability), and stock prices suffered in 2022 accordingly: Amazon (-49.5%), Alphabet (-39.0%), Apple (-26.8%). Top-line growth (subscribers, followed by revenues) at all costs, especially outside of a company’s core business, has not been what public-market investors have been asking for — which bears the question: Did the NFL mistime the market and/or hone in on Apple too early and for too long — missing out on an even bigger payday if sold earlier last year?
Anyhow, now Google has the chance to leverage the most-premium live sports programming available in the marketplace to 1️⃣ retain its revenue base by fortifying YouTube’s position as the most-dominant streaming platform by expanding its supply (= eyeballs 👀) and demand (= advertisers 💸) leadership beyond mobile and desktop to the big-screen and 2️⃣ expand its revenue base by pursuing a two-pronged strategy to own the (video) bundle of the future — regardless of whether the linear TV bundle survives (👉🏼 YouTube TV, for cord-movers), a self-select package of OTT streaming services emerges (👉🏼 Primetime Channels, for cord-cutters), or a combination of both bundles prevails. In either scenario, sports content will remain key to drawing and keeping the high-engagement long-form, live viewing base known from traditional linear TV and achieving success as a subscription- and advertising-funded business.
NFL Sunday Ticket on YouTube
How does the NFL Sunday Ticket fit into Google’s core advertising business and any other of the company’s developing, still nascent revenue streams?
With the above in mind (💡 think: 💸 Google’s financial prudence, ☠️ existential threats for its core business, 🌎 macro-economic uncertainties, 👀 audience and 💰 budget migration to connected TV as the default connected streaming device), Google going after the NFL Sunday Ticket is not as simple as a down-payment for future business with NFL: Its financial outlay is already on par with the league’s legacy outlets NBC, FOX, and CBS (approx. $2.0BN per season) — competing for the second-most expensive single package available in the entire 55-billion-dollar global sports media rights market behind ESPN’s domestic NFL agreement (approx. $2.7BN per season). NFL Sunday Ticket is supposed to create a meaningful business impact for Google immediately, over the next seven years, and long after NFL Sunday Ticket might be gone again.
Further, it presented the best fit with the company’s business segments: Google is a technology, not a media company (💡 think: 🤝 content distributor rather than 💰 rights buyer). Its intention and long-term ambitions also differ from Apple and Amazon as the NFL Sunday Ticket is not supposed to serve as their proof of concept for rights owners to 1️⃣ build their own global direct-to-consumer business on top of a 1.8BN strong active device base and as part of an “iTunes of Sports” (in contrast to the MLS Season Pass on Apple TV) or 2️⃣ handle live sports broadcasting production and sustain previous audience reach while migrating from cable/satellite TV to exclusively streaming over-the-top (in contrast to Thursday Night Football on Prime Video), respectively.
Neither linear cable/satellite TV nor streaming represent full-reach distribution systems anymore (in the case of linear cable/satellite TV) or yet (in the case of streaming) — which is inherent to a process that is “in transition” (= hybrid viewing). Both delivery methods will co-exist for the foreseeable future in such a hybrid era, but NFL Sunday Ticket has never been about maximizing accessibility. Instead, it has always been about delivering strategic value to the core business of its exclusive retailer: previously DirecTV, now YouTube. Platform-specific distribution rights to maximize accessibility (💡 think: 🔌 cable 🆚 📡 satellite 🆚 📱 streaming TV distribution) were not seriously considered and NFL quickly made their mind up that NFL Sunday Ticket will be a streaming-only product in the future.
In addition to this technical access barrier of being tethered to physical hardware (= satellite dish) in place, most recently charging $295 for the “Base” plan and $395 for the “Max” plan for the entire four-to-five-month season historically put a limit on audience reach and customer take-up for NFL Sunday Ticket — which arguably punched far below its weight during its 28-year-old partnership with DirecTV (approx. 2.0M paying subscribers among DirecTV customers).
For at least the front-end of the seven-year agreement, that hardware requirement will turn into a connectivity issue in rural areas. Ironically, remote connectivity has been the key advantage of satellite- over cable-based TV delivery when satellite TV operators started to compete against the more established cable TV industry in the 1980s. Today, nearly 90% of all US households (approx. 117M US households) currently receive a broadband internet service, easily outnumbering satellite TV subscribers (approx. 21M US households). Even disregarding the digital divide or technology gap that still limit consumer take-up of OTT streaming and without reducing the enormous cost barrier, overall accessibility and audience growth should be in the cards compared to DirecTV when YouTube is taking charge of its distribution ahead of next season. More, (must-have) content remains king, and can move audiences: NFL Sunday Ticket going exclusively digital will accelerate the irreversible decay of satellite TV subscribers and the inevitable adoption of OTT streaming. (👉🏼 see: Blog #48 - Tackling Audience Fragmentation: Cross-Platform Distribution or Non-Exclusive Licensees?)
Digital-Forward Distributor with Limited Innovation?
Beyond improved accessibility, consumers should not hold out hope for too much game-changing innovation in pricing, packaging, or presentation that would either further increase accessibility (which is not the product’s priority) or improve the experience (which is mostly pre-made due to the pure-distribution play) though:
💲 Pricing: Due to mandatory premium pricing to avoid undermining the national TV windows from FOX and CBS, YouTube will have limited leeway to increase accessibility through subsidizing price points or making it even a “free throw-in” in existing streaming subscriptions (e.g. YouTube Premium, YouTube TV). Two factors to point out though: First, DirecTV had some discretion to bundle NFL Sunday Ticket for effectively free into the satellite TV bundle as a retention tool. Second, traditional cable/satellite TV subscriptions come with annual or even multi-year contracts. Mandatory long-term commitments mostly went away once OTT not only emerged as a delivery method but also a business model marked by convenience (= friction-free cancellations) and flexibility (= monthly dipping in and out of subscriptions) — even though quarterly or annual options have made a comeback lately as the OTT streaming industry seeks improved unit economics through longer-term customer lock-in. In the short-term, monthly options for approx. 75$ per month might be the best consumers can hope for as far as lowering the cost barrier is concerned. Doing this would fit with its intention to bundle the NFL Sunday Ticket with a product (= virtual MVPD) whose key differentiator over its legacy competitor (= MVPD) is said flexibility to dip in and out on a monthly basis — and would prioritize new customer adoption/acquisition over long-term subscriber retention. Speaking of monthly flexibility and the premium-pricing most likely remains in place with or without a season-long commitment, inevitable liquidity crunches for customers caused by a one-time bullet payment had already been addressed by DirecTV by introducing monthly billing.
💡 Side Note: Subscription as periodical Value Exchange
Monthly, auto-renewing sign-up options seem like a conceptual misfit for single-threaded league passes such as NFL Sunday Ticket via YouTube, Ligue 1 Pass via Prime Video, and MLS Pass via Apple TV — instead of and compared to streaming services with a balanced event schedule thanks to multi-competition/sports content portfolios. Conceptually, subscriptions are a constant exchange of value every pre-defined period of time. (💡 think: 💳 money 🔁 in exchange for 🎞️ content) A single-league schedule’s inherent in-season variance (💡 think: two 🆚 five rounds per month) variabilizes the monthly content value delivered while the monetary value remains fixed … leading to fluctuating value-for-money propositions each month. Either proactively adjusting or suspending monthly payment charges on certain occasions and a strong emphasis on promoting the seasonal option (e.g. Apple’s branding of “MLS Season Pass”) feel inevitable.
📦 Packaging: With the most-marquee games airing on national linear TV (catering to the mainstream sports fan) and nearby teams being available via local FOX/CBS affiliates (serving the local sports fan), NFL Sunday Ticket serves two very specific market segments: die-hard NFL fans and single-team fans living outside the local media market. The current all-you-can-eat proposition fits the former, but delivers a lot of non-value-adding inventory as far utility (and willingness to pay) is concerned for the latter — making single-team or -game options much-welcomed additions for consumers. Due to a multitude of reasons, including the aforementioned undermining of FOX/CBS national and local windows (and even though any ad impressions and audiences originating from NFL Sunday Ticket via DirecTV have been attributed to the Nielsen ratings for the FOX/CBS broadcasts), the monthly or seasonal option for all games will probably remain the one and only offering. Further, not identifying individual team contributions to the overall media rights revenues is a core characteristic that underpins the well-established centralized media rights setup which pool srights from all teams. Even though everybody knows that national brands such as the Dallas Cowboys and Green Bay Packers are the league's value drivers, mid-to-bottom-tier franchises will have limited incentive to give them more arguments for a bigger share of the overall media rights cake.
🎨 Presentation: Google will take a similarly hands-off approach to content production and presentation as Apple will take with the MLS — receiving a ready-made product seeking distribution while focusing on its core competencies as a technology rather than media company. In contrast to pricing and packaging, there is also no need to reinvent the wheel and some quick-wins for technology-enabled enhancements such as multi-view, all-screen viewing options, data-enriched playback features, catch-up-to-live game summaries, and automated short-form content output (💡 think: 📺TV-to-📱streaming-to-🤳🏻-short-form content conversion, to better competing with other 📱 short-form content platform already eating into YouTube’s share of time spent) are easily available: Such digital-forward, innovative content presentation (behind or as top-of-funnel marketing in front of the paywall) can automatically be created on top of the ready-made streams, do not require much editorial resources, and do not call for more advanced, content-adjacent integrations around e-commerce, betting, or fantasy sports that that would come with significant technological, legal, and practical challenges. Against this hand-off, technology-driven approach in mind, it has also been unsurprising that Google will opt against investing in producing a proprietary version of the NFL whip-around show which DirecTV debuted in 2005 as the rights holder of the NFL Sunday Ticket (called “DirecTV Red Zone Channel”). The league’s in-house version produced by NFL Media (called “NFL RedZone”) will become the one and only version starting next season. Whether or not NFL Media’s RedZone will come as a free and/or exclusive add-on to NFL Sunday Ticket or as a free perk to a YouTube TV subscription (instead of remaining a non-exclusive premium add-on channel on YouTube TV via Sports Plus) remains to be seen — just like whether or not Amazon Prime will continue to be the program’s presenting sponsors.
Any incremental content creation will instead be untapped through other third parties: YouTube’s (professional) content creator base. Alternative broadcast feeds at scale and making a deep licensed/original NFL content library accessible to third-party YouTube content creators are the obvious and low-hanging fruits — whether such live or on-demand content access will be invite-only or opens up to the broader creator community remains to be seen as well. Fundamentally, YouTube will outsource content production and creation to third parties such as NFL Media and independent creators (= prosumers) and focus on any platform’s purpose and positioning:
🔛 Purpose: connecting third-party content supply (content owners) with third-party content demand (audience).
🎓 Positioning: non-publishing intermediary with lack of liability for content hosted on their platform … which becomes an increasingly fuzzy argumentation though as algorithmic “social platforms” evolve in curated “media platforms” and, eventually, differentiated “content publishers” by moves like licensing exclusive live sports programming.
In short, break-through business or product innovation should not be expected. Remember: To date, technology companies entering the sports broadcasting market have primarily changed where and how sports are delivered, not what it is like to watch them.,
Digital TV Bundle, Multi-Tiered Subscriptions, Storefronts, Advertising Budgets
How Apple, Amazon, and Google are going for video and audience aggregation primacy by leveraging live sports programming — an actual laggard in the cable-to-streaming transition?
To sum up, Google’s acquisition of the (retailing/distribution rights to) NFL Sunday Ticket is not about an upfront down payment to secure future business with the NFL but is supposed to generate a return on investment in the here and now. Accessibility will improve naturally as increasingly prohibitive hardware entry barriers are reduced and any re-imagination of pricing and packaging strategy presents potential upside. Any re-imagination of the product presentation from live long- to short-form content will be technology-enabled or outsourced to focus on the company’s core competency (technology) and market positioning (platform). But how does this proposition support Google’s core advertising or accelerate the development of its nascent service business? The answer: It is Google’s attack on Apple and Amazon for video (supply) and audience (demand) aggregation primacy on the big-screen device.
Strategic Convergence: Similar Blueprint for the Utility of Sports to Big-Tech
Applying a layered supply-and-demand framework for media content (💡 think: ⭐ IP Layer ➡️ 🎞️ Content Layer ➡️ 🔀 Distribution Layer, see 👉🏼 Blog #46: Content is King, Distribution is King-Kong?), outsized profits become attainable through either horizontal scale in one of the three layers (e.g. in distribution layer to maximize consumer take-up making something as broadly available as possible) or vertical integration of at least two layers (e.g. combining content and distribution layer to deliver a superior vertical solution to certain consumers). Both approaches present an inherent trade-off and scaling a subscriber base — which is a moving goal post in itself and defined differently for each business (💡 think: running a streaming service 🤑 profitably and sustainably depends on the underlying cost base, its monetization mix, and unit economics) — though horizontal scale has been the preferred playbook as of late as “sub-scale” entered the industry jargon with a negative connotation.
Going forward, there might be a return to both “select-scale” (💡 think: not growing subscriber bases at all costs 📉 and/or under onerous terms and conditions 🙅🏼♂️ with consumer gatekeepers) and “vertical integration” to turn unit economics profitable. To this end, Google retains strategic optionality as the cable/satellite-to-streaming transition progresses:
↔️ Select-scale in the content layer (tethered NFL Sunday Ticket to YouTube TV) to further differentiate YouTube TV beyond arguably the most advanced UI/UX and fortify its position as the preferred option for accessing linear TV untethered from any hardware such as cable set-top-boxes and satellite dishes.
↕️ Vertical integration across the content (stand-alone NFL Sunday Ticket via Primetime Channels) and distribution layer (YouTube App, and potentially even more upstream hard- and software) to both expand (size) and penetrate (share) the OTT market to the detriment of linear cable/satellite TV and other streaming devices / storefronts.
Equipped with similar capabilities and services, that multi-faceted approach to utilizing high-priced exclusive live sports programming whose acquisition costs cannot be absorbed by the base subscription of their respective streaming service (YouTube Premium, Apple TV+, Prime Video) seems to have become the consensus among large-cap technology companies — balancing their long-term fight over customer ownership ( 🛒 storefront) and advertising budgets ( ⚙️ operating system) on connected TVs with immediate content monetization (💳 multi-tiered subscriptions).
📊 CHART: “Big Tech” leverages exclusive Sports Content to become the Video Gateway into the Consumer’s Living Room
📹 YouTube x NFL Sunday Ticket 🏈
Vertical Integration: (Stand-alone) NFL Sunday Ticket retailed via Primetime Channels in YouTube App (with enabled in-app purchases) > 🛒 storefront and, to a lesser extent, ⚙️ operating system.
Horizontal Scale: (Discounted) NFL Sunday Ticket sold as a premium add-on through YouTube TV > 💳 multi-tiered subscriptions.In short, Apple leverages exclusively sold streaming subscription services such as Apple TV+ and MLS Pass (a.k.a. Apple TV+ Sports) to attract new users to the Apple TV App (think: 🆓 free pass-through entity, always owning customer relationship). Amazon, instead, leverages exclusively sold subscription streaming services such as Le Pass Ligue 1 to gain new subscribers to the Prime Video App + Subscription (think: 💰 paid pass-through entity, not necessarily owning customer relationship). For the end consumer, Apple exclusives come with an Apple ID. Amazon exclusives come with a Prime Video Subscription.
🍏 Apple x MLS Season Pass ⚽
Vertical Integration: MLS Season Pass exclusively retailed via Apple TV Channels in Apple TV App (disabled in-app purchases) > 🛒 storefront and ⚙️ operating system. (plus: select free-to-air matches on Apple TV as reach builder for both MLS offering and Apple TV interface)
Horizontal Scale: (Discounted) MLS Season Pass sold as a premium add-on through Apple TV+ > 💳 multi-tiered subscriptions.
🛒 Amazon x Ligue 1 Pass ⚽
The e-commerce giant had been the most aggressive spender on sports rights among its peers, amounting to financial commitments of almost $2.0BN per year across top-notch properties, including 🏈 NFL Thursday Night Football in the United States 🇺🇸 , ⚽ UEFA Champions League in Germany 🇩🇪 and Italy 🇮🇹 , ⚽ English Premier League in the United Kingdom 🇬🇧 , and ⚽ French Ligue 1 in France 🇫🇷. Doing this, Amazon successfully sought incremental subscriber growth for its Prime subscription in the most-saturated markets but has now arguably also reached its capacity to both 1️⃣ generate a material number of new subscriber additions through incremental sports programming content and 2️⃣ absorb any incremental sports programming acquisition costs into the single-layered subscription plan. As Amazon Prime reaches full penetration in such markets, subscriber retention alone could be achieved more cost-efficiently than further investing in live sports. If instead further investments in the company’s most-mature markets with little untapped subscriber growth potential remaining are planned, multi-tiering its subscription plans and evolving its sports proposition from a built-in feature to a stand-alone product will be required to facilitate select ARPU expansion. The well-established sell-through approach via a base subscription is an obvious option to improve content utilization and has already been implemented in France with the Ligue 1 Pass — where the company’s financial outlay for sports rights has been the highest relative to the total addressable market for Amazon Prime. Further unbundling such premium add-on from the Prime (Video) subscription and instead tethering it to the Fire TV operating system would further align Amazon’s approach with Apple and Google. Amazon’s lack of a mobile operating system (with meaningful market share at least) must be considered in any cross-device transaction/consumption mix and is certainly one reason Amazon has not opened up its CTV channel store business to non-Prime members. Thus, Amazon skews more towards horizontal scale and Prime sign-ups are the absolute priority for how live sports programming has been utilized to date:
Horizontal Scale: Ligue 1 Pass as premium add-on Prime Video > 💳 multi-tiered subscriptions.
Recent reports about Amazon developing a sports-only streaming application would accelerate the productization of its sports content as a stand-alone value proposition but would also require critical mass of live sports programming worth paying for on a market-by-market basis (💡 think: featurization vs. portfolio of live sports programming; see 👉🏼 Blog #47 ). Such dedication might not be worth the effort and complexity compared to the expected top- and bottom-line impact on the company’s income statement. Instead, those reports could simply refer to its intention to improve the UI/UX navigation paths, acknowledging that their current in-app interface/discovery and experience of Prime Video is far from accommodating live sports content well. Even without going full-on sports programming and on a sports rights buying frenzy anytime soon (which sports rights owners should not hold out hope for IMHO), Prime Video’s sports programming output is expected to rise significantly with its original sports talk programming line-up in the United States. A stand-alone, vertical application or hub dedicated to each premium sports add-on (e.g. Ligue 1 Pass) and original studio/documentary programming would declutter the at times overwhelming content experience from the merged, horizontal main Prime Video application with a variety of different types of consumers that have different needs — serving die-hard sports fans instead. Nonetheless, it would hypothetically also add optionality in markets in which Prime Video’s capacity to absorb further financial investments in sports rights is depleted (e.g. United States, Germany, Italy) as it furthers its differentiation as a stand-alone Prime Sports product worth paying for. Whatever the purpose of a vertical sports application might be, the removal of the live sports programming embedded in the multi-genre video entertainment proposition of Prime Video would be surprising — keep serving and engaging the casual sports fans among its huge install base.
As seen, and regardless of whether it is Google, Apple, or Amazon, the set of strategic objectives is multi-dimensional and NFL Sunday Ticket (or MLS Season Pass or Ligue 1 Pass) is supposed to drive multiple business lines — a natural trade-off as content is spread across multiple platforms within these technology giants.
For new sign-ups, Le Pass Ligue 1 ($99 per season) comes not only with more than 300 exclusive matches from the domestic top-flight football league but also with a paid Amazon Prime subscription (available for €6.99 per month or €69.90 per year in 🇫🇷, no stand-alone Prime Video subscription available in 🇫🇷 ) as a required prerequisite — significantly improving the short-term (think: 💰💰 double-dipping on subscription fees) and downstream (think: 🛒 increased e-commerce spending compared to customers without Prime membership) unit economics. 🔎 5️⃣
For existing subscribers, the season-long lock-in has a significant impact: Merely improving retention rates by a couple of percentage points and, as a result, increasing customer lifetime values have an exponential bottom-line impact given the scale of the Amazon Prime subscription and advertising base — blatantly exposing the superior economics compared to pure-play, sub-scale streaming services.
YouTube TV: Virtual MVPDs as the Digital TV Bundle
Tethering NFL Sunday Ticket exclusively to YouTube TV would have been the closest approach to how the proposition has been utilized by DirecTV ever since 1994. Back then, satellite TV operators like DirecTV (launched in June 1994) and Dish Network (launched in December 1995) might have been even more nascent in its consumer adoption cycle (“Innovators”) than linear streaming TV is today (”Early Adopters”): Initially, retailing non-exclusively across all satellite TV operators to residential and commercial customers, DirecTV scored an exclusive agreement with the NFL in 1995 — supercharging satellite TV’s catch-up to the more established cable TV technology (hampered by its limited availability in rural areas and channel carriage capacity) in general, and DirecTV’s substantial, constant subscriber growth all the way through 2017 (which outlasted both its direct competitor Dish Network and the overall cable TV industry for a few years) in particular.
Now, history might repeat itself: Content, audiences, and advertising budgets migrating from linear cable/satellite TV to linear TV streaming is still in its early stages, especially when it comes to top-tier live sports programming (💡 think: last bastion of 📺 linear cable/satellite TV) that has not traded revenue for reach for its most-marquee matches in a substantial way yet — even though Amazon’s Thursday Night Football has seen a 41% drop in viewers on Prime Video in its first all-digital season compared to FOX in the previous season (but also had a median age of 47 years, compared to 54 years for the NFL’s audience on traditional linear TV).
In November 2022, linear TV streaming made up approximately 5.8% of total TV viewing (+0.1pp 🆚 October 2022) and 15.2% of all streaming in the United States. Given this limited adoption of linear streaming TV and overall interest in the traditional TV bundle, an exclusive sell-through via YouTube TV, currently priced at $65 per month would have under-commercialized NFL Sunday Ticket and arguably increased entry barriers in both the short- and long-term:
Decreasing short-term consumer adoption (💡 think: 📵 closing technology gap, 💳 paying for linear streaming TV bundle, ✂️ moving cable cord or satellite dish online), as the overall consumer price tag for the linear streaming TV bundle plus NFL Sunday Ticket during the four-month-season would have totaled around almost $500 — only marginally less expensive than when subscribed and fully paid to DirecTV.
Accelerated scaling of virtual MVPD business’ losses (💡 think: 😒 incremental forced sign-ups to YouTube TV from die-hard NFL fans), as its razor-thin, if not loss-making unit economics at current pricing and churn combined with the fixed cost base for per-subscriber content/channel acquisition are challenged to cover overheads and require to be cross-subsidized by and embedded in deep-pocket parent companies.
That does not mean NFL Sunday Ticket will not accelerate solving both of those challenges for YouTube TV: 📡 🔌 ⏩ 📱cord-shifting (by forcing audience migration from cable/satellite to streaming) + 🧮 unit economics (by decreasing subscription cycling from customers and increasing bargaining power against content/channel owners) will be accelerated and improved, respectively, over time.
However, offering more consumer choice via an NFL Sunday Ticket untethered from YouTube’s linear streaming TV bundle should not help to lessen the pressure on immediate price hikes for YouTube TV but also serve mostly incrementally and not cannibalize the beneficial impact on YouTube TV to a large extent — either proposition caters to a distinct segment of the consumer market: cord-shifters 🆚 cord-cutters/nevers.
Speaking of unit economics for TV bundle subscribers: Even in the midst of its secular decay and when accounting for the cost disadvantage of running a business on legacy infrastructure, cable/satellite TV operators still provide higher unit returns compared to its OTT-delivered competition due to superior 🌐 scale (approx. 64M satellite/cable TV subscribers 🆚 13M streaming TV subscribers), 🧲 stickiness (long-term / vendor lock-in with high switching costs 🆚 monthly, frictionless cancellations), and 💳 pricing power (intransparent pricing with a multitude of surcharges 🆚 price-based competition with limited differentiation between competing virtual. MVPDs):
Stickiness ↗️ : A season plan for NFL Sunday Ticket will introduce some friction into the cancellation process if an active subscription to YouTube TV remains a pre-requisite over the entire course of the four-to-five-month regular season.
Scale ↗️ : Amidst today’s content abundance and ultimate choice, few contents move audiences at scale, but even those mid-to-bottom-tier NFL games mean the Apple x MLS partnership on steroids (see 👉🏼 Blog #50: MLS x Apple - Decoding Apple’s and Amazon's Sports Video Strategy) and accelerated cord-shifting (from DirecTV to YouTube TV) or cord-cutting (from DirecTV to Primetime Channels). Plus: NFL Sunday Ticket being natively embedded into the electronic programming guide (EPG) of YouTube TV should allow a channel-surfing-like experience known from linear satellite/cable TV (instead of the dreaded inter-application flipping on connected TVs) and mitigate the sugar-shock for such early/late majority of the technology adoption cycles when moving their TV experience online.
Improved stickiness and scale only partially solve fundamentally challenged unit economics for YouTube TV and any other virtual MVPD business (💡 think: 👎🏼 negative gross margin, if ARPU is less than COGS): Mid-to-long term, exclusively retailing the NFL’s out-of-market regular season package should also fortify YouTube TV’s pricing power in an otherwise commoditized/undifferentiated business of carrying third-party content channels:
Avoiding purely competing on pricing, each virtual MVPD has a slightly unique positioning in the marketplace of linear streaming TV (💡 think: Hulu Live TV differentiated by 🍿 Hulu’s original and exclusive VOD content offering or Sling differentiated by 🤏🏼 skinny bundles with lowest entry-level price points and flexible upgrading through add-ons). Ultimately, consumer decisions are often made on price and channel selection — with both criteria going up and down in lock-step as TV distributors pass on costs to the end consumers in the long run. NFL Sunday Ticket tethered to YouTube TV should increase pricing power without meaningful content channel additions though and allow once again for steady price increases going forward:
Initially positioned as a less expensive, more flexible digital alternative to the linear satellite/cable TV subscription, price points for virtual MVPDs have constantly been adjusted upwards to account for loss-making economics in the first place and compensate for further channel additions over time — increasingly mirroring the ballooned pay-TV bundle except for the delivery method. The timeline of YouTube TV’s price increases ever since it originally launched for 💲35/month (in February 2017, following first movers such as fubo TV and Sling TV that launched in 2015) reflects a combination of the improved value-for-money proposition through an expanded channel line-up (never mind that value-for-money is always a subjective, not objective, consideration) and steadily improving profitability of a low-margin business:
💲💲 February 2018: $40/month (addition of Turner Network’s channels, incl. TNT, TBS, CNN, truTV, Cartoon Network, and Adult Swim, along with sports channels like NBA TV and MLB Network) 👉🏼 margin-neutral: +$5/month did not result in any significant margin improvement based on Turner’s per-channel carriage fees (approx. $5/month).
💲💲💲 April 2019: $50/month (addition of Discovery Inc’s channels and local feeds from the four largest OTA broadcasters CBS, FOX, ABC, and NBC) 👉🏼 (small) margin improvement: +$10/month led to negligible margin improvement based on Discovery’s per-channel carriage fees (approx. $3/month) and per-channel affiliate fees for the over-the-air broadcasters.
💲💲💲💲 June 2020: $65/month (addition of Viacom channels including Comedy Central, Nickelodeon, BET, and MTV) 👉🏼 (big) margin improvement: +$15/month led to significant margin improvement based on Viacom’s per-channel carriage fees (approx. $5/month).
Without an obvious programming hole in its channel line-up, YouTube TV has established itself as the leading virtual MVPD (approx. 5.0M live TV subscribers, but decelerating quarterly growth ever since Q1/2019 to mid-single-digit-percentage as of Q3/2022) and fifth-largest MVPD overall — behind 🔌 Comcast, 🔌 Charter, 📡 DirecTV, and 📡 Dish TV. Based on similar content/channel line-ups and acquisition costs (💡 think: ☝🏼 most-favored-nation clause) except for carrying local regional sports networks on a very limited basis, YouTube TV’s pricing ($65/month) has been converging towards the traditional pay-TV bundle. Hulu + Live TV (approx. 4.4M live TV subscribers @ $70/month), and fuboTV (approx. 1.2M live TV subscribers @ $75/month), as the company’s closest competitors among the live TV streaming services, took a similar approach to channel line-up and respective price adjustments. With no meaningful channel additions in sight and no price hike for two-and-a-half years, expect YouTube TV to justify another price hike with the launch of the NFL Sunday Ticket ahead of the NFL season 2023 — even though the base proposition will not have changed (when ignoring smaller differentiators such as DVR storage space, UI/UX improvements, 4K streaming).
💡 Side Note: Rigid/inflexible Linear Pay-TV Economics
As common for virtual MVPDs, with premium-priced DirecTV Stream as the rare exception, YouTube TV provides limited carriage of regional sports networks (RSN): Only NBC-owned affiliates have been part of the channel line-up. Other local sports channels such as $WBD-owned AT&T SportsNet, $SBG-owned Bally Sports and Marquee Sports Network (co-owned with Chicago Cubs), $CHTR-owned Spectrum SportsNet LA (co-owned with Los Angeles Lakers) as well as franchise-owned MASN (Washington Nationals + Baltimore Orioles), NESN (Boston Red Sox + Boston Bruins), Altitude Sports (Denver Nuggets + Colorado Avalanche), and YES Network (New York Yankees + Amazon/SBG) are not carried by YouTube TV — or most other virtual MVPDs due to their high per-subscriber content/channel acquisitions costs (= carriage fee) and already razor-thin unit economics (sum of carriage fees paid to content/channel owners 🆚 ARPU of subscription fees plus advertising revenues). Such margin optimization is needed to sustain their positioning as a less expensive digital alternative to the linear cable/satellite TV bundle. Due to those fixed per-subscriber costs, streaming pay-TV’s unit economics are rather predictable: subscription revenues and costs of goods sold grow linearly regardless of the subscriber base’s scale. Scaling will allow for improving gross margins through ARPU expansion via advertising and somewhat improved terms with third-party stakeholders such as the above-listed content/channel owners, payment gateways, or technical vendors for content hosting, protection, and delivery. Outgrowing the fixed-cost base remains an uphill battle, which would generate the gross profits needed to start covering the increasingly prohibitive subscriber acquisition costs and other general and overhead costs. FuboTV, not funded by a parent company with deep pockets but by the CEO’s story-telling to the investor community instead, has started to cost-rationalize (💡think: 🛑 sun-setting its betting vertical and, thus, losing a 🚀 long-term growth narrative vis-a-vis the investment community) and now started to counter-position against its closest competitors with the addition of expensive regional sports networks. (see: TWITTERPOST) Since per-subscriber carriage fees paid to content owners do not change with how widely any given channel is distributed, the stand-alone return on such RSN carriage investment might be attractive due to its exclusivity among its set of direct competitors (besides higher-priced DirecTV Stream). However, fuboTV keeps aggressively investing in growing its customer base that yields low-margin gross profits (approx. 5% gross profit margin when deducted per-subscriber carriage fees from subscription and advertising revenues) and continues to lose money on each subscriber addition when accounting for costs beyond the fixed costs paid to content owners — without an obvious path to profitability. There is a reason why DirecTV Stream requires premium pricing (approx. $90-105/month), leaving very little differentiation to the traditional pay-TV bundle (approx. $100-120/month). To accommodate its sports-first proposition with regional sports networks as part of the base channel line-up, one common but opaque tactic from cable/satellite TV distributors that fubo TV already has adopted is the additional (hidden) fee for regional sports networks (💡 think: 🤑 $10.99 - $13.99 per month based on how many RSNs are available in any given local market) — which (1) are not included in the advertised sticker price of $74.99 per month but also (2) can not be opted-out from since any available RSNs are part of the base channel line-up and (3) applies to 90%+ of the subscription base after the most recent additions of the Bally Sports RSNs starting in February 2023.
In contrast to any other big-five US sports leagues, RSNs are not a significant revenue source for the NFL. Therefore, the football league itself will have limited skin in the game that bringing NFL Sunday Ticket full-on streaming might negatively impact the total subscriber base of RSNs as audiences migrate to a distribution system with low RSN penetration. It remains to be seen whether YouTube reconsiders its reluctance to carry RSNs to become the go-to destination for and super-serve sports fans — either with the launch of NFL Sunday Ticket or more likely when potentially going after the NBA’s out-of-market regular season package down the line: As long as the RSN’s limited distribution on linear streaming TV persists, the NBA would have a much bigger incentive compared to the NFL to preserve a still-viable yet unsustainable linear TV bundle facing pressure from cord-cutting and carriage disputes stemming from cable/satellite TV’s own margin improvement effort on the backend of their industry life cycle.
As the virtual MVPD business matures (💡 think: 🔝 eventually overtaking cable/satellite connections as the primary delivery method of pay-TV, 🤑 heightened package pricing and sizing comparable with cable/satellite packages), the purpose of the NFL Sunday Ticket will also evolve from acquisition tool that forces consumer adoption of YouTube TV to subscriber retention: DirecTV’s satellite TV business went through the same industry life cycle and has in the previous few years thrown the NFL Sunday Ticket into its most-expensive satellite TV packages for free as a pure retention tool — which also highlights some wiggle room around the reported “premium-pricing” requirements not to undermine FOX/CBS national broadcast windows. The problem and why DirecTV has ultimately not been competitive anymore: Without material impact on customer acquisition, high-cost programming such as the NFL Sunday Ticket is underutilized as a mere retention tool. At this stage of the industry lifecycle (💡think: 👍🏼 high market share x 👎🏼 no market growth = cash cow), customer retention can be done more cost-efficiently. Related: Optimizing for cash flow of a predictable legacy business has been the whole investment hypothesis when private equity firm TPG took on a minority stake in the satellite TV operator as part of its spin-off from AT&T in August 2021.
Google expanding revenue size and margins of a nascent but fast-growing complementary business segment such as YouTube TV to diversify the revenue base is one thing, but retaining a flattish $300BN+ advertising revenue line going forward is business-critical instead: The direct advertising opportunity around NFL Sunday Ticket might be limited as YouTube is required to show all national advertising sports in the simulcasted broadcasts from the CBS- and FOX-affiliated stations — which seems to make the above-mentioned Nielsen ratings of YouTube's NFL Sunday Ticket a must-have for the advertising industry. However, YouTube will be allowed to monetize the local advertising slots (irrelevant to out-of-market audiences) or to promote in-house products and services.
Exploring further pre- and post-roll advertising opportunities as well as non-intrusive, subtle non-linear ads during the NFL game simulcast might be possible. DirecTV probably had little interest in pushing the envelope on securing or carving out any further advertising rights and should not be the benchmark going forward. More importantly for YouTube in the grand scheme of things though, there will be a positive brand image transfer due to the association with the NFL and a halo effect that there is premium advertising inventory available on the world’s most important advertising platform changing YouTube’s perception into a streaming platform with “premium TV” content — having originally (1) come from user-generated “digital video” content, (2) been challenged with brand-safety questions, and (3) been limited to a performance-driven instead of also a top-of-the-funnel brand marketing channel. Advertising is mostly a zero-sum market (💡 think: 🔣 fixed percentage of national GDP) and budgets that now move to the big-screen device and its more fragmented hardware, software, and video services marketplace compared to mobile and desktop devices, remain up for grabs and are less locked-in by Google, Meta, and Amazon.
The direct advertising opportunity around the NFL Sunday Ticket will not move the needle for Google’s income state. The more material and scalable impact on the company’s core advertising (and service) business would be derived from leveraging the benefits of the exclusive content programming to upstream layers within the modular CTV stack (💡 think: 🎞️ content programming > 🛒 consumer gateway/storefront > ⚙️ software operating system > 📺 hardware device): The true value is in owning the underlying operating system (= software) and/or being the consumer gateway/storefront (= video/audience aggregation).
Living Rooms as Gateway to Consumer’s Disposable Income and Advertising Budgets
On connected TVs and in contrast to the closed mobile platforms iOS and Android, maximizing horizontal scale across the ⚙️ software operating system and/or 🛒 consumer gateway is not completely tethered to hardware: Save for Apple, all software-first companies such as Roku, Amazon, and Google license their respective OS to third-party TV manufacturers and untethered from their own streaming sticks (= hardware). Lately, even the most-dominant smart TV OEMs with a proprietary CTV operating system such as Samsung and LG started to license their operating systems Tizen and webOS, respectively, to their third-party competition for embedding purposes: All of them have become service companies and share of OS platform is what matters — representing the most important point of video aggregation, control, and data collection in the connected home. Interestingly, Vizio as the other OEM with a proprietary OS that owns a significant OS market share in the United States is holding out from pivoting to a licensed operating system: Economics of monetization and market consolidation will probably dictate a change of mind towards opening up its SmartCast OS to third-party licensees at some point though.
From the other side of the modular CTV stack, Roku and Amazon have both forward-integrated into designing and making TV hardware in-house even though such sales are low-margin in an exceptionally crowded marketplace and, due to the modular nature of the CTV stack, do not create much incremental downstream value compared to their OS simply being embedded in third-party smart TVs — which relationships are certainly put at risk by entering their home turf. However, it is deemed the most-efficient way to maximize platform account acquisition as smart TV with embedded OS overtake plug-in streaming devices as consumers’ preferred option to internet-connect their TV devices as upgrade/replacement cycles reach completion. In-house manufacturing arguably also allows for faster iteration and innovation of the connected-TV experience (💡 think: more frictionless 🎞 ad insertion delivery, more complete 💾 data collection, and in-house 🆚 third-party A/B feature testing) — informing and accelerating the OS development also available to third-party licensees. Even on the back of its market-leading 70M-active-accounts-strong US install base, Roku achieving manufacturing scale as a late-mover remains questionable though.
With Roku and Amazon confirmed entry and persisting rumors around Apple, Google’s apparent lack of interest in getting into TV device manufacturing and purely sticking to streaming sticks and OS embeds present an increasingly unique B2B market positioning (💡 think: 🤝 neutral, rather open-platform player in a market characterized by siloed platforms) and should buy them some goodwill from those OEMs without an in-house operating system. That the NFL just signed a multi-year agreement with consumer electronics manufacturer TCL, an important OEM partner for Google, as the official TV partner should be another sign of Google’s limited ambitions in the TV hardware space.
Overall, ownership of smart TVs (with embedded OS) has risen as most five-to-seven-year TV upgrade cycles have been completed by consumers ever since connected TVs entered the mainstream. Ownership of plug-in streaming devices (which enabled the immediate, low-cost upgrade to a connected device) has shown minor fluctuation, while gaming consoles have been on a slow decline as of late. Such market share breakdown becomes less insightful going forward as the smart TV with built-in operating systems crowds-out plug-in devices and is poised to become the viewers’ go-to device for lean-back premium TV streaming in the living room and hub of an integrated whole-home entertainment system.
At the same time, consumers have become increasingly loyal to platforms (💡 think: 🎣 fish where the fish are), not only including social/media platforms such Instagram, TikTok, or Twitter, but also when it comes to their preferred video aggregation service as well as software (💡 think: 🎨 preferred UX/UI, 📱🖥️ 📺 embedded in cross-device ecosystems as part of the 🏡 smart home). On the other side and amidst increased content choice and abundance, most programming (= video streaming) has become substitutable. With any operating system being available across all TV devices (either via streaming device or embedded software), hardware has become commoditized — leaving very little loyalty for those two parts of an increasingly modularized connected-TV stack.
However, if there is one property that is audience-moving, it is the NFL. The landmark agreement with the NFL is for Google what Apple will try with retailing MLS Season Pass exclusively via the Apple TV storefront, but on steroids. To serve its purpose as a loss-leader, the sell-through will be as easy as being tethered to the storefront of the free YouTube App (= video aggregation service) to gain market penetration and untap lucrative downstream economics across a broader customer base: For details on the underpinning downstream economics of video aggregation services including revenues derived from third-party advertising and subscription/transaction revenue participation, see: 👉🏼 Blog #50: Apple x MLS: Decoding Apple’s and Amazon's Sports Video Strategy.
Both of these critical layers of the CTV stack (= software + video aggregation service) are much more fragmented, modular, less search- more video-based, and up-for-grabs and fragmented than on the mobile platform dominated by Apple and Google. Google’s blueprint to secure a dominant position for its product in the advertising market (Google Ad Manager, AdMob, AdSense) on more modular platform stacks such as desktop computers (💡 think: 🎯 superior targeting capabilities based on data collection from free services such as 👨🏼💻 Google Workplace, 🌐 Chrome, 🗺️ Maps) will be difficult to replicate on connected TVs. Google (and Apple) compete without the built-in advantage of powering the default backbone as it is the case on mobile devices. As a result, horizontal solutions on each layer of the CTV stack will compete for a share of the B2C disposable income (= consumer gateway/storefront, including Roku Channel Store, Apple TV Channels, or Prime Video Channels) and B2B advertising budgets (= advertising inventory access and delivery, including challenger-brands tailored to connected TVs such as Tradedesk and/or live sports streaming such as Seachange xStream and Transmit.Live).
Living room devices are Google‘s fastest-growing screens and the company owns relevant CTV market share through its streaming sticks (Chromecast) as well as with its OS embedded in OEMs. But the “CTV OS Wars” are currently won by Samsung, LG, and VIZIO on the smart TV, while Roku and Amazon dominate the connected device competition in the United States.
Partially due to lack of scale and ubiquity, Google TV has not gotten aggressively into the connected-TV channel store or advertising business yet — chasing those high-margin, add-on service revenues (a.k.a. gatekeeper compensation, platform tax, rent seeker). NFL Sunday Ticket might be the final tipping point in this regard: Google is finally going hard after video and audience aggregation primacy on the big-screen, but rather from a position of weakness than strength.
The Hidden Costs of Accessing Customer’s Time and Wallet Share on Mobile and CTV
Someone’s gain is more often than not someone other’s loss: Post-sale participation in the downstream consumer market and advertising spending by platform owners is crunching content owners’ margins and delivers superior economics ( 💡 think: recurring subscription 🆚 infinite platform economics, see 👉🏼 Blog #49: Subscription vs. Platform Revenues from Live Sports Programming). CTV platform owners (= operating system and/or storefront) owners are the gatekeepers for programming (and advertising delivery) on their closed-shop platforms. In this regard, big-screen platforms are similar to the mobile ecosystems of Apple and Google — with distinct differences though: 📱Mobile 🆚 Connected TV 📺
OS Market: Duopoly 🆚 market fragmentation (with the market for CTV OS and/or storefronts still in the pre-consolidation phase)
B2B relationships: One-to-many 🆚 one-to-one relationships with customized terms and conditions (due to the very limited number of CTV applications compared to the abundance of mobile applications)
Device purpose: Transaction, account management, and consumption device 🆚 consumption-first device (due to limited/inconvenient up-down-left-right navigation options compared to touchscreens on mobile devices)
Applications: Multi-genre (”App/Play Store”) 🆚 video-first applications (”Channel Store”)
Usage exclusivity: Full 🆚 non-exclusivity (with higher mobility between connected-TV OS and/or storefronts to access content most conveniently/inexpensively/flexibly; benefitting from lower cost barriers for multi-device usage)
Participation in post-sale economics: B2C in-app purchases/subscriptions 🆚 B2C in-app purchases/subscriptions + B2B in-app advertising (video-first consumption heightened interest of CTV platform owners to participate in advertising revenues as part of their basic terms and conditions)
Marketing: Limited to promotions in crowded mobile app stores 🆚 high-value shelf space on home screens + channel store promotions (CTV platforms owners leverage their highly-trafficked, most valuable real estate to extract value from a low number of CTV applications)
Operating system and storefront owners, regardless of software-first or manufacturing companies, extract meaningful value through 💳 payment fees and 🧲 distribution costs. Squeezing their margins significantly (= margin stacking), many content owners argue that such compensation does not mesh with contributing almost nothing to the development of the industry, but making the overall sustainability/profitability in the “streaming wars” even more challenging. Only the most dominant and well-known brands such as Netflix and Spotify are capable to initiate mitigation strategies (💡 think: 📵 read-only applications that do not allow for in-app sign-ups, owning the customer and billing relationship via the open web interface). Even worse than a basic in-app sign-up with its below-par margins and lack of customer and billing relationship, sub-scale streaming services such as Paramount+, HBO Max, and Starz HBO Max remain completely at the mercy of storefronts (💡 think: 🛒 applications aggregated in channel stores that allow for customer sign-up through video aggregation service, losing customer and billing relationship as well as even more profit margins to platform owners). Bundling on channel stores (e.g. “Warner Pass” in France as an exclusive bundle on Prime Video, consisting of all HBO shows plus twelve channels such as Warner TV, Eurosport, Discovery Channel, Cartoon Network, and CNN), or via phone plans as another example, are more signs for that churn and sub-scale lead to all sorts of intra- and inter-company bundling.
To illustrate, assuming a worst-case scenario and no bilateral agreement that differs from the standard terms and conditions (💡 think: 📺 transacted on connected TV, 🛣️ sold in market with VAT included in the retail price, 🍏 installed on Apple TV, 🛒 retailed via storefront that allows for in-app transactions via a third-party operating system such as Prime Video Channels), HBO Max may retain less than 50% the consumer’s disposable income as net revenues after platforms tax and storefront commission. These are the funds available to refinance the obvious cost of services sold (e.g. license fee, production costs, hosting/protection/delivery costs) and other overhead (e.g. customer support). At this point of the income statement, the underlying unit economics of OTT streaming have not even been considered: 🧲 customer acquisitions costs > 💳 ARPU > 🔂 subscriber retention costs > 👤 customer lifetime value.
In short, there are significant costs of accessing third-party customers on mobile and connected-TV devices, which are high-performant and low-friction but the most 👻 anonymous (= no customer or billing information), ↘️ low-margin (= third-party compensation), ⬜ unbranded (= diluted branding and generic UI/UX in third-party storefronts), and 📊 black-boxed (= limited consumption data and analytics) retail channels for anyone’s direct-to-consumer business: Bearing the question if it is in fact a wholesale rather than retail channel.
Pursuing built-in and infinite participation in multi-billion-dollar B2C/B2B markets of entertainment budget and digital advertising budgets, companies that contend for but lose out on platform ownership of the ⚙️ operating system and/or 🛒 video gateway storefront implemented counter-measures on their end as well:
Apple has disabled in-app purchases/subscriptions in its video aggregation service Apple TV when accessed on third-party mobile or CTV operating systems (i.e. not owning the customer/billing relationship) — preventing consumers to transact via third-party payment solutions such as Roku/Google/Amazon Pay. (see above: ↔️ select-scale)
Youtube has experimented with charging a premium from consumers for its virtual MVPD YouTube TV, usually the highest-priced subscription video streaming services available and, thus, the highest monthly payment fees and store commissions up for grabs, when accessed on third-party mobile or CTV operating systems (i.e. not owning the customer/billing relationship) — raising prices by $5/month on Apple’s iOS and tvOS devices to partially make up for Apple’s payment fee.
Due to the onerous take rates from platform owners, any content owner’s preference is not to need to piggy-back on those third-party distribution capabilities and understandably focus their marketing budgets, highest discounts, and other promotional activities on the open web interface. Unfortunately for content owners, any incremental customer acquisition (and difficulty keeping current subscribers) via fully-owned retail channels might become even more cost-prohibitive in the crowded OTT streaming marketplace.
Outlook for YouTube
How does Google create parallel paths for YouTube to own the bundle of the future, regardless of whether the linear TV bundle survives (YouTube TV as leading virtual MVPD), the new bundle becomes a self-select package of third-party streaming services (Primetime Channels as CTV storefront), or a combination both?
To create a return on the loss-leading investment, Google will need to build a multi-dimensional value creation and capture for its ecosystem across several B2C (👥 consumer) and B2B ( 🏢 advertising market) touchpoints, with direct ( 💳 consumer’s disposable income) and indirect ( 💰 CTV advertising budgets) impact, as well as immediate (🎟️ re-selling NFL Sunday Ticket) and downstream ( 📺 participation in future on-platform transactions) returns:
Key success metrics will be derivatives from actual NFL Sunday Ticket sales: YouTube TV accounts/subscriptions, consumer adoption of Primetime Channels as preferred CTV storefront, and market share of Google TV among CTV operating systems and for consumer time spent.
Despite improved content accessibility and expanded addressable market compared to DirecTV, pure transaction revenues from NFL Ticket Sunday will not come close to breaking even on the two-billion-investment:
NFL Sunday Ticket via Primetime Channels: $300 per season
(Discounted) NFL Sunday Ticket via YouTube TV: $275 per season + $5 per month from YouTube TV (assuming approx. 8% gross profit margin on a $65 monthly subscription fee over the entire course of a five-month NFL season to make both sales channels revenue neutral)
Break-even for NFL Sunday Ticket: 6.67M 🆚 DirecTV’s 2.0M (paying) NFL Sunday Ticket customers
… a back-on-the-envelope calculation that does not even account for other cost items such as marketing and promotion, sales, content hosting/protection/delivery costs, and so on.
Instead, it is also about (1) retaining existing (advertising) revenue lines as market budgets move from small/medium-sized to big-screen devices and from search to video advertising as well as (2) amplifying nascent (service) revenue lines with built-in strategic optionality based on what emerges as the (video) bundle of the future: survival of the linear TV bundle (via YouTube TV), a self-selected package of OTT streaming services (via Primetime Channels) — or any combination of both.
In the short term, NFL Sunday Ticket sales and, thus, inevitably growing the advertising-rich virtual MVPD or high-margin channel store business will have two main acquisition channels:
Converting free YouTube video consumers (of which there are many, i.e. 135M unique CTV users in the US for YouTube) to paid customers (of which there are a few, i.e. 5M subscribers in the US for YouTube TV) — theoretically at far lower subscriber acquisition costs than without such distinguished proposition before and many of YouTube TV’s competitors with fewer consumer touchpoints in the competitive OTT video industry.
Catering to customers canceling their satellite or, to a lesser degree, cable TV subscription and signing up for a discounted NFL Sunday Ticket via YouTube TV — digitizing/moving the cord as the last reason to stick with the old-fashioned delivery method has been untethered.
Mid-to-long term, Google will need to optimize more variables along the multi-dimensional return equation of its connected-TV ecosystem, including but not limited to:
Retaining advertising market share as budgets migrate to the big screen and the CTV market inevitably consolidates across all layers.
Improving relative economics and overall size of its currently low-margin, sub-scale vMVPD business ( 💡 think: 🤑 high-revenue/margin business needed when 🧲 loss-leading someone into a company’s ecosystem).
Establishing a leading CTV storefront and, to a lesser degree, operating system to participate or even double-dip on subscription and advertising transaction volume on big-screen devices.
YouTube did not buy the NFL Sunday Ticket to make money upon arrival. The Mountain View - based technology giant went after it to earn high-margin revenues in a decade or more — when the NFL’s out-of-market regular season package may already have moved on to another third-party distributor, self-exploited by the NFL, or is not a thing anymore as even more carve-outs to accommodate incremental broadcasting windows and media partners has been the league’s preferred option. NFL Sunday Ticket will not pull off this multi-year playbook alone, but more premium content IP supply will be brought to market — either as a pure function of time (e.g. 🤼♀️ UFC Fight Pass + Pay-Per-View Events, 🏀 NBA League Pass) or when the inevitable merger and consolidation phase of the streaming wars (💡 think: 🤏🏼 small stand-alone streaming/IP operations such as Paramount, AMC, Starz; 🛒 exclusively absorbing them as premium add-on channels like NFL Sunday Ticket) begins. NFL’s out-of-market regular season package was the driving force behind establishing satellite TV as a primary, broadly adopted delivery method for video content a couple of decades ago. History might repeat itself, and there are worse things than starting a nascent CTV video aggregation business piggybacking on the world’s biggest cross-device video platform — combined with top-tier live sports programming which will continue to dominate big-screen, long-form, live viewing consumption and serve as a high-inventory advertising vehicle with vast revenue opportunities commanding premium CPMs.
To which extent the NFL Sunday Ticket bundle with YouTube TV and Primetime Channels can be leveraged for further backward integration within the modular CTV stack (💡 think: 🎞️ content programming > 🛒 consumer gateway/storefront > ⚙️ software operating system > 📺 hardware device) to uplift the company’s market share of CTV operating systems and devices remains to be seen — the underpinning economics would be a game-changer for the multi-dimensional return equation of its connected-TV ecosystem and needs to be at least partially realized for a positive return on the investment. On the other end of the modular CTV stack, creating a service bundle across its vast walled garden of connected products and services — connected by user data — like other “ecosystems” have done might only be a matter of time (💡 think: 🧨 bundling YouTube TV incl. NFL Sunday Ticket, YouTube Premium, YouTube Music and services/products from the broader Google portfolio such as ⌚ Google Fit and 🛒 Google Shopping).
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