How the sports content industry is being disrupted by digital technologies
The global sports industry has grown significantly over the last 10 years — outstripping GDP growth by a considerable margin.
However, despite this success, the sports industry still has a major issue with what economists call appropriability which is, in simple terms, the ability to translate the attention and engagement they have into revenue. So, for example, Man Utd will turn over £500 million a year, which is an impressive figure, though not up there with the corporate giants of the world, and particularly when you take into account that it estimates a global fanbase of over 500 million. Even if many of these fans are not hugely affluent and may never be able to visit Old Trafford, £1 per fan/year is arguably not a great return.
However, many in the sports industry increasingly see digital technologies as the key to increasing appropriability, revenues and overall audiences for their sports.
Until recently digital platforms have been relatively unimportant for most sports rights-holders. It’s true that they’ve all had websites and CRM systems in place for many years, but in the greater scheme of things digital has been more like a line in a marketing plan rather than a core part of their business model.
However, the rapid adoption of a range of digital, mobile and social technology by fans, along with improved network infrastructure and increased bandwidth are allowing rights holders to use digital technologies to reach much larger global audiences with content and services at a scale that wasn’t possible five years ago. This shift is fundamentally transforming the way that rights-holders (federations, leagues, clubs) go to market and the business models that support them.
Direct Revenues (OTT)
The most obvious manifestation of this change is the increase in Over the Top (OTT) content streamed directly to fans without having to work with third party broadcast partners. For example Major League Baseball’s digital division, BAM, arguably the most successful of the digital sports business, now generates about $750m in annual subscriptions from streaming baseball to fans through its apps and web platforms. Digital technologies have fundamentally changed the business models for rights holders. Many sports rights holders are moving from being primarily B2B businesses that license rights to third party broadcasters to become Direct to Consumer (D2C) businesses that use digital platforms to reach and monetise global audiences. Highly scalable streaming technology now allows the MLB to go direct to consumers and thereby appropriate more of the value chain as they own rather than lease the point of access to the fan.
“Direct to consumer. I think it’s going to be a fast- and deep-growing business, and that’s why we’re in it.”
Where the MLB has lead others in the US have followed, NFL is now actually the biggest OTT sports service in the US with over 6% of households subscribing. Over 16% of US households now subscribe to an OTT digital sports streaming service.
The overall OTT market, i.e. entertainment, sports and everything else is currently worth about $21 billion (2016), and is predicted to more than double in size to $56 bn by 2020.
However, the complex nature of sports rights means that many rights holders have existing and exclusive relationship deals with broadcasters that preclude developing OTT in the short-term. In addition, certain sports are better placed to take advantage of the OTT market because of the nature of the demographic they attract, e.g. UFC. But, OTT is only one aspect of digital technology that is fundamentally disrupting business models and value chains in the sports industry. Perhaps more significant for most sports, in the short-term at least, are the indirect revenue opportunities digital platforms offer through sponsorship and other partnerships.
Indirect Revenues (Sponsorship)
In the ‘old days’ sponsorship deals were often done merely because an incumbent CEO happened to be a fan of that particular sport. That changed a while ago with the big deals being much more focussed on audience fit, reach and attribution. And of course digital is perfect suited to a world where measurable outcomes and performance and more important.
Digital platforms offer sponsors two main opportunities over and above traditional reach-based sponsorship:
1. Better relationships — fans are often willing to have much more personal and deeper relationships with their sports club than they will with most brands; and
2. Quantifiable outcomes — digital platforms offer the opportunity for brands to much more accurately measure the impact of sponsorship and partnership activity.
And this makes sense for brands, so for example, if you’re a low-affinity CPG brand, it’s much quicker and more cost-effective to buy a digital audience rather than build it.
Obviously, it’s important to respect fans data, but most fans are more than happy to received a well-targeted email offer from a partner, particularly if they know that it will help them pay for the new striker they’re rumoured to be in for.
No ‘one-size-fits-all’ model
Whether or not clubs, leagues or federations will develop these direct relationships with fans will vary from sport to sport, depending on a complex range of commercial, demographic and operational issues. And there is no one clear model that will work across all rights holders. For example, football fans may well, with the occasional exception, want to watch only games in which their team feature. However, it seems unlikely that tennis fans would just watch Roger Federer matches, though it is certainly possible that they only subscribe to individual tournaments watching say Wimbledon and not the other majors. Though it may well be that in the case of tennis it is the federation, i.e. the ATP that develops the D2C model.
These shifts will have a huge impact on rights holders. So if we take football as an example, with the exception of cup finals and international tournaments the average Man Utd fan mainly watches games that feature Man Utd. So it might make sense to pay a subscription to Man Utd to stream all the matches through their app, and then buy the rest of your EPL or football content on demand. After all, why pay for all of those football matches that you don’t watch, let alone all that cricket, sailing and rugby league that currently comes as part of your cable subscription and you never watch.
From there it’s then pretty easy to envisage a tiered season-ticket model which gives fans the right to attend varying levels of live games as well as stream vary levels of live game. So a full season ticket maybe gives you the right to attend all games and stream all games with a digital season ticket at the other end of the spectrum which just gives you the right to stream all of the games live. You can see how attractive this might be to a fan. Suddenly a club like Man Utd could jump from having 30,000 season ticket holders to having 30 million or more season ticket holders, fans who have a direct commercial relationship with the club who pay for a mix of online content and tickets to live games.
To be clear, this is only one possible scenario, Man Utd and the EPL, are perhaps not the best example because at the moment broadcast media still serves English football well and the EPL is a strong brand in its own right. However, in Spain, where football is dominated by two clubs — this type of digital D2C infrastructure is being built right now, with Real Madrid doing a deal with Microsoft and Barcelona a similar one with Amazon. So perhaps it’s not so far fetched.
Disruption by New Entrants
For the moment digital disruption in the sports industry has been about a reordering of the current value chain among current actors rather than the appearance of disruptive new entrants with radical new value propositions. However, there are signs that this might be about to change, with big content and tech players like Amazon setting up new sports divisions and the appearance of new venture funded players like Rugby Pass and Fubo TV. Rugby Pass was launched by Coliseum Sports Media in 2016 and streams live rugby to 23 Asian territories. FuboTV, a startup that operates an Internet soccer subscription-video service in the US, announced that it has raised $15 million in Series B funding led by 21st Century Fox and U.K. satellite TV operator Sky. And broadcasters are clearly intent in defending their position by investing in the most promising start-ups, e.g. Disney, the parent of ESPN in the US has just bought 33% of MLB’s BAM.
And it’s not only existing rights holders, start-ups and broadcasters that are moving into OTT streaming. One of the most interesting recent developments is the deal that the NFL recently signed with Twitter to stream 10 live games next season on the platform. Twitter paid only $10m for the rights, however, it’s widely thought that this might well herald the beginning of a move streaming OTT on social. Facebook has a huge global audience which would be relatively easy to monetise with sports content, though Facebook seems to have stepped back a little from the aggressive content strategy of recent months, social platforms, with their huge global audiences will almost certainly play a significant role in streaming sports content in coming years.
Roadmap — Rights-holders have all the cards
Digital disruption of sports sponsorship is happening now. Of the two main commercial opportunities, it is indirect revenues that will have the most immediate impact with clubs building larger and deeper digital audiences, investing heavily in both CRM and other data platforms, but also in developing more compelling digital experiences and content that help reach these audiences.
However, it is the development of direct revenues from OTT sports content that is potentially much more disruptive than the shift of sponsorship money from broadcast to digital. Though, as has already been noted, it’s a lot less clear how this is going to play out.
Ultimately, rights holders hold all the cards, and they’ve also been able to learn from the missteps made by other content businesses (music, news, etc) disrupted by digital technology, so ultimately they should be able to develop the business models that suit them best, even if it does take time for the rights landscape to change. It’s hard to envisage a future in which most rights holders will not have a D2C relationship at the heart of their proposition to fans, alongside other less significant legacy models.
Progress won’t be even, certain sports will embrace new digital models much more quickly than others that have more complex rights deals in place or appeal to demographics who are less keen to embrace digital technologies. Indeed, some sports are well on the way to becoming digital first — UFC and MLB are two obvious examples in the US. And there are other sports, e.g. EPL football where they’re still very much a broadcast first model for the foreseeable future. When and how individual sports switch to being digital first will depend on rights, audience and business models.
For many rights holders, the next three to five years will be all about investing in technical capability and growing the audience, and laying the groundwork for the inflection point when they take control of the fan relationship.
Ultimately, if sports clubs, leagues and federation play their cards right they will be able to use digital technologies to not only grow revenue, but more importantly appropriate a much greater share of the revenue they already generate.