Cooks in the Sports Streaming Kitchen

One of the most interesting headlines across the media industry this year has been the announcement of the joint venture between Disney, Warner, and Fox to stream sports content. Beyond the specifics of the service, the JV highlights several fundamental realities facing the large media conglomerates, with ramifications down the value chain. We had a spirited debate as to the logic, or lack thereof, of the JV and what it tells us about the industry:

The Pessimists’ View

• Accelerated Cord Cutting: While the venture aims to hedge against linear TV declines, the likely accelerated cord cutting may offset the value proposition of the JV to its owners
• Group Dynamics: Co-ownership of major properties has a checkered history in entertainment. Past cases have often been marred by in-fighting and conflicting interests (e.g. Hulu, Vevo)
• Limited Cost Benefits: Despite the combined muscle of the three media giants, there may be limited cost benefits in acquiring media rights. The JV won’t bid for new rights packages jointly based on pressure from leagues, competitors, and government
• Incomplete Offering: While the venture will hold substantial rights, it will miss out on other rights owned by competitors such as Comcast, Paramount, etc creating gaps for a comprehensive offering to consumers
• Profitability Challenges: To compete with digital bundles like YouTube TV (now the 4th largest Pay TV provider in the country), the price point must be significantly lower. Achieving profitability with escalating costs and a price ceiling relies on very strong growth and retention assumptions

The Optimists’ View

• Consumer Proposition: The venture could offer a first of its kind compelling consumer proposition, especially if bundled with existing services like Disney+, Hulu, and Max
• Flywheel Effect: By positioning itself as the “home screen” for sports consumption, the venture could create additional non-monetary incentives for rights owners (e.g. the leagues) to license their content. A flywheel effect might kick in, benefiting both parties
• Shared Costs: Infrastructure and marketing can be shared among the co-owners. Additionally, amortizing sports rights costs between linear TV and streaming could optically enhance accounting profitability
• Untapped Demographic: The venture’s stated priority is “cord-nevers”, a potentially large and underserved market segment for sports content
• Big Tech Defense: The JV is a new point of defense from the entry of Apple, Google, etc into sports

Our Takeaways

• The venture’s timing raises questions. Is it a strategic move or a sign of desperation?
• The bull thesis relies on creative accounting as well as operating assumptions that are yet to be proven
• Ultimately, consumers stand to gain. If the co-owners can weather the storm they are creating, they have a chance at creating a sustainable standalone streaming business. However, time is not on their side