Sports rights: Not yet the ‘slam dunk’ for OTTs

Sports rights: Not yet the ‘slam dunk’ for OTTs

The Delta Perspective

Authors:
Sam Evans - Partner
José del Valle-Iturriaga - Partner and Head of the Media, Sports & Entertainment practice
Batuhan Er - Senior Consultant
Raghul Suthagar - Consultant


A shifting sports rights landscape

The value of sports rights has steadily increased across markets with leagues such as NFL, La Liga and NBA growing 41%, 87% and 111% respectively between 2013 and 2018. For some properties, where there has historically been consistent and rapid growth, like the English Premier League (EPL), most recent auctions have plateaued in rights value, which signifies a potential market correction or a point of reflection as leading internet platforms consider their premium content strategies. Overall, the global sports rights market is expected to continue growing annually at more than 4% for the coming years.

A significant driver of growth is expected to be the deeper penetration of new ‘non-traditional’, i.e. non-pay TV players such as technology platforms and social media companies. These players not only increase the number of bidders, but they are also well positioned to extract greater value from the content they purchase through their ability to utilize asymmetric business models where the content is used as a mechanism to support sales of additional higher value services. Furthermore, as TV viewership continues to shift from linear to catch-up/non-linear and faces competition from OTT players, live content remains as the key attraction that generates a mass audience for linear TV. The increasing scarcity of mass viewership on linear TV drives advertising premiums during sports events, which in turn contributes to the growth of sports rights market.

Exhibit 1: Sports rights inflation and media rights market outlook

As rights values continue to increase, consumers are simultaneously evolving the ways in which they engage with content. For example, millennials spend over five hours on mobile devices daily, including significant social media usage and own on average eight connected devices. This segment also has a greater appetite for content than previous generations, although fragmented across platforms and devices. The impact for sports is an increasing use of online and mobile screens as well as growing interest in on-demand and non-live content. During the 2016-17 European football season fewer than 17% of TV viewers for the top five leagues were under the age of 35, for online this figure was 45%.  As such, it is critical that sports can follow their audiences. In doing so, not only could they sustain engagement of the existing fan base, but they can also reach new fans. 

Exhibit 2: Football viewership during 2016-2017 season for top five leagues in Europe

OTT players, leveraging IP and mobile distribution, are well suited to serve these segments and are starting to explore the sports rights opportunity as demonstrated through Amazon’s acquisition of NFL and EPL rights, the US and Italian expansion of DAZN and Facebook’s acquisition of baseball and football rights for certain Southeast Asian markets. OTT players’ sports content strategies are still nascent with their share of rights value lower than 10% in the majority of markets.  Close attention will be paid to their next moves, especially as premium live rights reach their next auction cycles.

Exhibit 3: New buyer share evolution for selected sports leagues

 

Segmenting the OTT sports rights approach

While OTT players acquiring sports rights share similar over-arching characteristics, such as ability to stream live and on-demand across device types, the universe of players is highly segmented with different business model approaches. OTT approaches to sports content can be split into five primary groups, each having their own opportunities and challenges.

Exhibit 4: Five segments of OTT sports content plays

Aware of the evolving consumer content consumption behaviour, traditional sports rights buyers (e.g pay-TV channels and platforms) are launching OTT ‘any-screen’ propositions both as a mechanism to extend their subscription value beyond the primary TV screen and as a way to enable segmentation through an OTT-only offering.  These players, such as BeIN and Sky Sports, benefit from existing content ownership and economics from the traditional pay-TV base but they must effectively develop a pricing approach to avoid the unbundling of premium content from their core base.

Conversely, technology platforms such as YouTube may not have the pay-TV economics or existing content rights, but they are able to take a digital-first approach to sports content without the risk of cannibalizing existing revenue streams. In addition, the sheer volume of personal data that can be gathered by online and social platforms creates a compelling proposition for advertisers versus traditional television. The availability of viewers’ personal data enables highly targeted advertisements, with pre-rolls and mid-rolls tailored for each viewer and new formats such as dynamic product placement, whose impact and reach can be measured accurately. These game changing capabilities are crucial for platforms aiming to benefit by using the premium content to drive engagement and monetise through alternative forms, which, in the case of Facebook, is advertising. In the case of Amazon, the ultimate benefit comes from conversion to Amazon Prime and subsequent boost in e-commerce revenues.

In the past three years there has also been the emergence of the pure-play sports OTT, like DAZN which are seeking to replicate the Netflix-approach but focused on the sports vertical. Reports earlier this year indicated that DAZN could spend $2.5 billion on sports rights during 2019 to bolster a portfolio already including MotoGP, basketball and football. The challenge for a platform such as DAZN is building a sufficient subscription base to sustain on-going investments in rights, and to be able to make investments build a sufficiently comprehensive portfolio of rights which makes them a destination for sports fans.

Exhibit 5: Timeline of Amazon, Facebook, DAZN sports content strategies

 

Implications and opportunities for content owners

In the short-term at least, traditional sports content buyers are likely to continue to be at the forefront of rights auctions with premium sports one of the few, if only, content categories that drives home converged service adoption or switching and acts as an anchor to retain subscribers. 82% of pay-TV subscribers indicate that they would reduce or cut their subscription if they no longer required it for live sports access. Alongside this, pay-TV providers have generated a sustainable revenue stream for content owners, underpinned by their scale and economics, and a significant sudden move to new buyers as replacement could be perceived a risk by sports organisations. For example, in the most recent EPL rights auction for the 2019-22 seasons, despite speculation that internet platforms would acquire several of the rights packages, Sky and BT accounted for 98% of the domestic live broadcast rights revenues. 

Exhibit 6: English Premier League domestic rights 2019-2022

The immediate opportunity for sports rights owners is to understand how they can exploit the emergence, and spending power, of OTT players to increase the overall value of their content. In this, there are four primary opportunities:

Content segmentation

Splitting content rights can allow rights owners to stimulate competition through making packages attractive to different categories of buyers. For example, while some digital platforms may not bid for exclusive live rights, packages of in-game live clips or highlights could be attractive. Given the cyclicality of rights auctions, owners have opportunities every cycle to evolve their packages of rights based on the buyers that they could attract. With the emergent interest of OTT players across the five segments described before, there are three predominant approaches that should be considered for rights segmentation:

  1. Separating television and digital platform rights – distinct categories of rights for linear television and OTT broadcast.  For example, the Board of Control for Cricket in India conducted the auction for the 2018-2022 IPL cricket domestic TV and digital rights separately, leading to a 158% increase in broadcast rights revenues compared to the previous cycle where rights were combined.  Competition for domestic digital rights were led by players including Reliance Jio and Facebook.
  2. Increased division of live packages, and non-exclusivity – by offering some packages of live rights with fewer games, a lower overall cost can open the market to new buyers. Additionally, by selling some live rights on a non-exclusive domestic basis can increase overall value where two complementary buyers, for example TV broadcaster and social media platform can acquire content to offer to their target segments without overly cannibalizing each other due to demographic focus. The NFL and MLB have begun to explore this strategy.
  3. More ‘snackable’ content – packages such as ‘fourth-quarter only’ for NBA games on Bleacher Report can be used to structure content for different consumption habits that can align with targeted distribution channels. Allowing buyers to customize their purchase according to price sensitivity and/or time availability can help unlock new market segments. NBA aims to enable fans to purchase any portion of a game they prefer at a defined price. Content owners can generate incremental revenue from viewers with limited time or willingness to pay, but there is a risk of cannibalization, which depends on the homogeneity of the league and the saturation of the market. The applicability of this strategy is higher with a homogenous league such as NBA, where the demand for games are distributed more evenly than European football leagues, where top three to four teams generate around 80% of viewership. In addition, the risk depends on the penetration of sports subscriptions; markets with high penetration may have a higher chance of cannibalization, which would need to be managed carefully with pricing and other levers.

Exhibit 7: Examples of content segmentation

 

Market Expansion

Content owners can leverage OTT players not only to increase domestic rights value but also to expand reach internationally, especially in markets that may have low pay-TV penetration. International rights can be attractive for OTT players who are able to acquire content at a lower cost than in the domestic market and leverage their distribution scale to aggregate an audience.  Live streaming and on-demand free/freemium offerings can enable OTT platforms to lower the barrier for premium content consumption while also supporting their own monetisation. Facebook has adopted this strategy and signed three-year exclusive agreements in 2018 to stream all Spanish La Liga and EPL matches for free across certain South Asia and Southeast Asia markets. Using a pure-play model, DAZN is another example. They will enter Spain and Brazil markets in 2019-2020 season with a content library including some of the premium foreign content such as EPL and Coppa Italia but lacking the rights for domestic football leagues.

Monetising beyond ‘live’

OTT platforms do not face the same constraints for content as linear channels.  As such, OTT provides an opportunity for sports rights holders to increase their ‘asset inventory’ of content around the live game – both from the use of existing content that has not traditionally been sold and to create new content. For example, content rights of previous games could be sold along with additional magazine and documentary content. Amazon Prime Video has been a lead in this area with its All or Nothing documentary series, while Netflix has also released several titles, however there is still room for significant growth.

Exhibit 8: Expanding the sports content opportunity

Going ‘direct to fan’

IP and mobile distribution allows sports rights holders to distribute ‘direct-to-fan’ (D2F) where they can have the direct relationship with their customer base. D2F is an increasingly explored model by sports organisations with initial implementations demonstrating how it can be a complement to traditional rights buyers.

Exhibit 9: Case study of F1 and NBA direct to fan propositions

Given the start-up challenges of building a scale monetizable base for a direct-to-fan proposition, it is unlikely that in the short-term this can be a significant or full replacement to traditional rights distribution, however such models allow rights holders to target their core fan bases with a differentiated proposition versus what third party channels can offer. As the direct-to-fan model matures it is likely to become more prominent in the overall content strategy of rights holders due to the diminishing risk.

 

Challenges to be overcome

Despite significant market interest in OTT platforms acquiring sports rights, there is still some way to go until it becomes truly mainstream – of which the latest EPL auction in which only one package, the last to be sold, was bought by an OTT platform is evidence – and there are challenges to overcome.  There are three of note:

  1. Sports rights holders have long standing relationships with traditional rights buyers. For example, players such as Sky, Telefonica and ESPN have long been associated with the EPL, La Liga and NFL through which beyond delivering significant revenues for the sports have developed sizable fan bases.  A significant move away from these players could create commercial uncertainty for sports organisations.
  2. The sustainability of the OTT sports business model is yet to be proven. Premium sports rights are an expensive long-term commitment that require a clear path to direct or indirect monetisation. The appetite for OTT platforms to extend their investment beyond their initial tactical plays is yet to be seen, as well as the long-term viability of pure-play models like DAZN.
  3. Scepticism exists from some rights owners to OTT platforms suitability to be primary distributors of sports content.  Sports rights are a perishable commodity, unlike entertainment or drama, and need to be renewed at regular intervals. Hence, the OTTs must prove their audiences to sustain engagement and monetisation in sports content for the foreseeable future. 
  4. OTT players offer services on a best-effort basis, using non-dedicated bandwidth unlike IPTV and cable. Thus, the quality of live streaming continues to be very much dependent on the internet connection quality, which may lead at times to issues such as buffering and poor picture quality. Even with high speed networks, latency could remain as a key problem, especially during high peaks of concurrent users. OTT players will need to address the resulting potentially sub-optimal experience during popular live events, as viewers demand a “real live” consumption. OTT’s recognize that this is a key area of investment and the importance of improving customer experience but given the ‘peak demand’ that live sports can put on a network there may continue to be challenges.

 

The Delta Perspective

  • Live sports rights will continue to be highly-sought after both by traditional sports rights buyers (Pay TV, Telcos) and new OTT players in the market due to the inherent demand from end users
  • Due to the long-standing association between traditional Pay TVs, Telco operators and content owners, it is highly unlikely that they will be rendered completely anonymous in the context of sports rights in the next five years
  • In addition to their existing sustainable revenue streams from traditional buyers, content owners should explore value creation opportunities with OTT players through three ways: content segregation (to increase value); market Expansion (to capture new international audience); and expansion beyond live (to increase asset inventory)
  • Furthermore, some content owners will also explore their D2F proposition to complement their content proposition through other channels
  • The success or failure of new ventures such as DAZN will play a significant role in determining the impact of pure OTT plays in the sports rights market

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Delta Partners - TMT Advisory and Investment