Reality bites for the world of sport.

 

 

Only the paranoid survive, and we should all regularly check if we are still competitive in what we do.

In HR, it’s called skills gap analysis; commercially it’s product/market fit. In content, with TLDR (Too Long Didn’t Read), writing now absolutely has to be entertaining. And easy like a Sunday morning.

The best description of what this Column has become is from a pirate friend called Giles Morgan.

It’s really just a diary.

A weekly journal entry, trying to in some way connect the news-cycle of our sector, in a prose style deliberately “pulp”, or even “punk rock”. The reader should also hear a Scottish accent, as personality is now more important in op-ed than grammar and tight editing.

 

It’s been another intense week in the sports sector, and if you are across loads of companies and people, you will undoubtedly hear many different soundbites of news and gossip.

 

For whom the bell tolls? For Thee!

“Reality Bites” is a mid-1990s coming-of-age romcom that captures all the angst of that grunge decade. It really does smell like teen spirit. A box-office flop at the time, pigeoned-holed too narrowly for only the Gen-X audience, it has since achieved supercool status in its authentic depiction of the career and lifestyle choices faced by all young adults. In a moment when everyone is trying to understand exactly that, with Gen-Z, one wonders why many haven’t given this film much of a thought. They should. According to the author, the title of the film isn’t meant to be interpreted as “reality sucks”. Rather, “little bites of reality”.

No man is an island, entire of itself; every man is a piece of the continent, a part of the main. Never send to know for whom the bell tolls; it tolls for Thee.

John Donne, Jacobean writer.

What a stunning line that is. And so true.

All individual events in our industry are not an island, but part of a bigger continent, where these “little bites of reality” are actually telling us a story. Sadly, very few take the time to notice them in their full context, ponder what they all mean, and how they could be connected. Too many people just fall in behind the groupthink of the moment, never lifting their head to ask if the accepted wisdom may actually be wrong.

The bell will be tolling for exactly those people very soon, because sport is being turned upside down everywhere we look.

 

Reality can take a while to appear.

Way way back in 1841, a fellow Scotsman wrote a book called “Extraordinary Popular Delusions and the Madness of Crowds“, all about the risks of crowd psychology and mindlessly following the pack.

Life and business are always a collection of cycles, pendula swings, peaks and troughs, redemption arcs. The old cliché is true: the only constant is change. Fortunes have always been made in these moments, by those who can see turning points a little earlier than others.

Sport in 2024 is a generational opportunity for those brave adventurers who can understand how our industry is going to react next, and who are locked and loaded to pounce invest. But they will need to be informed and curious. Not just following the pack. The best money is always made being on the other side of the boat from everyone else.

So “Madness of Crowds” should be required reading in all school syllabi, and never more so than in this era of fake news and echo chambers. We all must constantly engage our own scepticism, intelligence and common sense, to question what we are being told.

For example, we were told that Elon Musk was an undisputed modern-day Da Vinci, the Oracle of futurology, and a technology genius. A real-life Tony Stark.

 

Elon actually has no clothes. 

Via my other podcast colleague, Grant Williams, I became introduced to a community which has always asserted that Musk is, in fact, a total charlatan, a thief of other’s ideas, a cuckoo in the nest of founders. In short, a complete bluff, whose only real talent is deliberately building the popular delusions for the madness of crowds. That is his real genius.

This community, labelled TeslaQ, is full of some of the smartest people you will ever meet and, for a decade, they have warned of how the sham man-child, and Tesla, would inevitably all crash and burn. They have been ridiculed by both the Tesla cultists and the general delusion consensus on Musk, especially when the share price exploded during Covid (via the trading app Robinhood and his classic pump-and-dump short squeezes).

The nastiest and most merciless of these fanboys is a vomit-inducing sycophant called Ross Gerber. Today, when the entire facade is collapsing for the whole world to see, as reality bites on Musk’s shameless lies, Gerber has the gall to tweet this…

We saw it first!

Gerber is without ethics or honour, effortlessly switching bandwagons and getting away with it. For those of us on the wrong end of his vicious ridicule, it is simply beyond belief, and a true signal of where our world now sits.

In 2024 truth is an optional.

But the real point is another.

 

Everyone believed in Tony Stark. Why?

TeslaQ provided world-class diligence showing that everything to do with Musk’s EV business, and all his other crap like the Boring Company, was in fact a ponzi. From the deposits for promised future vapourware products, to the fraudulent and illegal creative accounting.

No one cared. Because we live in a world where narrative trumps facts… until reality bites hard.

Those facts today are that Tesla is down 50% this year, and it is going to zero (but this is not investment advice). Their auditors will be running for the hills as we speak.

Sport has its own popular delusions. No one cared when some, over 2 years ago, vocally questioned the idea that sports broadcast rights could only go up. Today, many of sport’s finest thought-leaders have “re-engineered” their memory, but the truth is that our entire sector, and its PE fund suitors, absolutely drank the sport rights bull market Kool Aid.

None of them are as bad as Gerber, but let’s generously say they have adapted their new narrative seamlessly, with a very brass neck. 

This Sunday Column, from 15 months ago, is a critique of the private equity Football League deals so in favour at that time. I’d suggest that it is still educational today for anyone working in sport and media, having to deal with a new reality, especially around this bit:

NOTE, LADIES AND GENTLEMEN, THAT THERE IS NO SCENARIO FOR RIGHTS VALUES TO GO DOWN. Not even considered.

 

Writing this type of piece, when the Gerbers of this world are in their full pomp, is a risky and lonely place.

 

“Cassandra” and a “doom-pornster”.

They will accuse you of being contrarian for effect, merely to draw attention, or sell your innovation products. That’s always the destiny of the short-seller.

More importantly, let’s ask why so many serious people missed what was going to happen in rights and sportech values, when it was all in plain sight? The evidence was all there two years ago, as it was for Tesla.

There is an entire chapter in the book “Sport’s Perfect Storm” about learning how to read these signals and, specifically, how the bond market vigilantes had sussed out that the media/broadcast companies were in serious trouble. 

From “Sport’s Perfect Storm“

What is that telling us about the future of the media companies? (And hence, what does this tell us about sport?)

The value of the corporate bonds of media companies has declined dramatically. The vigilantes have worked out what is happening. The business model is challenged, by cord-cutting, rampant piracy, and changing generational viewing habits. So capital providers are now asking for higher yield, to be compensated for the inherent risks of this industry.
Hence, we have witnessed a downgrade in debt rating across the media sector.

The Morningstar US High-Yield Bond Index (which measures the performance of high-yield corporate debt) shows that the media sector has issued more distressed debt in 2023 than any sector other than Healthcare.
All these datapoints, driven by bond vigilantes, don’t point to a lot of confidence in Big Media.
Since early 2021, we have made exactly this analysis the core of our bear case for the industry of sport, in our AreYouNotEntertained? podcast. Interest rates were rising. The yield on the safest asset in the world, the debt of the US government, went from zero to 5% very quickly. This made every single investor in the world stop for breath, and re-assess their investment strategy, their asset allocation, and their entire approach to yield. Unless they were confident that they could do better than 5% with an investment, they would just sell speculative assets, and say no to opportunities. Too risky, compared to what they could get just leaving their savings with Uncle Sam.
All investments, especially debt, now have to compete with the new benchmark yield of 5%, and how do they do that? This is the interesting part.

The financial market traders should NOT have been more prescient on all this than the people actually operating in sports rights everyday, but by God they were. The share and bond prices of Big Media have been hammered, because it was actually easy to just follow the money and see the reducing gross margins.

Streaming (who remembers the excitement around those Disney+ type businesses 2 years ago?) is not a model anywhere near as profitable as the old bundle. Piracy was bound to ramp up, and kids no longer watch the full live game product, or even regular season games. 

 

Ask yourself why you didn’t see it. 

If we want to improve, and survive the tide going out, we need to ask ourselves why we, as an industry, fell for this “Popular Delusion and the Madness of Crowds”.

This is more acutely directed towards the investment PE community. What on God’s green earth were you thinking? Sure, you maybe have structured your investment to give you protection on the downside, but… the need to deploy capital quickly, and capture juicy fees, is likely the real answer.

Harsh?

Let’s look at one of those: CVC and the French Ligue 1.

The popular delusion was that French football would get €1bn for their rights, and no one coughed, even when Canal Plus clearly weren’t interested and DAZN would obviously need to tighten its belt. Fast forward to today and let’s call it what it is. The tender has been a disaster, badly managed, and Macron is basically now nationalising French football by the back door, going to his Qatar chums, begging them (BEIN) to buy the rights.

In a normal serious world, heads would have been severed a long time ago. Not opining at conferences like Billy Big Bollocks.

CVC is now looking to list its shares on the public stock markets. Caveat emptor.

 

Money, demographics and geopolitics isn’t a slogan.
It should be a playbook.

And it’s here, stomping all over our sector. Reality really does bite!

Money

The free cashflow isn’t in the media sector anymore, and the people being laid off, or dealing with slashed budgets, know this better than anyone. It is hugely amusing, for example, that people are reading the DAZN-DFL public spat as the German league not trusting the financial guarantees of the UK broadcaster, when their buddies at Sky Deutschland are also losing wads of cash, €300m a year.

All this smells very much like the old Setanta days, when people just preferred the safe status quo of the familiar partner, Sky. The DFL seems simply to be looking for excuses to not take Dazn’s money. Why? Coz no-one got sacked buying IBM, but people who did sell to Setanta, like my successor in Scotland’s SPL, did get their jotters.

DAZN will sue them but, for right or wrong, it must realise that it now has a higher perceived solvency risk, as it is still far from profitability, and is actively hawking itself around for sale. EA weren’t interested, the Saudis passed. All that is heightened “risk”, and has a cost.

DAZN have been a very welcome major bid under the value of all sports rights in recent years, and they are now going to be much less aggressive. Mr Blavatnik just isn’t going to get his usual 3x return on the 5bn he has dropped. My advice to him would be to take anything that allows him to save face and break-even on his 5-Very-Large. His bet hasn’t worked, and he should deploy his stop-losses, as every day that passes the asset is worth less, IMHO.

Demographics

On the demographic question, the kids ain’t paying for what we, as an industry, want to sell. They are more likely to buy a firestick than shell out to watch 90 minutes. All generations are different and, sooner or later, reality always bites. Ask jazz musicians once Elvis turned up. 

Geopolitics

So all that is left is (geo)politics, and, frankly, our football/sport is in the process of being quietly sucked into the public sector: regulated at best, nationalised at worst.

This is the kernel of today’s diary entry, make no mistake.

Football is a vote winner/loser, and the best tradable source of soft power. There will be a popolar uprising for politicians to save sport, and politicians will be more than happy to oblige, all on the taxpayers’ dime. Macron with Ligue1, in the year of the Paris Olympics, is a smart enough politician to be ahead of this game, acting well before the fans storm the gates of the Bastille.

In the UK, the government regulator is warming-up on the sidelines, and it will likely be an election issue in coming months. The bites of reality are here, and they have cross-bench agreement.

Gorgeous George is a flawed but world-class politician. The last of the breed of super capable working class, Scottish socialists. Catholic and Celtic with a capital C.

Manchester United is important to all of us like him. Rod Stewart says it best.

🎶 You’re an essay in glamor
Please pardon the grammar
But you’re every schoolboy’s dream
You’re Celtic, United, but baby I’ve decided
You’re the best team I’ve ever seen. 🎶

Georgie boy knows what’s coming, and this video shows us our future. Watch it very very attentively.

 

The biggest “popular delusion” of all is that governments have the money to save us. 

Especially post-Covid, the “madness of crowds” has seemed to think, and indeed demand, that our governments will always be the endless safety-net of last-resort. That they will always have money to pay people to stay at home and do nothing, bail out companies right, left and centre, send arms all over the world, indulge us in all our worries and stress, and protect us from every trigger.

Here is a reality.

Our governments are all bust and up to their eyes in debt. They are paying for all these things we demand by printing money, and debasing our currency. The Germans tried that after Versailles. It doesn’t work.

The USA, the world’s police person, is running an annual deficit (costs greater than revenues) of $1trillion a quarter. That’s a “T” for trillion. The total debt of Uncle Sam is $36 trillion, and these numbers are now so big as to be beyond comprehension by any serious person. It is “Alice in Wonderland” voodoo economics, driven by voters now thinking that the world owes them a living, and politicians obliging them, to get elected.

You can keep abreast of all this insanity, in real-time, here with the debt clock. 

 

Little bites of reality are everywhere.

Look around! You can pick from a plethora of examples for the diary. The Column today offers only a couple to make the point. They may seem all unconnected, but we are a continent, not individual islands.

It’s all for grabs, and could go in any direction. Old sport as an industry is pretty much over.

It is clear, after the horrendous officiating at Coventry, and Nottingham Forrest, that VAR is a technology that cannot be managed by the referee management class. Our referees are Bs, Cs, and Ds, and can’t handle the difficulties of managing advanced technological output, with EQ. The best ones in the old days had an understanding of common-sense officiating that knew a penalty, an offside, a red card, with pragmatism and experience. Now, the software man in the room has ripped that authority away from them, and we have the worst of all worlds. It is all ruining the game, and the current rules are making it much worse. Sport, and football, in their current battle for the attention of kids, cannot have something so disengaging as this VAR nonsense. It’s killing the product/market fit right across the demographic board. Kids rightly laugh, and older proper fans sigh at the Coventry offside with the classic: ”the game has gone”. When the integrity of competition is questioned, people switch off.

 

Money’s too tight to mention. 

Gerry Cardinale is now understanding that he got exceptionally lucky in winning the title in his first year at AC Milan. He has lost this year’s at San Siro in a direct game against Inter, and this was the 5th derby loss in a row. When he bought AC Milan, for a very big number, he wouldn’t have understood the Italian word “campanilismo” (church bell rivalry). Italy is, in reality, a collection of small walled cities who utterly detest their rival next door, and Italian football is dominated by exactly this. Mourinho had to leave because he had lost too many derbies to Lazio. Gerry and his investment is now being bogged down in Italy, having already used the Hail Mary Pass of bringing in Ibrahimovic as his football Tzar, also totally undermining his CEO. If Inter is fully re-capitalised or sold to wealthy owners, Gerry is in a serious competitive disadvantage. I’d stay away from Milano. European football, and its clubs, just doesn’t make money and Redbird and Clearlake investing as they have will extract a heavy price from their LPs. It will bite hard. Still CVC is listing on the public markets. Hooray. 

 

Cry me a river (of losses).

The glorious English Premiership, in all its dominance, is a financial basket case, and it too is overvalued.

Sweet mother of Jesus. How can we have seen such an exponential increase in revenues over these last 30 years, and still be drowning in this red ink? Whichever way one wants to cut it, European football is bleeding cash and, at some point, reality will bite, and franchise valuations will fall.

 

We can go on and on with examples, but it’s really now time to wake up and smell the coffee.

 

Today’s Column ends, as it should, with optimism.

There is little immediate solace to offer around the “Storm” that is about to hit our industry but, at some point, the floods will subside and doves will be sighted. The night is always darkest before the dawn. 

Sport will always matter, and rightly calls itself passionate unscripted drama. All the great stories work best as a series of peaks and troughs, depths of despair, and visions of the promised land. The good news, the albachiara (new dawn), comes from the fact that evermore serious capital is being raised to deploy in sport as an asset class. New funds sprout up everyday, and that money needs a home.

The real conundrum is in finding the match in investment ticket size, risk profile, governance/control, that tomorrow’s investors will need, and that sport can accept with peace in its soul.

This is easy to write, but very hard to execute. This is the market gap where fortunes will be made.

 

PE needs their investments to be big.

Minimum £100m+, ideally more like £500m, and sport just does not have many potential assets of that quantum, outside of football clubs. So it is not easy to find these sweet-spot deals for ROI. Everyone’s fund is looking.

In Europe, the underpriced risk of relegation, and uncontrolled player costs, makes any kind of real return on clubs very challenging. In America, with closed leagues, salary caps, and clear governance, they are instead rolling out the red carpet and handing out cigars.

Private equity firms ‘preparing funds’ for NFL investment ahead of rule changes

But all these deals are modelled on franchise valuations going north. They won’t. At some point price/earnings multiples will start to count again.

To date, capital into sport has returned a mixed bag of success. We can all see clearly the F1 and Dorna success stories, but the horrors of the bad investments are very well hidden in the Balance Sheets of PE, or their continuation funds. A lot of money has been lost. They are just not admitting it.

 

Same in early-stage venture investing, if not more.

VC investments into sport and sportech have been very disappointing and, again, the worst is yet to be seen. Valuations in sportech have been sliced by 50-70% from what Albachiara sees out there. More perplexing though is the new risk-adverse attitude of VC: they seem to want to lend you an umbrella when the sun is out. They want to invest in a start-up only when it is derisked.

Duh, we won’t need your money at that point, pal!

In fact, VC funds no longer appear to be in the “risk” game at all, and one wonders what their mission now actually is? And who is going to fund innovation into sportech and mediatech going forward?

Reality bites.

 

The only way to reduce risk for financial investors is in serious deal assessment and execution skills.

You can’t invest in European sport, with all its volatility, without better due diligence on operational risk, especially on the player side. Chelsea has proven this point in spades. The modelling done by the various investment banks counts for absolutely nought when you execute so badly.

The optimism is in thinking that serious and experienced C-Suite sport management, not rights experts, can do better. In assessing deals; understanding the true health of an asset; negotiating around real valuations that stand up. And then staying in place post-acquisition to manage the asset.

And if the valuation of the deal is too high, these people should just tell LPs to walk away. The very best conglomerates have these soup-to-nuts SWAT M&A teams. Sport and sports funds do not. Yet.

We should study the old boys: Hanson, Buffett, Goldsmith, WPP, LVMH. These organisations all had M&A as their core competence, and they have gotten really good at it. They weren’t just bankers and deal-makers; they were operators with capital available for smart acquisitions.

That’s a big difference, and this is where the new capital will go: operators with top finance skills.

 

The Phoenix always rises from the ashes. 

My own week ended attending the Simple Minds concert in Milan, almost 30 years to the day we first met, them a marquis Virgin act, and me a jobbing label CFO. After the show we spent a couple of hours alone. Suffice to say, that the memory lane of the Noughties was not a happy place for Kerr and Burchill. They were dropped by their label and, to quote them, “we drove past stadiums we used to fill, to get to smaller venues we weren’t ever selling out”. The world had decided they were done. Their storm had hit hard. Their reality had bitten. Today, in 2024, they have just finished a totally sold-out world tour at major venues, with a freshened band and sound. They will play the Rose Bowl in Pasadena in the summer. The perfect redemption arc to a story. 

Winona Ryder was the star of Reality Bites and, indeed, the dominant iconic actress of the 90s. She had such power and leverage that she could dictate on that movie who got hired (Ethan Hawke), who didn’t get sacked (Janeane Garofalo). Real power. At the end of the 90s, she, like Simple Minds, completely fell out of favour, yesterday’s woman, more known for a crazy shoplifting error than the true star of her generation. In the last 5 years, again like the Minds, she is back with “Stranger Things“, and the offers, like “Beetlejuice 2“, are flowing in again. Reality Bites is today a true cult movie.

Peaks and troughs.

 

Sport as an industry is Winona and Jim at the end of the 90s, and faces the reality of the Storm.

But it will return, if it believes. We all need to believe in our product and prune back our industry to the real talent. Let the bluffers like Elon melt away.

We need to believe in ourselves, but with realism, experience, and discipline.

🎶 I just believe in me, Yoko and me, and that’s REALITY 🎶