The quest for sport content that pays its way.

 

The industry of sport talks endlessly about what it needs to do, to find and engage fans. I am as guilty as anyone in boring people to death. 

What I’m personally not so sure about, is an even simpler question:

What are the things that we have, that fans/customers will be prepared to pay for?

This is right back to brass tacks for any business. The revenue model.

We know so many of sports’ leaders just simply refuse to consider sport even as a business, and resist this conversation, but they are roadkill, and let’s ignore them. They’ve almost certainly never had true P&L (profit and loss account) responsibility, and they will retire soon. Good riddance. Then we can get a chance at saving an industry.

Do we have something people are prepared to pay for?

Sport, as a business, gets its money in a combination of B2C, B2B, and B2B2C relationships. Of itself, that’s rather interesting. 

But let’s clarify the jargon. 

B2C is where you sell directly to your customer. E.g. a ticket to the stadium. Sport is spectacularly bad at this, with criminally low monetisation (outside central media deals) of those most loyal of customers. A humiliating indictment on us all. 

B2B is where you sell to another business, like a sponsorship, or a corporate box. Let’s put a ad-based broadcaster in here (a TV company whose business is selling advertising).

B2B2C is the more complex one. You are selling to a business, which then sells onto your customers. This includes:

• A broadcaster selling subscriptions to a sports channel/bundle.
• A licensee selling goods with your brand.
• A kit deal like Adidas.
• Let’s also put the data boys like Genius and Radar et al in here.
  (They buy your data, to sell to bookmakers, who attract sports fans to bet).

The sports fan (in one way or another) is buying tickets, subscriptions, replica shirts, merch, and also spending on betting. 

But we now need to ask the same question more specifically: 

What are the younger generations prepared to pay for? The industry of the future.

Today’s Sunday Column is about that question, and is provoked by the outgoing CEO of BMG (Bertelsmann Music Group). BMG has always been one of the majors, a German private company which, as you’d expect, was always strong on process and discipline. We all admired BMG as a competitor label. Germans don’t mess about. 

The evolution/revolution of music is 20 years ahead of sport. The music industry product, the LP, the album, was unbundled by tech and piracy. The market fragmented, and its value chain changed utterly. As perfectly explained in this article.

Hartwig Masuch is BMG’s long-standing leader, and has seen it all. He is about to be replaced by the CFO (in itself quite telling). This quote from Masuch, as he reflects on his time, stopped me cold. 

Do you want to be a hostage to that fragmentation by focusing on frontline signings, or do you focus on a proven body of work that can’t be taken away or fragmented?
The more fundamental question: why do so many people still believe in the necessity of having incredibly large infrastructure and investment just to have chart hits?
We instead focus our resources mainly on known quantities which were the hits of 10 or 15 years ago. But if everybody sees what we see – that the momentary income of new chart repertoire is becoming less relevant in terms of the overall industry – why in the hell dedicate all those resources to it?

For those not familiar with how the music business works, he is saying this:

Why gear yourself up with huge overhead, to develop new product and fresh offerings, when they don’t make money; whereas your catalogue is a “known quantity” of appeal, revenue and profits?

Hollywood has worked this out as well. They don’t invest so much in new stuff, and prefer to exploit some extension of their proven “catalogue”, which they call franchises. Many old school guys like Scorsese have been very vocal on absolutely despising this, relegating “art” below “product”.  Here is Martin’s schtick, as explained here.

Undoubtedly, the music and movie businesses are going safe; investing only in de-risked proven product. Masuch makes this very, very clear. 

Think about the demographics: there are more people over 25 years old than under 25 years old in the world – and the over-25s have credit cards.
I think some economic choices in this business are still relatively uneducated.
If you look at the body of work the Majors have, if they’d have focused much earlier on maximizing the relevance of their catalogs versus building zero-EBITDA-producing, labels, their numbers would look great from a dynamic perspective. I think that’s now dawning on them.

Hits don’t make money in the modern value chain of the music biz.

Bottom line, Masuch can’t understand why the Majors keep investing in profitless hit product, when the money is in catalog. Yikes.

Some readers may be reminded here of a certain Bernard Ecclestone. It’s all very complex isn’t it? But for me, this is the killer lyric. 

“Huge-revenue but zero-EBITDA- producing”. 

This phrase is so profound that it describes a 20-year entire zeitgeist in “venture” and “growth” in capital markets. 

All this is changing and most people have little idea what this will bring. 

Coesfeld, the BMG replacement, doubles down on the finance industry that has enabled all of this with their debt and leverage.

What happened in the course of 2022, is obviously this big shift in the interest rate environment. It was sudden; faster than everybody had anticipated [not Grant Williams!]. So, financial players who’d been making cost of capital arbitrage from investing debt into music, woke up to the fact that it wouldn’t be enough just to do the financial engineering [and not actively ‘work’ catalog to maximize its value].

Ring any bells? 

This finance guy is telling us to look for the “return”. And to reject what is instead merely the vanity of growth and revenues, jacked up by financial engineering. 

Indeed, there has been a frenzy of financial vehicles looking to invest in music catalogues in the last 5 years. Paying top dollar. Read this piece, if interested.

In today’s episode of “No Shit Sherlock” we read the quote: “Multiples have contracted some, and I don’t think the appetite is the same — meaning the feeding frenzy for buying these assets that existed last year has gone.”

Those catalogue values today are a fraction of the value two year ago!!!!!!!

Substitute catalogue values for sport rights values and you can see our future. 

I know I am bombastic of opinion, but I just read the tea leaves, and I have never forgotten the true axioms of my profession of finance. 

“ Revenues are vanity, profits are sanity, but never forget that cash is king.”

The world has changed, and sport has the advantage of seeing that change in action in other sectors. It would be a major error to ignore that. 

So how does this extrapolate to sport and its offering?

We are grateful to the splendid Ben Wells this week, who wrote this great article.

The Cost-of-Living Crisis has come at a time when technological innovation continues at pace, and post-pandemic behavioural change begins to show in the habits of sports fans. Sport’s model is under pressure more than it has ever been. And sport’s model hasn’t been fit for purpose ever since the internet became widely adopted two decades ago.

Money is now tight, people and businesses must hunker down, and make choices. 

What will those be? What will be cut?

If we are inverting the order of the mentality of the last 25 years, to now prioritise cash over profits, and profits over revenues, what does that mean for sport? 

It is true that in entertainment, movies, TV and music there will be an increasingly preference for “catalogue”, as defined by things that have already proven a successful product market fit. The Avengers work, spin-off TV series work, Jason Shatham works, we can repackage and remix Rumours by Fleetwood Mac. These don’t need a massive expenditure of fresh marketing to convince people. They are safe, likely to generate a cash-positive return. Good business. 

What is the comparator in sport? 

We have to note that sport doesn’t really have catalogue. It’s based around unscripted “live”. It’s a different product. Its archive has never ever really made big money. That’s a big difference. 

Nevertheless…let’s work backwards.

What won’t work in sport now, in this new paradigm of safe investment into content?

It’s not difficult to answer. Follow who is holding the cheque book. 

Click through to read the article.

David Zaslav, the new chief of one of sport’s financiers, Warner Discovery, is very clear. He uses the chilling euphemism “financial opportunities”.

In plain English this means, “anything not working for profit is toast”. 

Any rights holder who got a bid from BT Sport should be in a cold sweat. I don’t follow rugby closely, but I think that includes them. 

Ergo, I continue to struggle with this massive disconnect in sport. All the big finance deals, like CVC into rights holders, make a simple bet that rights are going up. 

THEY ARE NOT! With very few exceptions, they are going down.

It’s over folks. We are now in the era of Zaslav. Buckle up. 

The equivalent of the safe “catalogue” of sport, if BMG’s Masuch asked to know, is the top top end of our industry. EPL, NFL, IPL.

Even the NBA and MLB regular seasons are not premium content. I’ll tune in when it matters in the playoffs. If I can, Id prefer not to pay for the oversupply of the regular season. Marginal sports content is going to harvested, especially in tough recessions. 

All this gloom, right?

Not necessarily. The best storytelling technique takes us out from the Pit of Despair with Fresh Hope. 

Sport has one market it can attack, and must capture. 

The kids, under 25s, are spending their money elsewhere. On gaming, virtual goods, digital props, Roblox, Discord Premium. 

Getting a good piece of this market (significant TAM) is sports’ task.

So this is our future as an industry. 

Segmented strategic marketing. 

A model to maximise our top premium product, our Armani Black Label. This will be fine.

A model to monetise the huge fan bases of today that are not paying for the product the way we have offered them, which hasn’t changed in 50 years. Ben Wells again: 

It’s time sport’s commercial model is given a rethink. Critically, we believe this comes by transitioning event businesses into digital media businesses. In embracing this mindset shift from an event business to a media business, we believe all rights-holders operating in the sport and live entertainment sectors, can grow profitability in the face of the enduring Cost-of-Living Crisis. And those that don’t, we believe, will be staring down the barrel, if they’re not already.

A model for community participation sports. I’m thinking the PTO here. A serious ARPU play on a rich demographic.

The first step to solving a problem is to recognise it. Too many in sport think there isn’t a problem, and they are must-have premium content. Zaslav and his ilk will laugh in their face, armed with some spreadsheets.

The best synopsis of this thesis I’ve heard was from Mark Watts on AYNE this week. And he is a bullish investor in this future. 

Sport as a product is not like music and movies. It’s bigger, and means more. It’s unique in it’s unscripted drama and cultural connections. 

But, my goodness, we need to change a lot to save it, and I am just not optimistic that elephant can and will dance.

Every sport needs to ask itself tomorrow morning: do I work as content, for Mr Zaslav?

Auguri.

Talking of top drawer, and stuff that works… the young one, here, to Tina, is Kobe to Michael. Ciao Anna Mae.