Hot-Take #4: Was Formula One’s Return to Sky Deutschland a Foregone Conclusion?

There was some news for German fans ahead of the forthcoming 2019 season: Formula 1 returns to Sky Deutschland for the two upcoming seasons, only one year after not extending their broadcasting deal and going instead with comprehensive free-to-air coverage on RTL exclusively. In addition, the racing series launched its direct-to-consumer service F1TV before last season. Why this return into pay-TV should not be a surprise and might have been planned by F1-owner Liberty Media from the moment when it (reluctantly) granted all-encompassing broadcasting rights through 2020 to RTL just one year ago.

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In general, F1 wanted to go pay-TV-only in most of its established market as soon as it took over ownership of the racing series at the beginning of 2017 for +/- $8.0bn (including +/- $3.6bn in net debt). Syphoning live media coverage out of the free-TV landscape was an obvious move to make its subscription-based OTT service (so-called "F1TV") more attractive to its fans: Liberty relied especially on its more matured markets (e.g. Germany, Brazil, U.K., Spain, or Italy), in which it is about monetization instead of growth, to gain any traction for their D2C offering. Limiting (or ideally ending) live coverage on FTA channels in their most monetizable markets was a necessary evil for Liberty Media. In order to follow the steps of other original rights holders from North America* who have launched an OTT service (e.g. WWE Network, NBA Game Pass, NFL League Pass, MLB.TV) that is mostly targeted at their most-vivid hardcore fans, anything other than a dip in overall TV viewership in the short-term would have been a surprise: In fact, television viewing on race day year-on-year was down 5% for the 2018 season - mainly driven by moving from free- to pay-TV in large markets such as Italy.

* Liberty Media is based in Englewood, Colorado and the influence of other U.S. sports on the management approach by the Carey, Bratches & Co. has been a sea change for the rather traditional racing series - for better or worse: The new ownership clearly identified the United States as untapped market for Formula One and went all in making the racing Series more attractive to the North American mainstream fan. Whether there is enough appetite for the Formula One in the world‘s largest sports markets is another questions, though.

Pulling F1 - Live Coverage from Free-TV across Europe to Facilitate Launch of F1TV

That approach across Europe stood in stark contrast to their strategy in potential growth markets, in which Liberty Media pretty much granted linear (not streaming) broadcasting rights for free to highly distributed and/or free-to-air networks (e.g. ESPN in 🇺🇸, CCTV in 🇨🇳) to gain visibility and momentum among mainstream sports fans.

However, positive news out of the United States for example, where average viewership for race windows airings increased from 538,114 (mainly on NBCSN or CNBC) to 547,722 viewers over the course of the 21-race season (+1.8%) thanks to the move over to more-distributed ESPN networks (ESPN, ESPN2, or ABC), only partially offset the declines in viewership across many European markets. (see: Twitterpost)

As I said, the best case for the purpose of growing and monetizing their direct-to-consumer live streaming service would have been to take their racing series pay-TV-only on linear television in many markets across Europe, the home of the most developed fan bases.

In fact, this strategy was successfully executed in several important markets in the run-up to the launch of F1TV** in March 2018, including:

• 🇫🇷 France: TF1 (free-to-air) only with 4x races per season), Canal+ (pay-TV) with all races [starting 2018]

• 🇪🇸 Spain: Teledeporte (free-to-air) only with Spanish GP, Movistar+ (pay-TV) with all races [starting 2018]

• 🇮🇹 Italy: Rai (free-to-air) only with Italian GP, Sky Italia (pay-TV) with all races [starting 2018]

• 🇬🇧 UK: Sky UK (pay-TV) giving up exclusive streaming rights to facilitate F1TV launch [starting 2019]

** The launch of the much-hyped F1TV, which is powered by Turner’s iStreamPlanet and NBC’s Playmaker on the back-end, itself has been a story on its own: Despite more than twelve months between announcing the OTT service in spring of 2017 and the initially scheduled launch date in time for the start of the 2018 season, it was not only delayed for weeks and was launched after four races already into the 2018 season, but was plagued by technical issues throughout the its inaugural campaign. It was so bad at times that F1-CEO Chase Carey called last season the „beta-phase“ for F1TV in the aftermath. That would not have been a problem if you had not charged your customers the full price for a product which is still a „beta-project“ after all?

But let us look at why Formula One’s return to Sky Deutschland in Germany, the racing series’ most important market ahead of Italy, was an inevitability in the end.

Sports Fans in Germany are used to Free-to-Air Model and Voiced Their Opposition Simply put, viewers in Germany are used to a free-to-air model so it is difficult to convince them to pay for content, and they are willing to voice discontent if necessary.

Formula 1 on RTL, in particular, has been a stalwart on free-TV over the past 25 years, especially ever since the rise of seven-time world champion Michael Schumacher starting around 1992. In a sports landscape that is dominated by football/soccer, Formula 1 has been one of the very few sports properties which at least came close to football/soccer in terms of popularity and TV viewership on a constant basis: Even after the peak of the Michael Schumacher (e.g. average viewership in 2000: +/- 9,87m viewers), the racing series had drawn +/- 4.2m viewers per race on average since 2014 on RTL - still an impressive number in today‘s media landscape that consists of much more entities competing for the consumer‘s mind and wallet share than just a decade ago.

Facing the risk of losing F1 entirely to the pay-TV ecosystem, the public protests - both from fans and, probably even more importantly, from German F1 drivers - was enormous once first reports about the ready-to-be-signed deal between Liberty Media and Sky Deutschland surfaced. The benefits for both parties involved were obvious:

(I)

Liberty would have made F1TV, available in Germany for €7.99 per month or €64.99 annually (+/- €3.10 per Grand Prix), essential for thousands of F1 hardcore fans who have passionately followed the racing circuit but would not be willing to pay at least +/- €30.00 per month on Sky’s sports packages, which currently should have about +/- 4 million subscribers, assuming 80% of all 5.2m Sky Deutschland subscribers have signed up for the sports package, instead of only entertainment packages. Given a population of +/- 82.8m people and +/- 38.4m TV households, that is a really low number when you consider that Sky Deutschland is the only relevant pay-TV player in the market.

(II)

Despite the availability of F1’s direct-to-consumer service, the property’s ability to drive subscriptions for Sky Deutschland would have increased greatly with RTL out of the picture: German consumers do not only show a reluctance to pay for media content but lag in terms of the adoptions of digital services as well. A linear subscription to Sky Deutschland, which - as observed with the broadcasting deal in the United States with ESPN - probably would have granted exclusive linear broadcasting but no streaming rights, would have been considered as a much better proposition for less digital-savvy consumers and older demographics - of which there is a lot of among the established F1 fan base in Germany. Already having some questionable decisions on their short track-record (e.g. „Americanization“ of the racing series, expensive new headquarters), Sean Bratches, Chase Carey & Co. were effectively forced by outside-pressure to extend its broadcasting deal with the FTA-channel in its most important market - completing bucking the trend of providing much more exclusivity to pay-TV channels across other European markets. The continuation of extensive free-TV coverage did not only result in Sky Deutschland loosing its interest due to all the reasons above, but meant that those „cheap“ and „less digital-savvy“ German F1 fan lost any remaining incentive to sign-up to F1TV. At least in the short-term, it would have been an uphill-battle to begin with anyways, both with or without free-to-air coverage. (see: Twitterpost)

Totally punting on the idea of establishing a direct-to-consumer business in their most important market, however, was certainly no option for Liberty Media though: With getting back into business with Sky Deutschland, the US-based media conglomerate took just the latest step in its strategy to somehow gain any traction for F1TV. In retrospect, Jean Todt, currently president of FIA, criticizing the „ad-loaded“ F1 live coverage on RTL and „feeling sorry for the German F1 fan“ during the Brazilian GP while blatantly promoting their ad-free in-house OTT service already set the stage for what eventually followed last week. (see: Twitterpost)

With (most likely) virtually no revenue via F1TV in Germany last year, teaming up with Sky Deutschland only one year into the current three-year rights cycle (2018 - 20) will not only result in incremental revenue, but it also sets the stage for 2021 when the deal with RTL expires: F1 will finally move exclusively on pay-TV for linear distribution and F1TV hopefully gets some traction (and revenue) among German F1 fans, whose consumption habits and willingness to spend might have changed by 2021. It would exactly be the result which both F1 and Sky Deutschland wanted from the beginning - it will just come three years late. Considering the aforementioned peculiarities of the German media market, it ultimately might play out even better for Liberty Media than the initial plan to go all-in with paywalled coverage in a market that needs to be monetized on the one hand, but simply was not ready for such dramatic changes at that point in time on the other hand.

Protests by Sky Consumers and Ad-loaded Live Coverage on RTL as welcomed Narratives

Finally, it is safe to say that I do not believe the argument that there was (overproportional) big backlash from Sky subscribers in wake of losing the F1 before last season - a notion which was heavily pushed by both Liberty and Sky when announcing the deal a few days ago: In general, there has been a disappointment among Sky customers given that the pay-TV channel has lost numerous broadcasting rights over recent years as part of the company’s cost-cutting moves since 2016 in order to somehow break-even on an EBIT-basis in wake of the skyrocketing rights fees for the Bundesliga (+/- 874m per season through 2021), the country’s top-flight football/soccer competition. Germany has traditionally been a tough market environment for the pay-TV business given the dominant free-TV landscape (see: Premiere, Arena), whereas first-tier live sports has always been a reliable subscription driver in other European markets (e.g. France, Spain, Italy, UK) and the United States. After having recorded its first really profitable year in the company’s history in terms of EBIT (= operating income) during FY 2016/17 (+/- £40.0m), the German division of UK-based Sky PLC was right back in the red once the Bundesliga-deal kicked in during FY 2017/18.

I think it is safe to assume that Sky customers were the least worried about F1, which continued to be available on Free-TV in Germany. Although the interruptions through several ad breaks during the live coverage give at least some legitimacy to the claim that Sky subscribers were angry or at least disappointed - which is understandable when you pay the same for less content from one year to the next. But cancelling the subscriptions for that reason? I don’t buy it. It simply made ditching RTL after the 2020 much easier for Liberty Media and probably alleviated some bad feelings on Sky‘s end of the equation after F1 backing out of the deal before last season. From Sky customers’ perspective, losing the UEFA Europa League entirely as well as some UEFA Champions League (starting 2018/19) and Bundesliga (starting 2017/18) games to subscription-based, digital-first players such as DAZN or Eurosport have certainly been a bigger deal though. For Liberty, paying +/- 8.0m for Formula One has put a lot of pressure on the management team around Sean Bratches to revitalize the racing series and untap new markets. However, it has largely failed to add impactful races to the calendar (e.g. GP in Miami) as well as major sponsors (instead reverting to tobacco sponsors by exploring vague loopholes in their sponsorships rules) and car manufacturers, which recently seem to prefer competitions such as the Formula E for reputational reasons or the superior technological transfer to their core business. Formula One benefits from its peak years (2000 - 2010), having built a loyal but ageing fan base across many large European markets but struggles to attract younger fans: merely +/- 14% are less than 25 years old. F1TV’s lack of traction is not only an issue that is specific to Germany though, as evidenced by the non-material contribution of digital revenues to overall turnover during FY 2018(+/- 0.06% of total revenue). The direct-to-consumer business will be the future for many sports properties, not just in the media segment but for merchandising and ticketing as well, Formula One’s ambitions in this regard are off to an unpromising start though - in Germany and around the world.

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