#41 Thoughts on OTT/D2C in the Sports Media Landscape — 1st Edition
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Earlier in November, I attended the SportsPro OTT Summit 2019 in Madrid. With the event now in the rear-view mirror, attending only five sessions during the event has certainly been less than I intended. However, building personal relationships and exchanging thoughts with like-minded people for 48 hours straight was probably the even more gratifying experience. And I also recognized quickly that these five sessions were more than enough for coming up with five top-of-mind thoughts on my flight back from Madrid to Berlin -- which provide an answer to these fundamental questions:
💬 Direct-to-Consumer vs. Wholesale:
Is it worth for rights owners to disrupt the current (and profitable) B2B2C marketplace in favor of any ambitions in the direct-to-consumer space? In any case, they have to make a decision when it comes to the way of monetizing their IP.
💬 What actually is OTT?
If "Over-the-Top" is merely another distribution channel, and even the most traditional legacy players in the sports broadcasting market started to serve digital distribution to reach the consumer on their preferred platform, is everybody an "OTT" now?
💬 Big Tech's Role in Sports Broadcasting:
YouTube has seemingly found its niche in the sports broadcasting marketplace, and it is not what rights owners hoped it would be (and probably less significant than many have thought).
💬 Commodity vs. Differentiators:
How can rights-holding broadcasters still distinguish their streaming services in the eye of the consumer as much of the technical infrastructure gets commoditized?
💬 Fighting Piracy - Protection or Innovation:
Is the lack of product innovation the real cause for piracy and would be much more effective in fighting it compared to over-investing in content protection?
Before jumping into my takeaways, I want to share a (much-simplified) graphic that I compiled a few months ago and hopefully provides some context when it comes to the battlefield of the "SPORTS BROADCASTING WARS" -- which itself is one puzzle piece in the heating-up "STREAMING WARS" -- which is, as far as I concern, one deciding (albeit not only) component in the grand scheme of the "ECOSYSTEM WARS."
Granted, the fact that this illustration was created "a few months ago" makes it almost already obsolete in the fast-changing media space: Nobody thought about Disney+, Peacock, Apple TV, HBO Max, Britbox, or Joyn at the point of creation. Nonetheless, I do think it provides some context and an understanding of the underlying economics.
THOUGHT＃ 1️⃣
"The four most important revenue streams for sports teams and leagues are driven by B2B relationships. Any ambitions to disrupt that B2B2C - marketplace and transform into a D2C business is both challenging and dangerous."
📆 Session: How the NBA drove Fan Engagement through innovative OTT ExperiencesThought-provoking
👤 Thought-provoking Panelist: Melissa Brenner (Executive Vice President, Digital Media @ NBA)
The U.S. sports leagues have been at the forefront of any direct-to-consumer ambitions among rights owners ever since the MLB launched their over-the-top streaming service "MLB.TV" back in 2002, to complement and augment both the domestic as well as international coverage of their on-field product by third-party broadcasters. Looking at NBA's "League Pass," even those experienced players are still in a phase of pure experimentation as nobody seems to really have figured out the OTT space just yet: The current pricing model of "NBA League Pass" is a great example: Although consumers have demanded flexibility and "a-la-carte" options, offering the full range of options, including team-based subscriptions, bundled pay-per-view game passes, and access on a quarterly or real-time basis in addition to more traditional subscription options (e.g. all-team season-long subscription) is likely to rather overwhelm consumers instead of pure enjoyment of these almost limitless options. Although consumers have been demanding the highest flexibility and affordability, they also like simplicity and guidance.
Melissa Brenner was expectedly was tight-lipped about which offers do perform best, except for providing a few interesting but obvious insights such as that the 10-minute access of real-time is most popular among the youngest cohort of fans. I strongly believe that the NBA is all about experimentation right now since their D2C business remains non-material to the league's top- and bottom-line compared to their broadcasting deals with ESPN and Turner Sports in the USA and few lucrative overseas deals. If the NBA League Pass (or their D2C streaming business at this point) will ever become a more relevant revenue driver, the league will have streamlined their offering and pricing-tiers left over will have probably performed best.
However, this brings us to another recent media development at the NBA in which I have been most intrigued: The NBA is going direct to consumer with a product that has been traditionally distributed via an aggregator (i.e. the traditional pay-TV): their linear pay-TV channel "NBA TV". This decision to forego any TV platform is offering a look at both the upside and downside that direct-to-consumer business is offering for rights owners: On the positive end, offering NBA TV on an "a-la-carte" basis without the need for an expensive, ballooned pay-TV bundle, which is certainly the case here given that NBA TV (available 45M TV households in the U.S.) is a premium-tier pay-TV channel, at $7.99 per month is roughly 30-35x what the basketball league receives as an affiliate fee per subscriber from cable or satellite pay-TV operators such as Verizon, AT&T, and Charter: the "whole-discount" which content providers have to take in order to tap into the built-in reach, distribution, and subscriber base that these TV platforms are providing. What becomes obvious, the future of direct to consumer is about smaller, more passionate (and monetizable) audiences. Given the territory-by-territory nature of the sports broadcasting market (i.e. sports rights markets + sports programming market), such move by NBA TV or any other rights holders do not enable global distribution and scale and, therefore, expansion. That is also the reason why I remain particular bullish on entertainment OTT services such as Disney or Netflix which have the opportunity to either take back global distribution rights of their content from third-party distributors (see: Disney) and/or bolster their library with original programming. That also means right owners such as the sports leagues and organization themselves have at least the opportunity to follow the blueprint of their peers in the entertainment space: owning the media value chain from end-to-end. However, doing this instead of wholesaling their IP to third-party broadcasters/distributors has to be part of a holistic, global strategy simply in territories in which expectation for rights fees (i.e. reserve price) have not been met — which currently seems to be the main reason why rights owners such as the Big-5 in European football have launched (LaLigaSports), announced (Bundesliga Pass, My Ligue 1), or teased (English Premier League, Italian Serie A).
Until then, league-operated channels or any other sports-centric channel offering a direct-to-consumer in addition to the linear option as part of the traditional pay-TV is a simple hedge against cord-cutting or cord-shaving — for which premium-tier channels are particularly susceptible to. The downside is as obvious as the upside though: Any direct-to-consumer business inevitably endangers existing revenue streams from third-party broadcaster — by far the most lucrative source of income right now. As the middlemen in that traditional B2B2C marketplace, pay-TV platforms have traditionally paid a premium (via carriage fee) for being the exclusive way to access the content provider's assets, and every sports channel such as NBA TV drives incremental subscribers among their vivid niches to more premium-tier packages. In other words, for the die-hard NBA fan to have access to NBA TV, he or she has most likely subscribed to (and pay for) the SEC Network, Golf Channel, and the Tennis Channel. Looking across the U.S. sports media landscape, the linear pay-TV channel beIN SPORTS which has seen its distribution dropping constantly in the last few years as it has been losing sought-after properties such as the Italian Serie A that made it a "must-have" for many (football) fans, and therefore pay-TV operators. With current distribution of below 20M TV households, the Qatari-owned broadcaster seems to be an obvious fit to go "over-the-top." — which is a nice segue into my Thought #2. (For comparison's sake: ESPN, despite all the doom and gloom due to the secular trend of cord-cutting, is still in 83M TV households.)
THOUGHT＃ 2️⃣
"What actually is OTT? In the end, it‘s just another distribution medium. Business models of broadcasters can differ greatly although all are exploiting such distribution. So the OTTs we are talking about must actually be digital-only broadcasters, right?."
📆 Session: OTT Saturation
👤 Thought-provoking Panelist: Sergio Oslé (President @ Movistar+)
Speaking during one of the opening sessions at the SportsPro OTT Summit, Movistar's President Sergio Oslé already addressed the elephant in the room: What actually is "OTT"? The interpretation can vary widely: Is it just another distribution medium to reach customers through their preferred means of consumption, which would make even the most traditional broadcasters an "OTT" since almost everybody nowadays follows platform-neutral approach to the distribution of their content? If so, even the streaming services that remain tethered to a traditional linear pay-TV subscription on an authentication-based basis (e.g. beIN SPORTS Connect, WatchESPN) would be an "OTT." On the other end of the spectrum, an "OTT" could be defined as the digital-only streaming service by rights holders (e.g. DAZN, ESPN+) or owners (e.g. WWE Network) that can be can be subscribed to on an "a-la-carte" basis but is not available via linear satellite or cable TV. In the middle, there are some digital-first players who try to strike the balance between being part of a linear pay-TV bundle and offering the same content direct-to-consumer on an "a-la-carte" basis (e.g. Eleven Sports). Looking at the first definition of "over-the-top media services" that pops up in Google search, which unsurprisingly comes from Wikipedia, it is "a streaming media service offered directly to viewers over the Internet [...] bypasses cable, broadcast and satellite television platforms that traditionally act as a controller or distributor of such content." Does "bypassing" mean that the same content cannot also be offered through traditional distribution? Regardless of where you fall when it comes to the definition of "OTT," I would emphasize that "OTT" does not necessarily equal "Direct-to-Consumer" (which is the ultimate objective of actually going D2C) as you will see in my "final over-arching thought" at the bottom.
Finally, Movistar+, whose President brought up this topic in the first place, is yet another peculiar case that does not really fit any of the three cases mentioned above: Owned by the Spanish telecommunication service company Telefónica, Movistar+ has been one of the longest holdouts among telcos when it comes to launching some sort of a stand-alone OTT streaming service including some of its live sports content and is untethered to a traditional satellite or cable pay-TV subscription: Movistar+ LITE was launched in June 2019. However, it has the add-on "LITE" for a reason: Telefónica’s prime live sports assets (i.e. LaLiga, UCL) will continue to be only available in combination with a traditional (much more expensive) subscription since these assets are core to the integrated business model of Telefónica (e.g. Bundled "Triple-Play" of pay-TV channels, telephone/mobile, and broadband). In fact, only lower-tier assets of their sports portfolio (e.g.. Bundesliga, Ligue 1) are accessible via the new, much cheaper and stand-alone OTT product. Thus, how would you categorize Movistar+ which makes only selected content available via a stand-alone OTT in the grand scheme of the sports media landscape?
THOUGHT＃ 3️⃣
"Not a thought, but rather a confirmation: "Big Tech" is not coming to rescue the flattening sports rights market anytime soon."
📆 Session: Evaluating YouTube’s Sports Strategy
👤 Thought-provoking Panelist: Tomos Grace (Head of Sport, EMEA @ YouTube)
One reason why high-caliber companies are present on stage at conferences such as the SportsPro OTT Summit is that they have an interest in positioning their agenda in the marketplace. In order to bring across your message, you have your talking points and given that their agenda does not change on a monthly basis (at least hopefully for any company's sake), the content is often the same and predictable. Going with such expectations into any session, YouTube's Tomos Grace actually providing some really interesting nuggets, including that 7-to-10-minute highlight content performs much better (both in total watch time and number of unique views) than the quote-on-quote "snackable" content (2-to-3-minute highlights), was a much-welcomed surprise. However, these insights, in addition to the expected talking points, provided rather a confirmation of my viewpoint when it comes to almost every technology giant that has been mentioned to enter the sports broadcasting arena: They will not open their (deep) pockets for broadcasting or even just digital-only streaming in sports anytime soon.
Granted, that was not a foregone conclusion from the beginning as Facebook, Twitter, YouTube & Co. started to tip their toes into sports broadcasting around 2016. They were open-minded, made big moves to equip the companies with the required brain power such Facebook hiring an industry veteran in Discovery's Peter Hutton, but quickly recognized that their primarily ad-supported revenue models are not made for first-tier live sports broadcasting. The future of live sports broadcasting remains in paid content, regardless of how great the built-in reach of such ad-supported, free platforms is.YouTube's Head of Sports (EMEA) also admitted that horizontal platforms such as YouTube do not accommodate live sports well and need to make progress in this regard. My question is how likely it really is that a horizontal platform that tries be everything to everybody and where live sports will not be the focus of the business ever can cater to the needs of rights holders and owners. Instead, YouTube & Co. will likely be most valuable to the sports broadcasting ecosystem as a max-reach distributor of free highlight content serving top-of-funnel marketing for rights holders and owners. Luckily for YouTube, rights holders such as Sky Sport UK or BT Sport seem to embrace that proposed value proposition and become literally much more open-minded when it comes to distribution models for their (non-live) content: Premier League highlights on YouTube shortly after the final whistle (instead of keeping any highlight within the walled gardens of the pay-walled Sky platforms) or the UEFA Champions League Final as free-to-air live broadcast (instead of a short-term financially more lucrative sublicense to free-to-air broadcasters in order to comply with UEFA requirements) are just a few examples for this shift in mindsets. Live sports broadcasting might not become a serious business for YouTube ever, although it is still experimenting with it, including committing up-front guaranteed minimum rights fees in a few selected cases (e.g. LaLiga in India, UEFA Champions League in Latin America). Rights-holding broadcasters leveraging highlight content as free top-of-funnel marketing (pioneered by the NBA) instead of trying to incrementally monetize such non-live content and squeezing even more money out of the consumer, is a beneficial trend for Facebook, or any free online platform with tremendous reach. It will secure a place for Facebook, Twitter, YouTube & Co. in the sports media landscape — while not committing sky-rocketing rights fees at all and instead simply relying on their built-in user bases as currency. #RevenueShare
THOUGHT＃ 4️⃣
"Most of the sports broadcasting value chain will be commoditized, rights holders have to pick and choose the very few parts that differentiate them in the marketplace, while outsourcing the rest to (a set of) third-party service providers."
📆 Session: Taking Sport to the Cloud: How AWS Customers are transforming the Fan Experience
👤 Thought-provoking Panelist: Simon Frost (Head of EMEA Media Marketing @ Amazon)
The topic with which Amazon, one of the giant technology companies that are most associated with becoming a serious player in sports broadcasting and has the biggest track-recording of actually doing, was on-stage at SPOTT19 fit the narrative of my Thought #2 nicely: The emphasize was on Amazon Web Services (AWS) — instead of their investment in and learnings from NFL Thursday Night Football (global rights), the English Premier League (U.K.) or The Tennis US Open (U.K.). By the way, even Amazon’s annual financial commitment of roughly $100M as the most aggressive one among "Big Tech" when it comes to live sports broadcasting rights remains non-material in the big picture of a $50BN sports rights market.
Instead, the focus of Amazon's Simon Frost (Head of EMEA Media Marketing @ Amazon) was all about what the e-commerce giant is doing that is not consumer-facing: providing the technical backbone of the future sports broadcasting landscape. My key takeaway from his presentation has been that (from a technological point of view) most of sports broadcasting value chain (e.g. production, hosting, delivery, play-out) will get commoditized over time and only a few selected pieces in the UI/UX will be able to serve as differentiators for broadcasters. In a few years' time, current pain points of streaming such as the lack of reliability, quality, latency, and so on will be largely solved and will not make any streaming service special. It doesn’t make sense to invest heavily in building/replicating soon-to-be commodity. Thus, it does make sense that these parts will be handled by a (set of) third-party service provider just like AWS. That being said, broadcasters need to pick and choose parts of the technology stack that has the potential to truly differentiate its consumer-facing service from the competition, take these potential USPs in-house, and invest aggressively. Such USPs can be very different from service to service but could be as "simple/obvious" as the video recommendation engine. However, it should also be noted that a company's USP has nothing to do with technology but lies somewhere along the broader sports media value chain (e.g. personal network in the rights acquisition).
Coming back to AWS, providing such commoditized services will be financially attractive for AWS as a service provider at global scale and almost zero marginal costs. Rights holders instead need to pick & choose which parts can differentiate their service. Amazon found pure gold by building the infrastructure to satisfy internal demand, evolving in the technical backbone for many third-parties. Thus, live sports broadcasting will become an attractive business for Amazon, it will most likely just not play the role that many assumed: being aggressive when it comes to direct rights acquisitions.
THOUGHT＃ 5️⃣
"The sports media industry can fight piracy with improved security measures and collaboration forever, but as long as there is a lack of product-market-fit, (young) consumers will continue to be pushed into illegal means."
📆 Session: Piracy forcing Innovation
👤 Thought-provoking Panelist: Vincent Helluy (Global Content Protection Partnerships @ Canal+ Group)
Innovation in the context of piracy is most likely associated with improved security measurements and technologies such as watermarking, DRM, noise detection and so on. However, product innovation might be even more powerful, or can at least be a helpful complement to whatever progress is made on the protection front. Being constantly worried about fighting piracy and, therefore, spending much of the available time, money, and resources on this annoying issue, instead of working on the actual product, has led to a product-market-fit between existing offers and the demands of the new generation of sports fans — which are still interested in watching a full-game live broadcast instead of only catching up through short-form highlight content in the aftermat(c)h.
I don't blame rights holders such as beIN SPORT, who have spent billions of dollars, for tirelessly worrying about how to combat illegal means to access their content from the first minute in the morning until calling it a day late at night. But the result is the lack of product innovation while the demands and preference of consumers are constantly changing. Case in point: Even disregarding pricing models and subscription tiers which are one of the main reason for the consumer's frustration with the current offers in the marketplace, the OTT solution of beIN SPORTS, who are for understandable reasons more occupied with combating piracy than anybody else in the sports media landscape, is objectively ranking among the least advanced products when it comes to UI/UX. In other words, especially younger consumers have simply no reason to pay up for legitimate products as their product experience is just not warranting it. Digital services such as Spotify and Netflix have provided evidence that even these notoriously cheap customer cohorts are willing to pay for content, as long as the value for money is right.
The main reason why even the best protection will not prevent all piracy: Current incentivization systems at most rights owner's organizations are geared towards purely maximizing broadcasting revenues, with little regard for other factors than the highest minimum guaranteed rights fee offered by the bidders — especially if these factors are of non-monetary nature. Even if the most technologically advanced rights holders across the biggest sports media markets (i.e. North America, Western Europe) implement state-of-the-art security technology, in order to maximize total media rights revenues, rights owners will probably continue to grant broadcasting rights in even the smallest, least advanced media markets to squeeze out the incremental dollar. There is a reason why the stream you stumble across on illegal websites has probably in a commentary language you have never heard before and a quality you would never accept if you had paid for it.
💬FINAL OVER-ARCHING THOUGHT ☝🏼
"OTT drives fragmentation. People like aggregation. It will return.."
Fragmentation is driven by OTT: Plummeting production and distribution costs combined with the enticing outlook of cutting out any intermediaries (i.e. higher-margin business) and owning the customer relationship that can be leveraged in a multitude of ways beyond pure media content make it almost impossible for rights owners and holders to resist the temptation to at least try this direct-to-consumer thing. As a result, fragmentation will continue for the foreseeable. However, the initial enthusiasm of consumers for "a-la-carte" options will slowly but surely wane as frustration of growing monthly bills for OTT streaming services and disorientation due to content overload or lack of guidance will rise. Bottom-line, people like aggregation (and convenience); hence, it will return. It's probably a cyclical movement, and at some point recognition in consumers' mind will set in that pay-TV was not the worst. One question will be who will "win" the role of the aggregator. In other words, who will provide the distribution (and be the gateway that manages the relationship to the customers) for content providers — which, in turn, need to spend billions on content production and acquisition and are currently not applying any business economics in doing so. On the other hand, distributors will almost operate at zero marginal costs — something the technology companies are accustomed to as part of their core business and would be more than happy to do so in the (sports) media landscape as well instead of spending big on content (i.e. sports broadcasting rights) themselves: Amazon Fire (or Amazon Channels), Apple TV (or Apple App Store), Roku and so are already in place to play that role of the new "middlemen," take their cut of the revenues, and move content providers back into a world that is very similar to the one before any of there D2C/OTT ambitions existed: without any direct-to-consumer relationship.
Finally, I often thing about how comparable the emergence of "Over-the-Top" (i.e. the market entry of digital-only/first players in the sports broadcasting arena) is comparable with the migration of live sports from free-to-air television to pay-TV, which started approximately a decade ago and has been one of the main catalysts for the explosion of the rights fees ever since. Describing the current situation as the migration from (traditional) pay-TV to digital players would be the logical next summation -- if it really happens is a completely different question, I doubt it.
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