By Ed Botti, May 7, 2020
Unless you have been living under a rock for the last 8 weeks or so, you know by now that the pandemic we are all living through has toppled our sports viewing calendar in a way that no one saw coming.
Each year as I anticipate the upcoming Baseball season during the cold winter months, I turn to my winter sports mode, and follow my two winter teams, the New York Rangers and the Brooklyn Nets. I know, I am a glutton for punishment.
March is always an entertaining month for me. The Yankees are in full swing in Tampa, Hockey games are on almost every night, and Basketball is getting ready for a full month of Madness! Throw in a couple of PGA tournaments and UFC or Boxing, and my TV watching agenda is all set.
Who needs Netflix? Not me, I’ll catch up on Ozark at another time.
On the evening of Thursday March 12, the red hot and up and coming Rangers were off for a few days, while the Nets were embarking on a tough west coast swing. I had just attended the prior Sunday game and watched them beat the Chicago Bulls, the playoff push was on.
I was getting ready to watch the Nets take on the Golden State Warriors, “a winnable game”, I thought to myself. At that point in time, all I was thinking was, why did they fire Kenny Atkinson, and can they keep Kyrie Irving on the floor and make a genuine push for the Playoffs?
My warm up game that evening was the Memphis Grizzlies vs the Portland Trail Blazers.
And then it all changed.
As I sat on my couch with a nice beverage, it came across my TV screen for the first time; two Utah Jazz players, Donovan Mitchel and Rudy Gobert tested positive for the virus.
I remember thinking to myself, “did I just read that”?
It set off a chain of events that I never would have dreamed of, and within 24 hours or so, March Madness was cancelled, NBA, NHL MLB, PGA, UFC WBC and all the others were all closed for business.
In the blink of an eye worrying about Kenny Atkinson and Kyrie Irving were the last things on my mind.
It became real, and now we started worrying about our lives, jobs, and family.
Now that we are firmly entrenched in this situation, and we see the global economic impact it has had on everyone, and deal with the “new normal” of the work at home experience, wearing of a mask to stores, and the nightly, depressing endless stream of news, are we actually seeing a light at the end of the tunnel? And what are the things we loved to do, and took for granted, going to look like when we come out of this?
How can we go to a restaurant, get on a subway, get a haircut or go to a movie? All of those things now seem so far gone.
More important to me than a movie or a restaurant is, what about sports?
As a business consultant and forensic accountant, I wanted to take a deeper dive into just the Sports Industry as a whole. The athletes, leagues, teams, the media that cover the games and the networks that broadcast the games, and analyze the impact these last 2 months have had on it, and how it will change the industry going forward.
It became such an extensive study, that I decides to limit the analysis to just the revenue streams.
In 2019, the value of the North American sports industry was appraised at $71.06 billion USD. This valuation was expected to rise to 83.1 billion by 2023. In other words, business was booming.
When you think about the money that is paid out to the players and the commissioners, you have to wonder just how much money do the leagues and teams make to pay these crazy salaries?
From a business perspective, there are three central sources of income for the leagues:
Broadcasting – the sales of media rights,
Commercial sponsorship and advertising interests, and
Facility income – ticketing and game day revenue from merchandising to food and beverages.
Teams in a league have their own autonomies, workforces and fan bases, but the overall rules of the game and structure are set by the leagues. Just like any other business, the more people consuming the product, the more valuable it becomes.
The channel to providing the most access to consuming their product is through the sale of media rights.
It’s pretty simple. More people listen to games on the radio and watch them on TV, than attend the games. That is where the big money is generated.
Broadcasting and the sale of media rights account for approximately $50 billion in revenue for major professional sports entities, worldwide.
U.S. sports media rights were estimated to be worth a total of $22.42 billion in 2019, about 44 percent of the total worldwide sports media market share.
Every league is a little different, but generally speaking the leagues allocate total income to its teams. In most cases it is arranged as a minimum payment with performance and/or competition bonuses.
Each team within a league also generates their own revenues as well. For example, the Yankees have their own sponsorship deals and programming subscriptions. Ditto for the Dallas Cowboys, Los Angeles Lakers, Montreal Canadians, and many others.
But in reality, the financial success of a team falls back on the connection to the principal league they are a part of. Those leagues have a lot of power and strength with respect to selling the media rights, and maximizing the value of the league and its franchises.
To put that into perspective, MLB has a seven year media rights contract in place for distribution of the games in excess of $5 billion with FOX Sports, while the NBA has a nine year deal worth over $24 billion with ESPN, ABC and Turner Sports, as the NBA is more of a global entity than Baseball.
So it becomes a win- win for both the leagues and the teams. A proven successful business model.
Within the industry there have been different opinions and debates relating to the ability to maintain these deals. There is something known as “cord cutting” that many believe will impact these deals. Cord cutting is the move from current programming distribution channels to online streaming, referred to as Direct to Consumer Marketing (D2C).
We saw that strategy initiated this past winter with the deal the Yankees announced with Amazon to stream 21 games. Which tells us that MLB was looking to change their distribution channel long before the pandemic became an issue.
Direct to Consumer Marketing (D2C) is an approach in which a business markets and sells a product or service directly to their customer base. By doing so it removes the need for any intermediaries.
Revenue from the distribution of the content is the bloodline of professional sports.
As of March 12, 2020 that bloodline has been shut down completely.
The cold hard fact is that anything more than a short term, temporary stoppage of the leagues would lead to the leagues being incapable of achieving their obligations to broadcasters, which would reduce their ability to distribute revenue back to the leagues and teams.
In such a circumstance, the impact on the sports industry would be catastrophic. It comes down to one thing; games generate broadcast deals, commercial sponsorship deals, and facility income. If there are no games, there is no income. Without income, what becomes of the leagues and their teams? I think we all know that answer.
Facing that catastrophic outcome, what can the industry do to combat it, and persevere?
Bereft of live games and searching for a method to sell media consumption, the industry has shifted to expanding their portfolio of content that can be distributed to their consumers. What we are seeing right now on a daily basis is the broadcasts of old and classic games, as a way to connect with the fans and keep fans consuming their product.
It’s a good idea, but does it have sustainability?
Just last night I watched Game 2 of the 1969 World Series, and saw a masterful performance by Jerry Koosman. I enjoyed it, but am I going to watch old games very often, when there are so many other programming options? Maybe a little bit from time to time, but overall I doubt it.
Do our significant others really want to sit down with us and watch a grainy black and white game from 1969? Nope.
It just doesn’t work on a grand scale.
Besides showing old games, more content is needed to keep us engaged.
Some of the documentaries that have come out are very entertaining. Specifically, the “Last Dance” a 10 episode documentary about Michael Jordan shown on Sunday evenings.
If you haven’t seen it, go back and watch it.
The NBA is distributing many other types of programming in an attempt to keep their fans engaged and consuming their product, and recently stated “our broadcasting partners are really understanding and we’re working with them on different forms of content. It’s not just the NBA, it’s all live sports, millions of fans around the world are looking for content. We’re working closely with our broadcasting, digital and marketing partners to find ways to engage at this time.”
The NFL is making every game since 2009 available for streaming to its fans, and it has generated a 500% increase in their daily sign ups. Sounds good, not for me.
All of that seems fine, but not close to the actual live event or the revenue generated by the live event. Any success it has, will be short lived.
Besides the consumption of the content, they now need to incentivize us. As a result, the leagues are trying to improve the flexibility of payment plans for consumers by making many of the archived games and other content free.
All of these major media rights deals involve long, complex and detailed contracts. Within these contracts are terms and conditions that both parties have to abide by to stay in compliance.
Negotiations are taking place between leagues and teams with their network colleagues to identify mutual solutions to the “force majeure” clauses that benefit both sides of their agreements. The force majeure clauses essentially release either party from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, takes place.
Options such as the leagues granting additional media rights, extension of current agreements and even paying the broadcasters compensation, are being examined for application in the very near future.
The revenue generated through media rights is so important to the industry that we are now hearing and reading that many leagues are advancing contingency strategies for games to be played without fans in attendance, as we just saw with the Korea Baseball Organization.
Another possible gateway to resuming games is to play the games in areas that are less impacted by the virus. This drastic measure would involve moving training facilities, and even quarantining entire teams, including the management staff, to a particular location.
There were rumors earlier this spring that MLB would consider playing all games in an abbreviated season in Florida and Arizona. For many reasons, that seems to have died down.
That type of move is not totally unprecedented. Earlier this year, I wrote about the Yankees holding spring training in Asbury Park, NJ in 1943 due to the World War II war effort. https://startspreadingthenews.blog/start-spreading-the-news/2020/2/20/greetings-from-asbury-park-nj
The pandemic emphasizes how dependent this business model is on the sale of media rights.
Conventional broadcast television configures its principal programming during the evening prime time period, and the increase in media consumption triggered by the virus does not align with that model.
Inevitably, this disconnect will compel the market to fast-track the acceptance of direct to consumer platforms to distribute sports content.
This method of distribution will become more enticing now because they have no predetermined schedule, but have an extensive inventory of content to keep people engaged.
As with most technological innovations and advancements that hit the marketplace, along with the changing of the demographic of the consumer, people will test these platforms and make the change in their delivery system of the content, when the pandemic recedes.
This change in behavior will signal the decline of cable television as we now know it.
With that change, will bring more change.
Network advertising revenue will be reduced, along with their dominance to purchase sports media rights. This will in turn enable the sports industry to sell content to other digital content distributors, internally.
The proof of concept has already been established by competitors such as Amazon.
The virus is a direct hit to the revenue stream the sports industry generates from the sale of media rights and advertising, and emphasizes the need to diversify the current business model.
We have already seen the marriage of MLB, NHL, NBA, and NFL to companies claiming to be “fantasy sports contest” platforms, which is nothing more than a fancy way of saying gambling and book makers.
In my opinion, that is a terrible idea that will result in severe damage. MLB suspends Pete Rose for life, continues to refuse his re-entry to the game, but is in partnership with DraftKings? Am I missing something?
While MLB develops strategies and partnerships to move forward, their little brother, minor league baseball, does not have those large media rights deals and most likely would not be able to operate or survive without fans. Layoffs and furloughs are common practices now in an attempt at reducing expenses.
Sports has a capacity, in common with other forms of entertainment such as concerts, to bring people with similar interests together for a shared event. The current virus situation is robbing all of us of that. Out of the absence of these shared events, the sports industry will have to remake itself to move into the next decade and beyond.
How they re-engineer themselves is starting to take shape, but I am sure many hurdles remain.
The first being getting past the virus and opening up for business.
Hang in there everyone!
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